Frontier Strategy Group’s Head of Global Economics, Antonio Martinez appeared on CNBC’s Closing Bell yesterday to discuss U.S. President-elect Trump’s approach to China, and share his view on the top global events that multinational companies need to prepare for in 2017:
Our editorial team later interviewed Antonio for a more in-depth overview covering his team’s flagship annual report, Events to Watch for 2017
FSG Editors: What are the top global events you believe multinationals should be concerned about/prepare for in 2017?
Antonio: We outline 7 critical events in our recently published Events to Watch for 2017, but the ones most critical for most companies revolve around Chinese economic mismanagement, a populist backlash in the Eurozone, and protectionism under a Trump administration.
1) China loses control: The Chinese government fumbles its ongoing efforts to manage growing imbalances in the real economy and in its financial markets, driving significant global volatility
2) Trump trade chaos: Trump’s protectionist trade agenda and confrontational negotiating style would sow economic disorder if they result in a trade war (not just around tariffs) with China or, to a lesser extent, Mexico
3) Populists crash the Euro: The election of anti-establishment populists in at least one of Europe’s major economies would increase financial volatility and bring the euro to historic lows
FSG Editors: Why should multinationals be concerned about Chinese economic mismanagement?
Antonio: We see continued pressure on China driven by rises in real estate and currency markets overwhelm a financial system already burdened by bad debt. If the Chinese government, which we still believe have the resources to step in, badly fumbles their response, you could see a major shock to confidence in the Chinese government’s ability to manage growing and persistent economic imbalances.
That will affect the business environment by driving a sharper economic slowdown in China, which will impact both developed and emerging market countries dependent on Chinese demand. You will also see significant FX volatility for other emerging market currencies especially as the yuan is likely to tank.
FSG Editors What do you see with a Trump trade chaos scenario?
Antonio: Most executives we talk to are optimistic that the tax cuts, infrastructure spending and deregulations in a new Trump administration will improve economic growth in the United States over the next few years. However, as global businesses they are also paying attention to the potential for protectionism under a Trump administration, not just what the administration would do but what that response would be, particularly from China.
Worst-case, we see a full trade war that disrupts supply chains to the vast majority of the 200 multinationals we work with, and that will disrupt economic growth worldwide. You might also simply see companies confronting stricter localization requirements in China and other markets affected. And all of this can start happening relatively quickly.
FSG Editors: What do you see in Europe that companies should be preparing for?
Antonio: We see electoral landmines throughout much of next year for the Eurozone project. The most concerning is certainly France, where we see a 40% probability of Marine Le-Pen becoming the next president. While the election of anti-establishment, anti-Euro populists will not necessarily mean the end of European project in 2017, it will drive a significant increase in uncertainty, weaken the Euro, and create more vulnerabilities for Europe’s beleaguered banking sector.
FSG Editors: What should multinationals do to prepare?
Antonio: There is a very strong case for contingency planning – we have found that the most sustainable performers in emerging markets are internally aligned on strategic assumptions, and resilient against external surprises.
We see 4 behaviors as key:
- Explicitly document assumptions and risks
- Review plan assumptions at least twice a year
- Strengthen local strategic thinking capability
- Use regional- and country-level scenarios
For existing Frontier Strategy Group clients, you can download a copy of the full report here.
Not a current client? You can purchase a copy on FSG’s online store here.