Populists crashing the euro; collapsing banks; Greece, France, the Netherlands and Italy out of the eurozone; crippling growth and sentiment: these were only some of MNCs’ fears for 2017 at the beginning of this year. Since then, improvements in fundamentals have signaled a strengthening recovery, and 2018 will be the year of solid, more predictable growth for MNCs operating across Western Europe (WEUR).
Most critically, political risk has subsided since H1 2017, after the positive outcomes in the French, Dutch, and earlier in the Spanish elections. German elections on Sunday will be no exception to this rule, and Chancellor Angela Merkel is likely to win, ensuring the positive momentum. Additionally, the health of WEUR’s banking sector is improving. Non-performing loans are at a gradual decline not only in Western Central Europe, but also in South Europe, and fragile banks’ mergers and recapitalizations have reinforced growth momentum through stronger credit growth. Last but not least, unemployment, the primary concern of political and business leaders in WEUR, has been declining fast in WEUR from 9.2% in 2014 on average to 7% in 2018, and even faster in South Europe. These improvements underpin the recent strength of the euro against the dollar, reaching a 2-year high in August and September, and WEUR will grow by 1.8% YOY in 2017, and 1.7% YOY in 2018.
However, MNCs should continue to invest in market monitoring, because this momentum could accelerate or easily be reversed in 2018. An overly optimistic or pessimistic viewpoint of WEUR executives will threaten performance, and aligning expectations with corporate will be critical to 2018 planning. Western Europe remains the third largest market globally after North America and emerging Asia Pacific (including China) accounting of the largest share of MNCs’ EMEA portfolio, highlighting that MNCs can’t risk poor performance in their WEUR portfolio.
MNCs will be in a good position to succeed in 2018 and get ahead of the competition, if they take into consideration the key risks and challenges for 2018. First and foremost, despite the risks having subsided, political and banking risks haven’t been fully addressed. Thus, MNCs should monitor the political risks that could potentially lead to a banking sector shock, albeit low-likelihood: the Italian elections by May 2018 and the rise in populism, and the end of Greece’s third bailout in summer that could lead to Greece leaving the eurozone. Moreover, MNCs should continue to invest in monitoring Brexit negotiations, which could lead in UK potentially leaving the EU customs union in 2019. This would severely impact not only MNCs’ UK performance, but also of markets with close trade links with the UK like the Nordics, and Western and Central Europe.
Secondly, macroeconomic conditions have improved, but only slowly, hence refining executional strategies will remain the key tool to reach 2018 targets. Credit growth has only recently turned positive in key markets like Spain, and continue to slowly strengthen in the rest. Unemployment remains sticky in France and Italy, and elevated in Spain and Greece. Thus, customers will continue to be price sensitive throughout 2018. MNCs need to closely monitor reforms for a brisker recovery to further raise capacity.
In terms of execution, MNCs who redefine their business model and value proposition will capture most of the 2018 momentum, while competition increases. Segmenting customers and re-estimating customers’ willingness to pay is essential to adjust pricing in a recovering market. Strong product positioning via multi-channel paths (from stores to e-commerce) will give a boost to MNCs’ market penetration. After revamping their business model, differentiation and innovation will continue to be a best practice in WEUR, encouraging introduction of new products, especially in top-performing markets like Germany and Spain.
For more information, clients can access our recently published Western Europe Regional Outlook for 2018.
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