As multinational executives head into 2019 annual planning, they face a highly complex environment in which to make bets that look increasingly at risk of disruption from geopolitical factors. In addition, they need to build 2019 annual plans with a keen eye on the following three years, as external conditions are likely to deteriorate over that period, and 2019 needs to lay the foundation of creating resilience within their organizations to whatever lies beyond. In EMEA, this is exacerbated both by the high risk of external risk of disruption to business in the region, as well as the challenges in making the case for investment resources in competition with a healthy US economy and ever-significant China opportunity. What are some of the key questions leadership teams need to address in these plans?
Growth across the region and in the world more generally has clearly recovered and remains on a fairly healthy trajectory. Even markets that suffered heavily from the oil price shock are experiencing some improvements, for example Russia, Nigeria, and even Saudi Arabia. Overall, we’ve increased our GDP growth forecasts across the region in the past three months and are now expecting weight-adjusted growth in SSA this year to average 3.4% YOY, in MENA – 2.8% YOY, in CEE – 3.2% YOY, and in Western Europe – 2.1%. These are healthy numbers supporting increasing opportunities for companies across sectors.
There are solid reasons to believe that this momentum can be sustained, though not accelerated, into 2019, and we expect growth next year to be on average slightly lower, but not substantially so, relative to this year. This should support both solid demand dynamics, as well as gradual opportunities for companies to raise prices and upsell customers in geographies and segments where purchasing power has remained more resilient or recovered faster.
The bad news is this is unlikely to last particularly long. Beyond 2019, the likelihood of a cyclical slowdown starting in the US increases substantially. While we believe that the US Federal Reserve will have the ability to intervene by dropping interest rates, other economies globally, particularly those in the eurozone, have significantly less monetary policy power to counteract a slowdown. As a result, a relatively modest slowdown in the US could turn damaging to Europe’s growth momentum, with spillover effects into Eastern Europe, Turkey, and North Africa, as well as the broader global economy.
As a result, 2019 plans need to lay a foundation of resilient growth for multinationals that can withstand some of these pressures when they arrive. This requires careful diversification of their geographic portfolio and its exposure to economic spillover risk. But more importantly, it also calls for re-think the value proposition and the way in which the company creates value for customers in a price-sensitive or spending-constrained environment. Even in markets that have recovered, the ability to ride growth with a sophisticated portfolio of products on a largely export-oriented model is becoming gradually obsolete. The companies that will be best positioned to deal with a cyclical slowdown will be those whose products are competitive, innovative, and affordable across a well-defined set of customer segments that they dominate. A lot of the work in defining, rolling out, and refining this offering needs to be core to 2019 plans if it hasn’t started already.
… and the ugly
The worrying part is that multinationals may not have enough time to put some of these plans in action before we need to active crisis mode operations once more. While cyclical slowdown risks can give us plenty of time to adjust strategy, more immediate geopolitical risks could disrupt both the operating and growth outlook much sooner. In particular, trade tensions between the US and China and the US and Western Europe could have massively disruptive effects to multinationals’ businesses as soon as in the next few months.
Depending on their scale, nature of retaliation, and spillover effects, companies could be looking at rising inflation, currency depreciation, increasing interest rates as well as challenges across customer and supply chains in a host of geographies that may or may not be obviously linked to direct trade conflicts between the US and other countries. For instance, Turkey and Central Europe are likely to be badly hit if the US imposes tariffs on European automotive exports, if the EU responds in kind, and/or if some of the US-China tensions play out, that may affect US companies with operations in Europe. Companies don’t need to be directly involved in the targeted industries to see a ripple effect through suppliers, indirect customers, or even broad macroeconomic spillover effects such as an economic slowdown or a currency depreciation. Should this play out, firms will need to go into contingency planning mode and integrate a lot more flexibility into 2019 plans, which will increasingly become a moving target.