The Business of Politics

Second-quarter results from the Duke/CFO Business Outlook Survey reflect political uncertainty.
July 18, 2016

Political uncertainty is altering the spending plans of U.S. companies, according to the latest Duke University/CFO Magazine Global Business Outlook survey. Worried by the upcoming presidential election and continuing Washington dysfunction, nearly half of U.S. firms (47%) are pulling back on hiring or spending.

Despite the political uncertainty, however, the survey’s Optimism Index for the U.S. economy remained steady in the second quarter. Financial executives rated the U.S. outlook at 59.4 (on a 0–100 scale), virtually unchanged from the previous quarter and approximately equal to the long-run average. Top concerns remain economic uncertainty, the difficulty of finding qualified employees, regulatory requirements, and the cost of benefits.

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Political Risk to the Economy

In this pre–Brexit vote survey, nearly 8 in 10 (79%) U.S. executives believe that the United States economy faces moderate (34%) to large (45%) political risk. Political risk to the economy was found to be lower in Europe (64% reported moderate or large risk for their individual countries) and Asia (69% reported moderate or large risk in their countries). Executives in both Africa and Latin America saw much higher political risks from their countries’ economies, with 90% of respondents in Latin America, and 93% of respondents in Africa, reporting moderate or large risk.

16Jul_Outlook_p45The greatest sources of U.S. political risk stem from the upcoming elections, Washington dysfunction, proposed regulations, and proposals to hike the minimum wage. (See chart, left.) At a point in the U.S. presidential election cycle when gross uncertainty typically begins to diminish, the unique circumstances affecting both the Democratic and Republican tickets have enabled substantial uncertainty to persist, and even grow, both within and across party lines.

This unique election cycle has also further applied the brakes to a legislative agenda that had heretofore shown scant forward motion. And CFOs are always wary of new government regulations (including changes to the minimum wage), fearing the business disruption, increased costs, and competitive disadvantages that can accompany new regulations.

Faced with this political uncertainty, the executives responding to the survey indicated that they are delaying or scaling back business spending plans until the risk dissipates. Specifically, they say that political uncertainty has led their firms to be more cautious with spending, making acquisitions, and hiring; each was cited by more than one-third of respondents.

Outside Looking In

Nearly 4 in 10 (38%) U.S. executives believe that foreign companies are wary about doing business with American companies due to U.S. political risks. This perception may be overly pessimistic — only about half as many executives outside of the United States agree that U.S. political risk is causing their firms to be wary of dealing with American firms. This perception by U.S. executives, relative to their counterparts around the globe, may be contributing to the survey’s finding that U.S. capital spending will increase by only 1% over the next year, a level that trails the expected inflation rate.

16Jul_Outlook_p44aOther countries’ willingness to do business with U.S. companies is also directly related to the topic of international trade negotiations and deals, which are a focal point of both U.S. political campaigning and legislative debate. A majority (54%) of U.S. executives think cross-country trade deals are good for the U.S. economy; this is lower than the approximately two-thirds of executives outside the country that favor such alliances. In sum, U.S. executives have a relatively dim view of dealings outside of their own country, compared with other countries’ eagerness to do business with them.

Around the World

Elsewhere in the world, economic optimism in Europe increased to 55.3 (on the 100-point scale) this quarter, up from 53 last quarter.

Top European concerns include economic uncertainty, regulatory requirements, government policies, weak demand, and employee morale. With 64% of European executives rating the political risk to their own countries’ economies as moderate or large, more than 6 in 10 (62%) companies are holding off on spending or hiring in response.

Asian optimism (excluding Japan) averaged 58.7 out of 100 this quarter, not much lower than the 59.3 registered last quarter. In Japan, however, economic optimism made a modest recovery to 47.8, following last quarter’s dive to 44.5.

Top concerns across Asia include economic uncertainty, weak demand, currency risk, government policies, and difficulty attracting and retaining qualified employees. With more than half (55%) of Asian executives rating political risk to their economies as moderate or large, an equal number (54%) of Asian companies are holding off on spending or hiring in response.

16Jul_Outlook_p44bAfrican optimism inched up from 45.7 to 47.4 this quarter, but African executives are worried about economic uncertainty, currency risk, government policies, limited access to capital, inflation, and difficulty hiring skilled workers. With 93% of African executives rating political risk to their economies as moderate or large (the highest in the world), 7 in 10 (72%) companies also are being cautious about spending or hiring in response.

Latin American economic optimism leapt upward to 52.9 from last quarter’s 44.6, as political uncertainties preceding the last survey have been settled in at least some of the countries in the region.

Optimism increased in Brazil, Chile, and Ecuador into the mid-40s, and remained much stronger in Mexico (65) and Peru (68.1).

Brexit Blowup

Lastly, European finance leaders were asked about the referendum in the United Kingdom on whether Britain should leave the European Union, the so-called “Brexit.” (The survey closed on June 3; the referendum was held on June 23—Ed.) European finance executives assigned a 42% likelihood of the Brexit being approved, ultimately doing a better job of predicting the decision to exit the EU than UK betting shops did.

When asked their opinion of a Brexit, strong majorities of European respondents believe that a Brexit would threaten the European Union (77%) and would lead to similar referendums in other EU countries (78%).

Strong majorities of European respondents also believe that the UK remaining in the EU is good for UK businesses (76%) as well as for other European businesses (78%).

Given the surprising outcome of the Brexit vote, these opinions effectively foreshadow a volatile and changing economic future for the UK, EU, and global economy.