The Economy

Geopolitical Realities May Stifle Economic Growth

Executives are bearish on geopolitics and its likely impact on commercial opportunities around the globe, study suggests.
David McCannOctober 18, 2018

Last year, executives told A.T. Kearney that they were very concerned about geopolitical instability — and at the same time, that they were bullish on the macroeconomic outlook.

The consulting firm disagreed with the sanguine assessment that geopolitical tensions would not affect the global economy, and said so in its annual “Views from the C-Suite” research report.

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This year, A.T. Kearney reports, executives seem to have seen the light.

“There is growing doubt among the global C-suite that strong macroeconomic performance can coexist with rocky geopolitics,” the firm writes in this year’s “Views” report. In fact, it adds, executives now point to a weakening global economy as one of the top challenges they face.

In this year’s study of 400 C-level executives and board members, the unstable geopolitical environment was rated as the top external challenge they face, followed closely by the high cost or low availability of capital, or both.

Even though executives were also most concerned about geopolitics last year (after that concern was ranked seventh in 2016), the specific areas of concern have shifted remarkably quickly.

A year ago, the primary focus was on refugee crises, transnational threats, and the escalation of armed conflict. Now, the top concerns include the imposition of tariffs, the intensification of sanctions, the rise of populism, and growing doubts about the resilience of the international framework for trade and investment.

Those factors “all cast a shadow of positive short-term prospects for the global economy,” the report states.

Contributing to the uncertainty is the United States’ pullback as leader of the international political and economic architecture. While China, the European Union, and others are trying to pick up the mantle, “a substantial global governance leadership void remains. The result is a weakening of the normative effect of the international rules of the game by which businesses have operated in recent decades.”

Meanwhile, survey participants’ outlook for the global economy tends to be bearish. That’s particularly true for North America, current strong U.S. economic performance notwithstanding.

By a wide margin, A.T. Kearney notes, business leaders across all regions and industries view North America as the most likely looming economic trouble spot. That “likely reflects growing concerns surrounding the threat of a full-blown trade war between the United States and China, NAFTA renegotiations, and various domestic political risks,” the report notes.

While the United States has maintained its strong economic growth trajectory, fueled in recent months by increased government spending and corporate tax cuts, risks to continued growth are rising.

In addition to concerns about the looming threat of a wider U.S.-China trade confrontation, expectations that the Federal Reserve will continue to raise interest rates through the next year have some economists predicting a recession in 2020. “Executives seem to agree that the economic expansion that started in mid-2009 will soon come to an end,” A.T. Kearney says.

Another trend discussed in the report is expanding corporate leadership expectations. “As people around the world lose faith in their government leaders’ ability to affect necessary change, they are looking to business leaders to play a larger role,” the report says.

More than two-thirds of executives said they believe they will be expected to take on a more significant role in societal issues in the coming year.

“This responsibility is at once an enormous opportunity for companies to reshape the capitalist system in a more inclusive way and a tremendous challenge for them to pursue broader societal objectives in a way that simultaneously improves their commercial success,” according to the report.