As the world looks to 2018, experts are anticipating more economic growth, reduced volatility, and optimism across markets. According to Bloomberg, the world’s economy is slowly reaching its best since 2011.
Yet despite favorable predictions, experts also warn there are a few scenarios to keep in mind that might affect the world of business. They range from political events to trade agreements, and prompt managers and corporations to rethink their strategies while they operate in a global marketplace.
According to an annual report put together by advisory firm Frontier Strategic Group that estimates and analyzes the impact of major world events on multinational corporations, it’s time for industries to reassess their plans and better respond to the various external challenges as well as opportunities in the upcoming year. Here are some of the events to watch in 2018 that could impact business worldwide.
A Korean Conflict
The relationship between North Korea and the U.S. grew much more tense in 2017. From missile tests to social media threats, the possibility of a potential war has alarmed both governments and citizens on the ground. According to Frontier Strategic Group, although a war is unlikely, tensions in the area would definitely have effects on the global economy. This would affect the Korean Peninsula the most, with major effects on South Korea accounting for 2 percent of the world’s gross domestic product, according to experts quoted by Business Insider. It will also impact supply, exports and investments and cause severe volatility. Experts warn that businesses need to evaluate their activity in the area, as well as come up with a plan to minimize risks of production in South Korea being affected by an armed conflict.
China’s Hard Landing
For the first time in almost three decades, China lost ground with credit rating agencies and was downgraded in May due to slow economic growth and rapidly rising debt. Experts warned that a credit-fueled growth makes China’s economy more vulnerable to financial shocks; the country’s debt has already surpassed three times its gross domestic product. In order to balance the risk associated with an overworked financial system and switch from a fast growth to high-quality development, the country announced reforms for 2018. But experts warn that if the reforms are late, they could trigger financial instability. “Chinese GDP would fall suddenly and sharply and then stabilize in a much lower range of growth,” the FSG report reads. “Consumer confidence would weaken. A freezing up of the financial system, lower confidence in Chinese economic stability, a stagnant economy, and depressed asset values would depress investment.” In order to prevent being caught by surprise, experts advise multinational companies to work on plans to support their Chinese partners who rely on local financing, while helping other partners in other markets that might rely on financing from China.
A U.S.-China War on Trade
While the Trump administration touted its “America First” policies, the world focused on President Donald Trump’s rhetoric about dismantling partnerships and how his actions have affected the country’s image on the global stage. Experts warn that Trump’s protectionist agenda on trade as well as his negotiation style could impact America’s relationship with its biggest creditor, China. One potential scenario: Global trade could be affected and dominated by the world’s powers, FSG mentions, and China might impose restrictions and punitive tariffs when dealing with the U.S., leading to an unpredictable global business environment with unpredictable operating costs. The same experts advise multinational corporations to work on their risk strategies in order to be ready to deal with any disruptions in the supply chain, as well as reorient their products to other markets.
A NAFTA Exit
The North American Free Trade Agreement between Canada, the U.S. and Mexico has been another important topic of the year, with President Donald Trump threatening to pull the U.S. out of the deal. As part of the agreement, which went into effect in 1994, some tariffs were lowered and trade and investment surged. Trade between U.S. and Mexico saw a big increase, more than doubling in 2015 compared to before NAFTA was enforced, while trade between Canada and Mexico quadrupled. Pulling out of NAFTA is not a complicated process — all a country would need to do is inform the remaining parties of its decision six months in advance. But if the U.S. leaves, experts warn that Mexico would struggle with investments, and their employment and domestic demand would be affected. The Mexican peso and the Canadian dollar would depreciate and increase inflation in Mexico, which would then need to tighten its monetary policy, which could reduce credit growth. In order to balance the potential negative effects, multinational companies should look at reassessing the regional supply chain, as well as rethink their activity in the Latin America region. “Even if NAFTA is not dismantled completely, the potential for market disruption in Mexico is high,” reads the FSG report.
A New Eurozone Crisis
In the last several years, the European Union has battled an immigrant crisis, experienced a shift to the far-right in political power in the East, and dealt with Brexit in the West. Although the EU has had a good year in terms of economic growth, surpassing the United States, experts still keep an eye on the European market. While unlikely, experts warn that an increased level in populism in Italy could adversely affect the markets by calling for another exit from the European block. This would affect the economic activity in the EU, and more so the banking system. The same scenario could apply to Greece if the country chooses to follow Britain’s lead. The Euro would depreciate, which would affect trade. As this poses risks for companies with operations in the EU, experts advise that they take steps in evaluating ahead of time the impact of these new Eurozone challenges and put together contingency plans to counterbalance the negative effects of the potential economic damage.
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5 Global Events to Watch in 2018 originally appeared on usnews.com
