Geopolitical instability, one of the more intractable issues over which businesses can exert limited or even zero influence, has understandably leapt to the top of economic concerns in boardrooms worldwide as executives weigh the likely effects of recent political developments on their operations. Companies polled by consultancy McKinsey & Co. say they are bothered by the implications of events like the annexation of Ukraine’s Crimea region by Russia as well as other developments in various parts of the globe that point to continuing turmoil in the geopolitical sphere.
Will these concerns abate if political leaders tone down their heated rhetoric over troubled regions like Crimea, the South China Sea – where several countries are locked in a territorial dispute with China – Venezuela and between South Korea and North Korea? Quite possibly. Only three months ago only 27 percent of respondents to the McKinsey survey saw geopolitical disputes as a problem but that number surged to 70 percent early this month when the research firm conducted the latest poll. By now, an even greater number of economic leaders are likely to be even more troubled by the de facto annexation of Crimea and the sanctions announced by Western countries in the European Union and the United States.
Even if the current disputes are quickly resolved without further inflammatory words and actions, it is likely that long-lasting damages would have been done already to the global economy, resulting in lower-than-expected growth, reduced investments in certain locations and the flight of capital to so-called “safety zones.” While the reactions of enterprise leaders vary somewhat depending upon their region – respondents operating in non-EU European countries are more alarmed, for example – the increase in the total number of executives worried about rising geopolitical risks should still be a concern for economic regulators.
“Given the degree of uncertainty in Ukraine after months of protests and political unrest, executives around the world agree that over the next 12 months, geopolitical instability will pose the biggest threat to global growth,” McKinsey said in the report. “In addition to the growing concern over geopolitics, executives also rank political conflicts and transitions higher than they did three months ago.”
Ukraine isn’t the only flashpoint of concern to business leaders although it is currently the most pressing worry. In Asia, the dispute over islands in the South China Sea between China and various countries, including the Philippines, Japan, Korea and Vietnam, has long been a simmering problem. In recent months China has clashed with Japan and the Philippines, sparking worries of a military challenge that could engulf the region in a major war. These concerns have only grown in the last few weeks as demonstrated by the dispute between Russia and Ukraine over Crimea, which the bigger company has now formally integrated into its territory. (See: Ukraine-Europe deal may cause unrest in east).
All sectors of the global economy would be negatively impacted by any further trouble in Eastern Europe and elsewhere, according to respondents to the McKinsey survey. The consultancy polled companies across multiple industry sections and technology companies share the conclusion of their partners in other sectors. While Russia and Ukraine play limited roles in the global high-tech market, the two other players that have entered the fray – the United States and the European Union – are major consumers of electronic products and also control critical segments of the design chain and supply chain.
Additionally, China is a key player in the electronics manufacturing industry and any outbreak of war between it and other regional players like Korea, the Philippines and Vietnam could cripple the supply chain, according to industry observers.
Executives in developing economies have other worries uppermost on their minds than the geopolitical concerns that is most pressing to their counterparts in Western economies, McKinsey said. This group of business leaders are lugging around old worries related to asset bubble, inflation and lagging consumer spending.
“On other top risks, executives in emerging and developed economies are divided. Those in emerging markets, for example, are more concerned than developed-market executives about inflation and volatile exchange rates,” McKinsey said. “Respondents in emerging markets are nearly nine times as likely as those in developed markets to cite high inflation, while much larger shares in developed markets attribute low demand to deteriorating household finances and postponed consumption. As in December, emerging-market executives are more worried about asset bubbles. They cite these more often as an overall risk to growth and are twice as likely as developed-market executives to say that over the next six months, asset bubbles will pose a significant threat to growth at home.”
The top six potential risks to global economic growth identified by the business leaders follow in order of importance:
- Geopolitical Instability
- Low Consumer Demand
- Domestic Political Conflicts
- Increased Economic Volatility
- New Assets Bubbles
- Transitions of Political Leaderships
The news from the McKinsey survey is not all negative, though. Looking further into the future, most executives expect the global economy to continue to grow and see positive developments in their local markets. “Executives are most likely to expect a global economic environment of renewed overall growth — that over the next decade, developed economies will spur innovations, and emerging economies will rely more and more on domestic-led growth,” McKinsey said in the report. “After that, executives say the most likely scenario is emerging-market resilience to crises in advanced economies.”