December 31, 2018

Further Growth Ahead in 2019, but Worrying Risks Loom

According to The Economist Intelligence Unit (The EIU), the research arm of The Economist, "The world's major industries are all set for further growth in 2019, but there are some worrying risks." The EIU's Industries in 2019 report discusses changes that US President Donald Trump's "policies—and other global trends—have already brought to six industry sectors: automotive, consumer goods and retailing, energy, financial services, healthcare, and telecoms. And we look ahead to the challenges facing these businesses in 2019."

The report highlights five major risks that could affect The EIU's industry forecasts for the year ahead.
  • The US-China trade war: The EIU cut its 2019 growth forecasts for the automotive and consumer-goods sectors in particular compared with six months ago.
  • A global slowdown: even those countries not directly affected by growing trade barriers could be vulnerable to a change in business confidence in 2019, with the most likely impact being on emerging markets.
  • Brexit: the UK's exit from the EU in March 2019 will be a drag on sectors including financial services, automotive and healthcare, regardless of any deal that is struck.
  • Sanctions on Iran: the US's decision to backtrack from the international Joint Comprehensive Plan of Action could push up global oil prices in 2019.
  • Cybersecurity and technology risks: a tussle for technological dominance is at the core of the US-China trade dispute, while regulators are also struggling to ensure safe connectivity.
The report importantly notes that "most of these risks are, to some degree, certainties. The UK will officially leave the EU on March 30th 2019, while US sanctions on Iran have already been imposed. It is not yet clear, however, what the full effects of these will be. Brexit's impact in 2019 depends on whether the transition deal that was negotiated in mid-November of this year is finalized, easing the UK's trade problems as it exits. In the case of Iran, much hinges on how successful the US—unsupported by the EU—is in blocking Iran's exports. If global oil supplies tighten sharply, then oil prices could yet soar. As for cybersecurity and technology risks, they are always present but are likely to increase in 2019 as connectivity spreads."

Moreover, "The power struggle between the US and China has already come to a head in 2018. In a three-stage process, the US has imposed additional tariffs of between 10% and 25% on Chinese imports worth about US$200bn a year. China has retaliated with its own trade barriers against the US, while liberalizing terms with some of its other trading partners. However, a further round of retaliation now looks likely in either December 2018 or early 2019, and could cover all of the remaining trade between the two countries."

I concur with The EIU that "how businesses react to rising tariffs will be as important as the tariffs themselves. Faced with increases in their trading costs, they can swallow the extra expense, pass it on to end buyers, or seek out new suppliers and new markets. They may also respond by reducing investment, laying off staff and reducing costs. Should that happen, we would expect global trade to shrink, inflation to rise, consumers' purchasing power to fall and global economic growth to slow."

The EIU expects all six of the industries covered in its "report growth in 2019, and in most cases it will be strong growth."
  • New-car sales in the 60 markets covered by this report will rise by 2.7%, with commercial-vehicle sales rising at the same rate.
  • World retail sales will increase by 2.8%, led by 6.1% growth in China.
  • Global energy consumption will rise by 1.8%, with particularly strong growth for renewables, while oil prices will firm.
  • Total deposits with the global financial industry will increase by 5.8%, while lending will rise by 6%.
  • Healthcare spending will climb by 5.1% worldwide, including 5.7% higher spending on pharmaceuticals.
  • Global mobile subscriptions will increase by 3%, fixed lines by nearly 2% and broadband subscriptions by 6%.
"This overall growth will give companies some breathing space as they maneuver to avoid the risks. Even so, the least adaptable will undoubtedly struggle during the sometimes difficult year ahead."

The Economist presents a list of ten items that will be the biggest stories of the year ahead.

What are your predictions for 2019?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

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