While a Slow, Painful Recovery to the Global Economy Is Predicted in 2021, the EIU Says Digitalization Will Present Opportunities for Certain Sectors

While I am always mindful of risks that can impact a company's operations, a pandemic is not often a risk most corporate leaders prepare for. The coronavirus pandemic's grip on the global economy was certainly not in consideration when I published a post about The Economist Intelligence Unit's (The EIU) Industries in 2020 report. One year later, The EIU's report entitled Industries in 2021: A Slow, Painful Recovery, which gives its outlook for six global industries: automotive, consumer goods and retail, energy, financial services, healthcare and pharmaceuticals, and telecommunications, says "[m]uch of what we predicted in last year's report turned out to be wrong. As we all know, the coronavirus (Covid-19) pandemic overturned assumptions about the development of the global economy and destroyed any hope of steady growth for many industries. This year more uncertainties and risks lie ahead as the world stutters into a recovery."

The report explains: "With their finances already weakened by the pandemic and resulting lockdowns, many companies will not be able to take advantage of a recovery that is likely to be fitful. The consumer goods and retail sector in particular is likely to see a wave of bankruptcies and store closures as more business goes online. The financial sector will also have to cope with a sharp rise in non-performing loans that, in some cases, may overwhelm the provisions that banks have put in place. Restructuring will reshape even those industries, such as telecoms, which have emerged from the pandemic relatively unscathed. However, there will be some winners from this process as markets consolidate around surviving companies and opportunities open up for new business models."

What is more, "With many industries lobbying for support, governments whose tax revenues are already depleted will have to focus support and incentives on sectors with the strongest growth prospects, or those that feed into long-term policy goals. These are likely to include protecting jobs, promoting investment (particularly in innovation) and tackling climate change."

Regarding the energy sector, The EIU maintains "policy will focus on increasing the use of renewable energy. Even Poland, previously a staunch defender of its coal sector, will begin a phase-out, while markets in South-East Asia will see particularly strong growth in renewables. In the automotive sector, generous incentives will continue to encourage purchases of electric vehicles, particularly in Europe, although countries such as France will start to trim back funding as the sector develops. China, meanwhile, will shift its focus towards hydrogen fuel cell vehicles, previously an area where Japan led the way."

On the topic of trade spats and international disputes, the report suggests: "As countries and companies try to rebuild, their focus is likely to turn inwards, with domestic markets and operations becoming a priority. However, as pressure to reshore production and secure supply chains increases, this will have implications at an international level, too."

For example, "In the telecoms sector, this has particular implications for Huawei, a Chinese telecoms company that is now being targeted by US export controls. The technology war will also affect other sectors, including automotive and consumer electronics, while in the financial services sector concerns over China's intentions could undermine Hong Kong's role as an international hub. The UK, meanwhile, will face its own international challenges, as Brexit finally takes full effect on January 1st, drastically changing the business environment for financial firms, automakers and many others."

"Digitalization," according to The EIU, "will affect nearly every industry sector. In the consumer goods and retail sector (and even the automotive sector) the growth of online shopping will generate new companies and new jobs, making up for some of the cuts seen in real-world retailing. However, online retailers will not have it all their own way, with cash-strapped governments keen to raise digital taxes that are likely to exacerbate international tensions."

Moreover, "The rise in online shopping and other activity will also fuel the growth of new financial services, starting with digital payments and progressing into digital currencies, including national ones in China and elsewhere. Even healthcare providers, spurred by the pandemic and social distancing measures, are expanding their online services, with new regulations widening access to telehealth—while at the same time reining back its use where it could affect patient care."

The EIU's "key global forecasts for the six industries covered by this report are:

• "Asia will be the first region to rebound to 2019 levels in most industries, given its relatively shallow slump in 2020;
• "Latin America and Africa will see the slowest recovery, held back by low commodity prices and high debt levels;
• "new-car sales will recover to grow by 15% globally, while commercial vehicle sales will rise by 16%, but only China, Ukraine and Turkey will see sales return to their 2019 levels;
• "global retail sales volumes will grow by 3% but still fall 2% short of 2019 levels;
• "energy consumption will rebound partially—by 2.6% worldwide—but demand for oil and coal will remain lower than in 2019 as the use of renewables surges ahead;
• "financial firms will face weak demand for their services amid mounting debt defaults, while their income will be hurt by low interest rates;
• "healthcare expenditure, which dipped in 2020 despite spending on the pandemic, will surpass 2019 levels, rising by 7% worldwide in US dollar terms; and
• "global mobile subscriptions, which also dipped in 2020, will increase by 3%, again surpassing 2019 levels."

The EIU held a webinar, which is available through this link or the video embedded below, features industry analysts who comment on specific aspects of the report. While I recommend watching the session in its entirety, one point worth mentioning is the presentation of how the six industries covered by the report will be impacted by four key trends:

Job loses and bankruptcies will mount

• Automotive
• Consumer goods and retail

Some governments will aim to support a green recovery

• Automotive
• Energy

Trade spats and international disputes will remain disruptive

• Financial services
• Telecoms

Digitalization will offer the biggest opportunities

• Consumer goods and retail
• Financial services
• Healthcare and pharmaceuticals
• Telecoms

"As these decidedly mixed forecasts demonstrate," the report notes "there will be nothing straightforward about the global economic and business recovery in 2021. Even if the coronavirus is brought under control, many companies will face challenges that they will not be able to meet. Nevertheless, there will also be opportunities on offer for companies that are nimble enough to take advantage of rapid changes in the economic, business and political environment."

What are your predictions for 2021?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

2020 Will See a Pick-Up in Global GDP Growth and Global Trade, Despite Continuing Trade Tensions

"After a gloomy year, the world's major industries are looking for an upturn in 2020. However, much will depend on policies in the US," says a report by The Economist Intelligence Unit (The EIU), the research arm of The Economist, in its Industries in 2020 report.

In its Industries in 2019 report, The EIU "highlighted five major risks that could undermine global business during the coming year. Four of those risks came true: the deepening of the US-China trade war, an emerging market downturn, tussles over technology and sanctions on Iran. These all dented economic growth and consumer confidence, dragging down sales across several business sectors during 2019. The fifth risk we mentioned, Brexit, has still not happened, but continues to overshadow business in Europe."

The EIU is "expecting a pick-up in global GDP growth and global trade in 2020, despite continuing trade tensions. However, regional trends will diverge, leading to mixed growth forecasts for the six major business sectors covered in this report: automotive, consumer goods and retailing, energy, financial services, healthcare, and telecoms. While there will be opportunities on offer, there are six factors that will determine the direction of these industries in the coming year:

• "A sporadic recovery. Although the global economy will accelerate, growth will be led by an upturn in non-OECD markets, while OECD markets will remain subdued. However, GDP growth in China will also continue to slow, affecting global demand for many goods and exposing problems with manufacturing overcapacity.
• "A watershed election. The US presidential election in November 2020 will be a turning point for several sectors. The re-election of the Republican president, Donald Trump, would slow the rollout of renewable energy, for example, while a Democrat victory could bring new efforts to reform healthcare, as well as sharp increases in corporate taxes.
• "From trade to regulation. The US-China trade war will broaden to affect markets including the EU and Japan. However, the focus will turn from tariffs to regulation, particularly that of the financial and technology sectors. We expect more US sanctions against Chinese companies, as well as legal skirmishes over intellectual property.
• "Asian alliances. While the US continues to raise trade barriers, Asia is forging ahead with new trade deals. The 16 countries in the proposed Regional Comprehensive Economic Partnership (RCEP) aim to sign an agreement in 2020, creating the world’s biggest free-trade agreement. Meanwhile the 11 countries in the overlapping Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will continue to ratify that deal, while opening negotiations with potential new joiners such as China.
• "Brexit hangover. Even if Brexit happens on January 31st 2020—as currently expected—uncertainty will not disappear. The transition period could be fraught, with short-term disruption to trade flows heightening political wrangling over future trade deals.

What is more, "These factors will affect all six of the industries covered in this report, to varying degrees.

"The automotive sector, which has tumbled in 2019, will benefit somewhat from the recovery in many emerging and developing markets. We see car sales heading into positive territory after dropping in 2019. However, commercial vehicle sales in particular will come under pressure from global trade trends as the US continues to threaten vehicle-producing countries such as Mexico, Germany, Japan, South Korea and China with increased tariffs. Brexit will also bring enormous challenges for Europe's vehicle sector, particularly for UK-based producers.

"Consumer markets will also be badly affected by global trade tensions, particularly in the electronics sector, while the political turmoil in Hong Kong will dent sales of luxury goods. This, combined with retail’s greater reliance on developed markets and the rise of online retailing, will slow global retail sales. We expect retail sales to rise by just 2.2% in volume terms, down from 2.5% in 2019.

"For the energy sector, the pledges made under Paris Climate Change Agreement in 2016 will begin to take effect in 2020, making this the base year against which 2030 targets will be judged. However, with the US on the brink of withdrawing from the agreement, global progress will be slowed. The target of slowing global warming to less than 2 degrees centigrade is looking increasingly unattainable, unless the US election results in an unexpected policy change. The oil sector will also be vulnerable to political shocks, although we expect slow consumption growth to keep prices range-bound.

"The financial services sector will see little uplift from accelerating global growth, because it will be more affected by the slowdown in core OECD markets. The economic weakness of developed markets will keep interest rates low, maintaining the pressure on banking and investment margins. Several major financial hubs, including Hong Kong and London, will also be fragile amid difficult political conditions. However, the expansion of digital banking will hold immense promise for increasing financial inclusion in emerging markets.

"For the healthcare sector, too, the US presidential elections will be a particular watershed. Debates will rage over healthcare reform and drug pricing. With other countries also bearing down on prices but expanding access to healthcare, we expect global health spending to accelerate sharply, while spending on pharmaceuticals slows.

"In the telecoms sector, investment in 5G and fiber fixed-line services is likely to be a top priority in 2020. However, companies will have to invest with little certainty of a return and with regulation still uncertain. Moreover, the US-China trade war will continue to pose a major risk, given the dominance of Chinese companies such as Huawei in the build-out of telecoms infrastructure."

The report adds: "As a result of these trends, our key global forecasts for the six industries covered by this report are:

• new-car sales will recover to grow by 1.7%, but CV sales will edge down by 0.1%;
• retail sale volumes will increase by 2.2%, slower than the 2.5% reported in 2019;
• global energy consumption will rise by 1.8%, with particularly strong growth for renewables, while oil prices will remain range-bound;
• bank balance sheets and lending will expand by 6.5%, with Asia leading the expansion;
• healthcare spending will climb by 6.2% worldwide in US dollar terms, despite growth of just 3.1% for pharmaceuticals; and
• global mobile subscriptions will increase by 3%, fixed lines by nearly 2% and broadband subscriptions by 6%.

"Despite these mixed forecasts, there will be opportunities on offer for companies that are competitive and international enough to take advantage. Even so, they will have to be nimble to adapt to rapid changes in the business and political environment."

Lastly, The Economist produced a video presenting its predictions for the top stories of 2020.

What are your predictions for 2020?

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.

Report Explores How Finance and Procurement Executives Should Adapt to Technology Innovation and Shifting Dynamics of Global Trade

"Technology innovation and the shifting dynamics of global trade are challenging businesses in every sector to adapt," says a report written by The Economist Intelligence Unit. "This pressure is felt as much by the finance and procurement functions as any other, and their preparedness for emerging trends will greatly influence their organizations' ability to thrive in the future."

Sponsored by Basware, a Finnish software company, Whats now and next for finance and procurement? Automation, digitization and the future of global trade "examines which emerging dimensions of three broad trends—automation, digitization, and shifting trade winds—finance and procurement executives expect will affect their companies most; what their impact will be; and how they have prepared. It is based on a survey of over 400 finance and procurement executives in the US, the UK, France and Germany, as well as in-depth interviews."

The report's key findings include:

The biggest impact of automation will be on internal processes. Respondents expect the automation of payments, procurement processes and supply-chain management to have the greatest impact on their organizations, ahead of artificial intelligence (AI) powered decision-making or decision-making within other key finance and procurement processes.

This will reduce companies' headcounts. The most commonly cited impact of automation is a reduced need for staff, as identified by 36% of respondents. A smaller headcount will be performing higher skilled tasks, with nearly as many respondents (34%) believing that automation will free up time for them to focus on more strategic initiatives.

Headcount will be counterbalanced by increases in technology investment and digital initiatives. The most common way for survey participants to prepare for automation is to increase their technology budgets, a strategy adopted by 39% of respondents. This was also true of digitization.

Digitization will reduce overall costs but also intensify competition for talent, respondents believe. Just under a third (32%) expect digitization to bring down costs, the second most commonly expected impact, but almost as many (31%) agree that recruiting employees with specialist digital skills will be critical to unlocking digital transformation in their organizations.

China-US trade relations and post-Brexit trade negotiations loom large. These are seen as the two most impactful trade trends by a majority of the finance and procurement executives surveyed. They expect trade dynamics to have negative effects, most commonly an increase in procurement costs (35%) and greater supply-chain complexity (29%).

This is forcing companies to look further afield for growth. The most popular way to prepare for shifting trends in global trade, the survey shows, is to develop alternative sourcing options (37%). Securing alternative sales leads/ markets (32%) is another common response.

Companies cannot predict the future but they can prepare to adapt. A common thread linking preparations that companies have taken for automation, digitization and global trade dynamics is the ability to be responsive to whatever fate may throw at them.

The report concludes that "[t]he confidence among finance and procurement executives in their ability to adapt to automation, digitization, and global trade trends is encouraging. Although no-one can predict the future with certainty, the survey reveals that these functions have at least considered and, in many cases, made explicit preparations for potentially disruptive trends ranging from robotic process automation to Brexit."

Importantly, "while companies cannot predict the future, they can prepare themselves to be responsive to whatever fate might throw at them."

How should finance and procurement executives prepare for the most important trends shaping their future?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

EIU Report Lists the Possibility of a US-China Trade Conflict Morphing Into a Full-Blown Global Trade War as Its Top Risk in 2019

"The outlook for the global economy is worsening," asserts The Economist Intelligence Unit (The EIU). "Given concerns over slowing growth in key economies, including China and the EU, and the wider impact of a trade war between the US and China, The Economist Intelligence Unit expects global growth to decelerate from 2.9% in 2018 to 2.8% in 2019 and 2.6% in 2020. However, even when taking into account this downbeat assessment, there remain a number of risks emanating from three key areas that could drive growth even lower than we currently forecast in 2019-20."

In its latest report, The EIU identifies and assesses the top ten risks to the global political and economic order. Each of the risks is outlined and rated in terms of its likelihood and its potential impact on the global economy.

Source: The Economist Intelligence Unit

1. A US-China trade conflict morphs into a full-blown global trade war (Moderate risk; Very high impact; Risk intensity = 15)

"China and the US have started negotiations to resolve the current trade dispute, and the US government has decided to suspend further increases in tariffs on US$200bn-worth of Chinese goods. Talks are likely to yield a limited trade deal—involving Chinese purchases of US agricultural and energy products, but with only broad commitments to domestic economic reform, particularly over structural issues, including technology transfer and intellectual property. While this will avoid an escalation in tensions for now, a full-blown trade war between the US and China remains a significant risk to the global economy, owing mainly to the fact such a deal will lack the necessary enforcement measures to ensure Chinese commitment to the structural reforms demanded by US negotiators. Moreover, beyond bilateral protectionism, there remains a risk that trade conflicts will escalate on additional fronts in the coming years, to the extent that global trade could actually decline, with major knock-on effects for inflation, business sentiment, consumer sentiment and, ultimately, global economic growth."

2. US corporate debt burden turns downturn into a recession (Moderate risk; High impact; Risk intensity = 12)

"Falling consumer sentiment and manufacturing activity indicators highlight the worsening outlook for the US economy as it faces the effects of a trade war with China, the impact of a lengthy government shutdown in December-January and an eventual turn in the business cycle. Nonetheless, the economy’s fundamentals remain fairly robust, with economic growth at an estimated 2.9% in 2018, and inflation slowing to 1.9% year on year in December, despite gradually rising wage growth. In addition, the Federal Reserve (the central bank) moved to a more cautious approach to monetary policy in early 2019. Therefore, although we expect economic growth to slow to 2.3% in 2019 and to just 1.5% in 2020, our central forecast is that the US will avoid a damaging recession in 2019-20."

3. Contagion spreads to create a broad-based emerging-markets crisis (Moderate risk; High impact; Risk intensity = 12)

"Many emerging markets suffered currency volatility in 2018, primarily as a result of US monetary tightening and the strengthening US dollar. In a few instances, such as Turkey and Argentina, a combination of factors, including external imbalances, political instability and poor policymaking, led to full-blown currency crises. More recently, however, the pressure on most emerging markets' capital accounts has eased, as the US Federal Reserve has adopted a more cautious monetary policy stance. Nonetheless, market sentiment remains fragile, and pressure on emerging markets as a group could re-emerge if market risk appetite deteriorates further than we currently expect."

4. China suffers a disorderly and prolonged economic downturn (Low risk; Very high impact; Risk intensity = 10)

"In China, a shift towards looser macroeconomic policy settings is under way as a result of the escalating trade conflict with the US. This will support domestic demand in the short term, but in the process previous goals of lowering unsold housing stock and corporate deleveraging are receiving less emphasis. There is a risk that, in the government’s efforts to support the economy, policy missteps will be made."

5. Supply shortages lead to a globally damaging oil-price spike (Low risk; High impact; Risk intensity = 8)

"Market fears of oil-supply shortages have eased since the US granted six-month sanction waivers to eight of the key purchasers of Iranian oil in December. Along with higher output from Saudi Arabia and Russia, and global growth concerns, this has caused the price of dated Brent Blend to fall to close to US$60/barrel, compared with highs of over US$80/b in September. However, the risk of major supply disruptions remains."

6. Territorial or sovereignty disputes in the South or East China Sea lead to an outbreak of hostilities (Low risk; High impact; Risk intensity = 8)

"The national congress of the Chinese Communist Party in October 2017 was a milestone in terms of China’s overt declaration of its pursuit of great-power status, setting the goals for China to become a 'leading global power' and have a 'first-class' military force by 2050. The president, Xi Jinping, is keen to develop China's global influence, probably sensing opportunity during a period of US retrenchment. How China intends to deploy its expanding hard-power capabilities in support of its territorial and maritime claims is a source of growing concern for other countries in the region."

7. Cyber-attacks and data integrity concerns cripple large parts of the internet (Moderate risk; Low impact; Risk intensity = 6)

"Public, corporate and government faith in the internet as a source for global good is under strain. Revelations of major data breaches across a range of social media, and the use of that data for propaganda, are likely to see social media companies facing tighter regulation in the coming years. Meanwhile, cyber-attacks continue apace. In March 2018 the US blamed Russia for a cyber-attack on its energy grid. At a similar time there was a sustained attack on German government networks. Although these attacks have been relatively contained so far, there is a risk that their frequency and severity will increase to the extent that corporate and government networks could be brought down or manipulated for an extended period."

8. There is a major military confrontation on the Korean peninsula (Very low risk; Very high impact; Risk intensity = 5)

"There was a pick-up in diplomatic activity on the Korean peninsula in 2018, peaking with a historic summit in June between Mr Trump and the North Korean leader, Kim Jong-un, in Singapore. Decades of carefully planned approaches between the US and North Korea have failed, but there is a glimmer of hope that a more improvised and personal approach by two unorthodox leaders could make progress, with a second meeting between the two scheduled for late February. However, we maintain the view that there are irreconcilable differences between the US and North Korea on both the pace and the breadth of denuclearization."

9. Political gridlock leads to a disorderly no-deal Brexit (Low risk; Low impact; Risk intensity = 4)

"Although a withdrawal agreement between the EU and the UK was finalized at an EU summit on November 25th, it was initially rejected by UK members of parliament in a vote in mid-January, and only received parliamentary backing in a later vote on condition that the Irish border backstop be renegotiated. (The backstop stipulates that the UK would remain in a customs union with the EU indefinitely should a trade agreement preserving an open Irish border not be found.) However, the EU has so far rejected any reopening of withdrawal agreement negotiations. With so little room for maneuver before the March 29th deadline, we think that the UK prime minister, Theresa May, will be forced to delay Brexit by requesting an extension of the Article 50 window."

10. Political and financial instability lead to an Italian banking crisis (Low risk; Low impact; Risk intensity = 4)

"After positive growth in the preceding 14 quarters, the Italian economy contracted in both of the final quarters of 2018, constrained by a mixture of domestic political and economic uncertainty, tightening liquidity conditions and the worsening global trade outlook. In the light of this, we expect real GDP growth to slow from 0.8% in 2018 to just 0.2% in 2019. There is, however, a risk of a much deeper recession should investor confidence lead to another spike in bond yields."

Source: The Economist Intelligence Unit

Which risks provide the greatest concern to you or your business?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

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.

EIU Report Explores How Brexit Will Affect Trade, Regulations and Jobs Within Six Sectors of the UK Economy

To my surprise (and disappointment), the United Kingdom electorate voted in 2016 to leave the European Union. In March 2017, Theresa May, the UK prime minister, informed the European Council president Donald Tusk of the UK's intention to leave the EU in March 2019 in accordance with article 50 of the Treaty on the European Union. Several of my friends and colleagues have asked for my opinion on how Brexit will affect the UK's economy in general as well as its impact in specific sectors.

Admittedly, I have yet to formulate a definitely response. To date, so many variables are undetermined, which carry terms such as "hard Brexit," "soft Brexit," "EEA" or European Economic Area, "Norway minus," just to name a few. Therefore, I read with great interest a report, A Year To Go: How Brexit Will Affect UK Industry, published by The Economist Intelligence Unit (The EIU) that explores how Brexit will affect trade, regulations and jobs within six sectors of the UK economy.

The report provides the latest update about negotiations between the UK and EU by noting that "a summit of EU leaders on March 23rd agreed the terms of the transition agreement reached by the UK and EU negotiating teams on March 19th. Talks on the substantive issue of the future trading relationship have yet to start in earnest and a deal is supposed to be done by October 2018 to allow time for ratification."

Moreover, "With a year to go before the UK leaves the EU and the 21-month transition period begins—during which time the UK will maintain access to the single market and will be bound by the obligations of membership--this report analyzes the possible impact on six sectors of the UK economy. The transition agreement provides businesses with some certainty that they will have time to adjust to the new UK-EU relationship. However, Brexit will nevertheless entail some disruption. In three sectors, we expect the impact to be direct and difficult to manage—financial services, healthcare and life sciences, and automotive. In consumer goods and retailing, telecoms and energy, the impact is likely to be more diffuse but still disruptive."

The first part of the report discusses The EIU's "current core forecast for Brexit, which involves the UK agreeing to a Canada-style free-trade-agreement (FTA) with some special terms for sectors that are particularly important to the UK economy." The report adds, "this so-called Canada-plus-plus deal will probably emerge during the transition period. We then outline a 'hard Brexit' or 'nodeal Brexit' scenario that involves talks breaking down during the transition period, and the UK leaving the EU without a trade agreement. Using the usual modelling techniques that underpin our industry forecasts, we compare how the economic growth projections for these two scenarios would affect key indicators for our six sectors, unless policies are adopted to mitigate those effects.

"The second section of this report is more qualitative and focuses on how Brexit will affect companies and other organisations operating in our six sectors. The issues at stake mainly involve trade, regulation, employment and skills and access to investment with much riding on how the UK coordinates its policies with those of the EU and its institutions."

The issues at stake mainly involve trade, regulation, employment and skills and access to investment with much riding on how the UK coordinates its policies with those of the EU and its institutions.

The EIU's key forecasts are:

"We expect the UK economy to carry on growing in 2018-22 under our core scenario of a Canada-plus-plus deal and our hard Brexit scenario. However, if the UK leaves the EU without a trade deal we estimate that by 2022 the UK’s nominal GDP will be 2.7% lower than in our core scenario. Given that inflation would also rise under a no-deal Brexit, real GDP growth in 2020-22 would probably be halved. However, our long-term outlook for the UK economy remains positive, regardless of the terms of the UK’s departure from the EU.

"After Brexit our view is that London will retain its status one of the world's leading financial centers, along with New York and Singapore, and that it will also remain Europe's leading financial hub after Brexit. There is also a large degree of inter-dependence between the UK and EU financial services sectors, just as there is for the trade in goods between the UK and the EU. This inter-dependence matters and means that there is to some degree a mutual interest in achieving a deal that works for both sides. Even under the core scenario, however, a financial services deal will be partial and some financial institutions will consider relocating some personnel and parts of their business after Brexit. The sector is more reliant on global than on EU trends, and will remain a robust driver of the UK economy.

"The healthcare and life sciences sector is likely to see exports shrink under our core scenario, but the worst-case scenario—a shortage of much-needed medicines—will be avoided through regulatory agreements. The slower economic growth predicted under a no-deal Brexit scenario would dent tax revenue and consumer spending. Unless policies are adopted to mitigate the effect, this would result in total health spending per head being £90 (US$125) lower in 2022 than it would be under a softer Brexit. However, the UK government could potentially use some of the fiscal savings from ending contributions to the EU budget to mitigate the impact on these sectors.

"The automotive sector faces a huge challenge: without a UK-EU FTA, large-scale production in the UK would become difficult. UK vehicle-makers will try to expand in other export markets, but will also need to stimulate domestic demand. Under a no-deal Brexit, we forecast that vehicle sales would be 13.1% lower by 2022 than they would be under our core scenario. Cumulatively, the industry would sell around 840,000 fewer vehicles between 2019 and 2022 than under our core scenario.

"The loss of EU workers and disputes over regulation will affect most consumer goods manufacturers, as well as the food sector. Unless agreements are reached over mutual recognition, the effect is likely to push down exports and push up the prices of imports still further. The biggest impact of a no-deal Brexit would be on retail spending, which could be 13.4% lower in nominal terms in 2022 compared with our core scenario.

"In terms of energy policy, the UK will continue to forge ahead on emissions reductions and decarbonization. However, the task will become more difficult and energy costs may rise if it exits Europe's internal energy market. Energy consumption would be 2.9% lower by 2022 if the UK leaves the EU without a deal and the economy slows as expected.

"The UK's exit from the 'digital single market' will primarily affect telecoms operators with significant business on the continent. However, there may also be an effect on investment in innovation, as well as on the prices that UK consumers pay when using their mobile phones abroad. Investment in mobile technology could be 3.5% lower by 2022 under a no-deal scenario."

Based on my readings as well as conversations with experts in financial services, I agree with The EIU's assessment that London will retain its status one of the world's leading financial centers and that it will also remain Europe's leading financial hub after Brexit. I expect, however, to see financial firms grow their operations in key EU cities such as Dublin, Frankfurt, Madrid, and Paris in the coming years. Doing so will mitigate any work permit issues employees from countries outside of the EU may encounter working in the UK. Furthermore, companies, including those I manage or consult, may develop a two-pronged European strategy with a unique approach for tailored for doing business in the UK and a separate strategy for the EU.

As far as Brexit's impact on the other five sectors covered by the report, I remain attentive to negotiations that will lead to formal agreements in the months ahead. I think the UK electorate made a mistake in voting to leave the EU. Nevertheless, I, along with several U.S.-based business executives, am hoping for a solution that will provide minimal negative impact to the UK economy.

How do you think Brexit will affect trade, regulations and jobs within the aforementioned six sectors of the UK economy?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

The Global Healthcare Industry Will Experience Many Changes in 2018

My previous post focused on The Economist Intelligence Unit's (The EIU) report, Industries in 2018, that forecasts how six industry sectors (automotive, consumer goods and retail, energy, financial services, healthcare, and telecoms) will develop globally over the coming year. This post focuses on report's discussion of the healthcare industry, which asserts the continuing policy chaos in the United States, China's health reforms and the preparations for Brexit as the biggest challenges for companies.

"US attempts to overturn Obamacare will still head the agenda in 2018, but other countries may have more success with their reform plans," the report explains. "Efforts to overturn the 2010 Affordable Care Act (ACA, commonly known as Obamacare) have loomed over the US healthcare sector in 2017 and are likely to do so again in 2018. Whereas the Republicans spent much of their first year in office trying to draft and pass reforms to 'repeal and replace' Obamacare at the national level, over 2018 they will focus on dismantling the current system from the inside." The EIU asserts that "as the system crumbles, there will be increased pressure from the public and from industry to come up with viable alternatives. Individual states are already stepping into the breach."

The report notes that "what happens in the US will be vital to the global healthcare and pharmaceuticals sector over the coming year." Furthermore, The EIU "expects US healthcare spending to reach US$3.5trn, which is around 44% of the global total (based on the 60 biggest economies). Pharmaceutical spending will reach around US$444bn, or around 36% of the global total, despite efforts to rein back prices. No other market will come close: health spending in China and Japan, the nearest contenders, is less than one-sixth as high."

With respect to China, the world's most populous country will see important changes in 2018. The Chinese "government will continue with its efforts to broaden and deepen the national healthcare system. This will involve implementing the numerous reforms begun in 2017 or earlier. Two of the three public health insurance schemes, the New Rural Co-operative Medical Scheme and Urban Resident Basic Medical Insurance, are gradually being merged. Tax breaks introduced in mid-2017 will encourage more people to take out top-up private insurance."

The report importantly says,

In the meantime, China's family-doctor system will expand, and hospitals will start to adopt new management procedures. These will include new payment schemes and a double-invoice system intended to reduce hospitals' reliance on mark-ups from selling pharmaceuticals. Pressure on pharmaceutical prices will increase still further. However, other measures will be aimed at improving drug quality and speeding up the approval of innovative medicines. This follows a ruling in October 2017 allowing companies to use foreign trial data to support their applications.

It is a packed agenda, and not all of it will work. As is usual in China, many of the reforms will be done on a pilot basis in particular regions and cities, and even when the policies are supposed to be national, implementation will vary across the country. Pharmaceutical companies will have to adapt quickly to cope with the changes and to benefit from market growth, which we expect to be around 8% in local-currency terms but just 3% in US dollar terms.

Emerging markets will also experience far-reaching changes in their respective healthcare sector:

India will be starting to implement the National Health Policy it unveiled in March 2017, which aims to provide free drugs, diagnostics and emergency services to all Indians through public hospitals. Indonesia will be scurrying to meet its goal of universal coverage by 2019, while the Philippines has a similar goal for 2022. Pakistan will continue to pilot the prime minister's National Health Insurance Programme for low-income households.

Many countries in Latin America and the Middle East, as well as Russia, will be reassessing funding for healthcare as their economies recover from the effects of low global commodity prices. In Mexico, for example, the government has promised to unify public healthcare services into a universal social service, while Brazil's government is considering introducing a compulsory health insurance system. South Africa is due to release its long-awaited plans for health insurance in late 2017, although they may be delayed again.

Lastly, listed below, in its entirety, are items to watch for in 2018:

• EU regulations: Data protection rules will come into effect in May 2018, followed by rules on e-procurement in October 2018. However, the implementation of new clinical trials regulations, initially scheduled for 2018, has been delayed until 2019. The EU will also be working towards the full implementation of its 2017 Medical Devices Directive by 2020, and for in vitro diagnostics medical devices in 2022.
• Patent expiry: Generic competition looms in the US for two erectile dysfunction drugs: Pfizer’s Viagra (sildenafil) has protection until 2020 but will face competition from Teva’s copy from the end of 2017, while Eli Lilly’s Cialis (tadalafil) will lose patent protection in September 2018.
• Polio eradication: The Global Polio Eradication Initiative is likely to narrowly miss its 2018 deadline for wiping out the disease worldwide. At the end of October 2017 the only countries where the disease is still endemic—Afghanistan, Pakistan and Nigeria—reported a combined total of 12 wild polio cases this year, along with 61 vaccine-derived cases.

What changes do you predict to occur in the healthcare industry in 2018?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.