The 4 Greatest Risks to the Global Economy in 2020
February 19, 2020 |
The C2FO Team
COVID-19 has the world’s attention, but there are other threats that could further disrupt how business is conducted.
To say 2020 is off to a brutal economic start might be a bit of an understatement.
The rapid spread of COVID-19, a novel strain of coronavirus, has closed factories, halted transportation and kept workers at home around the world. A drastic drop in oil prices has further stoked fears of an impending global recession. Stock markets have been rattled and many companies worldwide are desperately seeking liquidity to address critical needs.
Everyone’s focus today is on the coronavirus, as governments place restrictions on social mobility and scramble to approve trillions of dollars in relief packages for affected workers and businesses.
The world has not experienced a pandemic of this scale in more than a hundred years. It’s difficult to determine how long the coronavirus will continue to take a devastating toll on the global economy.
Unfortunately, the virus is not the only threat on the economic horizon. As 2020 continues to unfold, here are what we believe to be the four greatest risks to global commerce, and some possible tactics for confronting them:
1. Global Pandemic
When the World Health Organization declared the coronavirus outbreak a global pandemic on March 11, it was expected but nonetheless a watershed moment.
The economic impact, of course, has been tremendous, as businesses temporarily shut down and lay off workers, and trading markets continue to tumble. The service and travel industries have been hit hardest, but nearly every company worldwide has experienced disruptions to earnings and supply chain health.
As the coronavirus appears to subside in China but continues to wallop Europe and the United States, we may not know for several months the full economic impact of the pandemic.
The good news is that governments and businesses are taking action.
Widely criticized at the time, China’s swift actions to contain the coronavirus in cities where the outbreak was spreading appear to have been instrumental in limiting the country’s number of infections and deaths.
Governments worldwide have borrowed from this approach, canceling events, closing schools and restaurants, and in many cases ordering residents to stay at home. Many businesses have supported these efforts by asking non-critical employees to work from home or even shutting down operations for a period of time.
Taking steps to mitigate the outbreak, while “flattening the curve” of those infected, may only go so far in defeating the virus. A recent article in The Atlantic explains how China’s policy of suppression—aggressively testing many people for the virus, even those without symptoms—was also key in the country’s success in containing COVID-19. Other countries, including the United States, have been slow to launch their own comprehensive testing efforts.
The coronavirus’ lasting effect on the economy will depend on how long the outbreak continues. In the meantime, governments may need to take additional bail-out measures for workers and businesses like the $1 trillion U.S. stimulus package that Congress is working to approve.
2. Trade Tariffs
Remember when trade tariffs seemed like a big deal a few months ago? Frayed trade relations among global powers still remain a threat.
The trade tariffs war between the United States and China in 2018 and 2019 hit the U.S. economy with rising costs for goods, dampened manufacturing, business investment and economic growth, and stoked political instability in other countries.
U.S. tariff increases of 10% to 45% affected about 16% of U.S. imports from China and other countries annually, the Congressional Research Service reported. This equated to roughly $396 billion of imports, based on 2018 data. U.S. imports from China constituted 90% of the affected trade.
The U.S. mitigated the effects on some imports by exempting Canada and Mexico from steel and aluminum duties and excluding certain products. But tariffs generally increased. In May 2019, for example, the U.S. increased tariffs by 15% to 25% on nearly $200 billion of Chinese imports and in September levied new tariffs of 15% on an additional $126 billion of Chinese imports.
The Congressional Budget Office expects trade tariffs to decrease real GDP by about 0.5%, increase consumer prices by 0.5% and cut average real household income by nearly $1,300 in 2020. On a better note, the Institute for Supply Management’s PMI for January was 50.9%, up from 47.2% in December. A reading of 50% indicates generally expanding manufacturing; a reading below 50% indicates manufacturing is generally contracting.
The U.S. and China eased the trade war on Jan. 15, 2020, however, with a “phase one” trade agreement, but a majority of the prior tariff increases remain. The agreement requires China to change its practices regarding intellectual property, technology transfer, agriculture, financial services and currency and foreign exchange, and to buy an additional $200 billion of U.S. goods and services in the next two years.
If your business relies on goods from China or Europe, now’s a good time to increase inventory before prices increase further. Another option is seeking alternative suppliers in countries unaffected by tariffs. It’s easier to make this kind of switch for raw materials and commodities than for finished products.
If you can’t save costs in your supply chain, you may have to raise prices. The upside is that, because the tariffs affect so much of the U.S. economy, most customers should understand why you’re passing along increased costs.
3. Cyber Threats
Cybercrime is on the rise and had cost the financial industry more than half a trillion dollars as of mid-2018. The Merchant Risk Council (MRC) attributes the growing risk to factors that include new technologies and sophisticated methods for invading financial systems. According to cybersecurity company McAfee’s chief scientist Raj Samani, cybercrime in mid-2018 was underreported by at least 95%.
Cybercrime affects economic growth, investment, jobs and innovation, MRC said. IP theft constitutes at least 25% of cybercrime costs and makes military technology especially vulnerable. Cryptocurrency hacking and fraud pose the biggest threats to financial institutions, with banks being the prime targets. Russia, North Korea and Iran are among the leaders in financial institution hacking and cyber espionage.
“China conducts cyber-enabled economic warfare against the United States and its allies,” according to the Center on Sanctions & Illicit Finance. Conservative think tank The Heritage Foundation says that, since Sept. 11, 2001, the U.S. has “forgotten that we can be the victim and not just the perpetrator of economic warfare,” and that “Chinese cyber-enabled economic warfare threatens U.S. supremacy.”
Taking a proactive approach to keeping your company’s data secure is essential in today’s digital world.
In the event of a cybersecurity breach, reporting it as soon as possible and working with government agencies to minimize the cost and damage could be your best approach. MRC says regulators can join forces to combat cybercrime by using a uniform technology security system and pressure nations that shield cybercriminals.
4. Global Recession
Even before the coronavirus outbreak, a worldwide global recession loomed as the top risk in 2020 among CEOs in the U.S., China and globally for the second straight year, according to the Conference Board C Suite Challenge 2020 survey. Respondents from Latin America and Japan ranked recession as the second-highest risk.
Recession fears persist with “continued uncertainty around global trade, increasing competition, global political instability, and tightening labor markets—which, in themselves, can be significant restraints on business growth,” according to a survey summary. In 2018, global recession was barely on surveyed CEOs’ radar, and a “real risk of this recession mindset is that it can become a self-fulfilling prophecy.”
Today’s worldwide shutdown of markets virtually ensures that we are in the midst of a global recession. However, it’s interesting to note that a pandemic was not even on the radar of U.S. CEOs just a few short months ago. At that time, they pointed to more intense competition and a tight labor market as their second- and third-greatest fears. Rounding out the worldwide top 10 are global trade uncertainty, global political instability, cybersecurity, more demanding customers, less trust in political and policy institutions, tougher regulations and climate change.
One effective way to insulate your company from economic uncertainty is to participate in an early payment program such as what C2FO provides. For suppliers, an early payment program through C2FO requires no fees or commitments and customers still pay directly. By offering your customers a discount for paying early through the program, you can receive payment in as little as 24 to 48 hours. Those customers benefit from participating in an early payment program because it provides a competitive return on cash and also helps strengthen their supply chains’ financial durability.
C2FO’s program enables you to control your cash flow on your terms. Grow your business but not your debt, secure capital for seasonal demand, and control financial metrics during key reporting periods. The process enables you to easily review invoices, choose which ones to discount, offer the discount and receive payment.
These are uncertain, unstable times. Recently, we have been reminded how markets hate that uncertainty, which is now widespread.
Your control of these risks is limited. Your business has likely been impacted by the coronavirus pandemic. At this time, careful budgeting and mobilization of cash are not an ironclad blueprint, but they will better prepare your business to face its financial foes in an unprecedented economic environment.