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Global economy to see ‘steady’ growth of three per cent in 2019 despite risks

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The global economy grew at a “steady” 3.1 per cent last year and similar levels of growth are expected in 2019, but these headline figures mask growth that is uneven and often failing to reach where it is most needed, the UN’s chief economist warned on Monday

“We still have relatively strong growth, but we do see rising risks on the horizon and an increasing likelihood that some of these risks might actually materialize,” said Elliott Harris, United Nations Chief Economist, in comments coinciding with the launch of the World Economic Situation and Prospects 2019 (WESP) report.

Among these looming dangers, accelerating trade tensions are already “having an impact” on global trade and employment, Mr. Harris told UN News.

In addition, rising national debt is also crippling many countries’ ability to provide basic services, but this and other risks – such as those from climate change and waning support for international cooperation – could be avoided or minimized if countries worked together to do so, the UN’s top economist insisted.

With mounting pressures in the areas of international trade, international development finance and tackling climate change, the report underscores that strengthening global cooperation is central to advancing sustainable development.

Yet, these threats come at a time when international cooperation and governance are more important than ever – many of the challenges laid out in the 2030 Agenda for Sustainable Development are global by nature and require collective and cooperative action. Waning support for multilateralism also raises questions around the capacity for collaborative policy action in the event of a widespread global shock.

UN report spotlights ‘uneven progress’

According to the WESP report, published by the UN Department of Economic and Social Affairs, more than half the world’s economies saw growth accelerate in 2017 and 2018.

Developed economies grew at 2.2 per cent in both years, while unemployment rates dropped.

Among developing economies, East Asia and South Asia saw the strongest gains in 2018, at 5.8 per cent and 5.6 per cent respectively, while commodity-exporting countries continued their “gradual recovery”.

This improvement was particularly true for fuel-rich emerging nations, despite high debt levels caused by a fall in commodity prices, in 2014-15.

Although the overall picture among developing economies is largely positive, many are nonetheless experiencing “uneven progress”, the UN report cautioned, amid falling individual (per capita) wealth in several nations.

“Further declines or weak per capita growth are anticipated in 2019 in Central, Southern and West Africa, Western Asia and Latin America and the Caribbean – homes to nearly a quarter of the global population living in extreme poverty,” it noted.

And even where growth is strong, it is “often driven by core industrial and urban regions”, the WESP 2019 report continued, such that rural areas are being left behind.

To overcome this, and for poverty to be eradicated by 2030, the UN report suggests that there will need to be “both double-digit growth in Africa” along with “steep reductions” in unequal pay levels.

US-China trade tensions

On the issue of trade tensions, it noted that these had led to a fall in global trade levels in 2018, from 5.3 per cent in 2017, to 3.8 per cent.

And as a result of the United States-China uncertainty, the expectation is that trade volumes in 2019 “will be lower” still, Mr. Harris suggested.

Government subsidies have to some extent softened the impact of the tariff hikes in the US and China – whose growth is expected to decrease from 6.6 per cent in 2018 to 6.3 per cent this year – but the risk is that developing economies may suffer the fallout too, unless the dispute is settled.

“If the trade dispute becomes more widespread, we will likely to see disruptions of global value change,” Mr. Harris explained. “Bear in mind that the participation of global trade has been one of the ways that developing countries have participated in the rising global prosperity and have accelerated their own developments. So, anything that disrupts that, of course, (will) have a negative impact on their abilities to increase their levels of prosperity and to develop sustainably.”

This cautionary assessment is telling because the US in 2018 contributed more to global trade than Japan or the European Union, according to UN economists at UNCTAD, the UN Conference on Trade and Development, which contributed to the WESP 2019 report.

Rising interest rates in the US – or a strengthening of the dollar – could also make matters worse for fragile emerging economies, the WESP report noted, adding that many low-income countries have already seen a “substantial rise” in interest repayments on their debt.

These include Lebanon and Sri Lanka, where over 40 per cent of Government revenue is spent servicing its debt, as well as Pakistan and Jamaica, where around a quarter of their budget is used to pay interest on national debt, representing a major constraint on public services.

Slow, steady growth in EU, but ‘Brexit’ looms

On the European Union’s prospects, the WESP report estimates growth of two per cent for the next two years, with much stronger performances, potentially, from States who became members since 2004.

The pack is led by Poland, which saw its economy grow by five per cent in 2018.

The bloc’s biggest economy, Germany, is set to see more moderate growth however, at 1.8 per cent, amid potential disruption to the domestic car industry from “new technologies, new competitors and significant legal and financial consequences from past sales practices related to the diesel technology”.

France is also set to see lower-than-average growth (1.8 per cent), linked to its weaker export outlook, while the UK (1.4 per cent) is projected to pay for trade uncertainty linked to its plans to exit the EU, or Brexit, with “companies moving assets or diverting investment from the UK to the EU”, WESP 2019 notes.

The ‘Brexit’ fallout may also be felt outside the EU, the UN report warns, with a possible “10-15 per cent decline in funding available to EU accession countries”.

Commonwealth States, Central Europe slso see ‘modest growth’

In most Commonwealth of Independent States (CIS), which includes Russia, most saw accelerating growth and slowing inflation last year, amid “supportive” commodity prices.

Despite this, overall growth is forecast to slow “modestly” this year to two per cent, and 2.5 per cent in 2020, WESP 2019 suggests, amid concerns that strong expansion in smaller economies may be unsustainable, while lower public spending is expected in others.

Focusing on Russia, the UN report notes that lifting the value-added tax (VAT) rate may encourage inflation and curb household spending, while ongoing sanctions could deter investment from abroad.

Other large commodity-exporting countries, such as Brazil and Nigeria, should see a “moderate pickup “in growth in 2019-2020, “albeit from a low base”.

Noting robust growth in Central Asia’s Tajikistan, thanks to increased aluminium and gold exports, WESP 2019 also suggests a much more positive future for the whole region, once China’s Belt and Road initiative becomes operational.

Frequently hailed as a 21st century version of the ancient Silk Road trade route, the region “should benefit from … upgrades to countries’ railway, road and energy infrastructure, improved connections with China and Europe, and better market access,” the report explains.

Elsewhere, South-Eastern Europe saw faster growth in 2018 and its overall gross domestic product (GDP) is expected to expand by 3.7 per cent in 2019 and 2020.

Serbia, the region’s largest economy, benefited from double-digit growth in investment amid strong performances in farming and construction, while Albania also saw “solid” economic performance, WESP 2019 noted, before cautioning that longer-term improvements risk being “constrained”, unless there are improvements in industrial infrastructure and dependence on foreign financing.

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Capabilities fit is a winning formula for M&A: PwC’s “Doing the right deals” study

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Ensuring there is a capabilities fit between buyer and target is key to delivering a high-performing deal, according to a new PwC study of 800 corporate acquisitions. . The study finds that capabilities-driven deals generated a significant annual total shareholder return (TSR) premium (equal to 14.2% points) over deals lacking a capabilities fit.

The “Doing the right deals” study looks at the 50 largest deals with publicly-listed buyers in each of 16 industries and evaluates the characteristics that delivered superior financial outcomes for the buyers, as measured by annual TSR.

A capability is defined as the specific combination of processes, tools, technologies, skills, and behaviours that allows the company to deliver unique value to its customers.

Two types of deals were found to outperform the market: capabilities enhancement deals – in which the buyer acquires a target for a capability it needs — and capabilities leverage deals – in which the buyer uses its capabilities to generate value from the target. These represent a true engine of value creation, delivering average annual TSR that was 3.3% points above local market indices. Deals without these characteristics – limited-fit deals – had an average annual TSR of -10.9% points compared to the local market indices.

While 73% of the largest 800 deals analysed sought to combine businesses that did fit from a capabilities perspective, 27% were limited-fit deals. The analysis shows that for every dollar spent on M&A, roughly 25 cents were spent on such limited-fit deals that in many cases destroyed shareholder value.

Alastair Rimmer, Global Deals Strategy Leader, PwC UK said: “Our analysis confirms that deals where the buyer is focused on enhancing its own capabilities or leveraging its capabilities to improve the target can result in a substantial TSR premium. Whether a deal creates value depends less on whether it is aimed at consolidation, diversification or entering new markets. What matters is whether there is a solid capabilities rationale between the buyer and the target.”

Capabilities fit delivers shareholder value across industries

The capabilities premium was found to be positive across all of the 16 industries studied. The share of capabilities-driven deals was highest in pharma & life sciences (92%), an industry where deals often combine one company’s innovation capabilities with another’s strength in distribution.  Other leading industries in capabilities fit deals were health services and telecommunications (both with 90% capabilities-driven deals) and automotive (86%).  Limited fit deals were found to be most prevalent in the oil & gas industry (62%), where asset acquisition can play an important role in addition to capabilities fit.

The analysis shows that the stated strategic intent of a deal, as defined in corporate announcements and regulatory filings, has little to no impact on value creation. Whether a deal fits or not depends less on stated goals of consolidation, diversification or entering new markets. What matters is whether there is a capabilities fit between the buyer and the target.  Deals aiming for geographic expansion notably stood out as performing less well than others, largely because many of them (34%) were limited-fit deals.

The M&A playing field has shifted due to COVID-19

More than ever, companies must be clear in defining which capabilities they can leverage to succeed, and which capabilities gaps they need to fill.

Hein Marais, Global Value Creation Leader, PwC UK added: “Deal rationales have shifted in a COVID context, reflecting the heightened need for new and different capabilities if an enterprise is to generate value and create sustained outcomes.  The need to move quickly increases the pressure to do deals at pace – and thereby the risk of failing to evaluate capabilities fit with enough care. Ensuring such capabilities fit, however, dramatically increases the chances of your deal creating value.”

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Companies may be overlooking the riskiest cyber threats of all

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A majority of companies don’t have a handle on their third-party cyber risks  – risks obscured by the complexity of their business relationships and vendor/supplier networks.  This is the finding of the PwC 2022 Global Digital Trust Insights Survey.  The survey of 3,600 CEOs and other C-suite executives globally found that 60% have less than a thorough understanding of the risk of data breaches through third parties, while 20% have little or no understanding at all of these risks.

The findings are a red flag in an environment where 60% of the C-suite respondents anticipate an increase in cyber crime in 2022. They also reflect the challenges organizations face in building trust in their data — making sure it is accurate, verified and secure, so customers and other stakeholders can trust that their information will be protected.

Notably, 56% of respondents say their organizations expect a rise in breaches via their software supply chain, yet only 34% have formally assessed their enterprise’s exposure to this risk. Similarly, 58% expect a jump in attacks on their cloud services, but only 37% profess to have an understanding of cloud risks based on formal assessments.

Sean Joyce, Global & US Cybersecurity & Privacy Leader, PwC United States said: “Organizations can be vulnerable to an attack even when their own cyber defenses are good; a sophisticated attacker searches for the weakest link – sometimes through the organization’s suppliers.  Gaining visibility and managing your organization’s web of third-party relationships and dependencies is a must.  Yet, in our research, fewer than half of respondents say they have responded to the escalating threats that complex business ecosystems pose.”

Asked how their companies are minimizing third-party risks, the most common answers were auditing or verifying their suppliers’ compliance (46%), sharing information with third parties or helping them in some other way to improve their cyber stance (42%), and addressing cost- or time-related challenges to cyber resilience (40%). But a majority have not refined their third-party criteria (58%), not rewritten contracts (60%), nor increased the rigor of their due diligence (62%) to identify third-party threats.

Simplifying the way to cybersecurity

Nearly three quarters of respondents said the complexity of their organization poses “concerning” cyber and privacy risks. Data governance and data infrastructure (77% each) ranked highest among areas of unnecessary and avoidable complexity.

Simplification is a challenge, but there is ample evidence that it is worthwhile.  While three in 10 respondents overall said their organizations had streamlined operations over the past two years, the “most improved” in our survey (the top 10% in cyber outcomes) were five times more likely to have streamlined operations enterprise-wide.  These top 10% organizations are also 10 times more likely to have implemented formal data trust practices and 11 times more likely to have a high level of understanding of third party cyber and privacy risks.

CEO engagement can make a difference

Executive and CEO respondents differ on how much the support the CEO provides on cyber, with CEOs seeing themselves as more involved in, and supportive of, setting and achieving cyber goals than their teams do. But there is no disagreement that proactive CEO engagement in setting and achieving cyber goals makes a difference.  Executives in the “most improved” group, reporting the most progress in cybersecurity outcomes, were 12x more likely to have broad and deep support on cyber from their CEOs.  Most executives also believe that educating CEOs and boards so they can better fulfill their cyber responsibilities is the most important act for realizing a more secure digital society by 2030.

Sean Joyce concluded: “Our survey shows that the most advanced organizations see cybersecurity as more than defense and controls, but as a means to drive sustained business outcomes and build trust with their customers.  As leaders of organizations, CEOs set the tone for focusing their cyber teams on bigger-picture, growth-related objectives rather than narrower, short-term expectations.”

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Are we on track to meet the SDG9 industry-related targets by 2030?

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A new report published by the United Nations Industrial Development Organization (UNIDO), Statistical Indicators of Inclusive and Sustainable Industrialization, looks at the progress made towards achieving the industry-related targets of Sustainable Development Goal (SDG) 9 of the UN 2030 Agenda for Sustainable Development. The report is primarily based on the SDG9 indicators related to inclusive and sustainable industrialization, for which UNIDO is designated as a custodian agency, showing the patterns of the recent changes in different country groups.

Six years after the adoption of the 2030 Agenda for Sustainable Development and its 17 SDGs, there has been increasing demand for information on whether the SDG targets could be reached, and what actions should governments take to accelerate progress. The UNIDO report introduces two new tools developed by UNIDO to help countries measuring performance and progress towards SDG9 industry-related targets: the SDG9 Industry Index and SDG9 progress and outlook indicators. The SDG9 Industry Index benchmarks countries’ performance on SDG-9 targets over 2000-2018 for 131 economies. In addition, the report develops two measures to answer the main questions:

  • Progress: how much progress has been made since 2000?
  • Outlook: how likely is it that the target will be achieved by 2030?

The global COVID-19 pandemic has inevitably had a negative toll on the progress towards reaching the SDG9 indicators, but the extent of the long-term impact remains to be seen. Industrialized countries continue to dominate global manufacturing industry, but their relative share has gradually declined over the past decade. In 2010, industrialized economies made up 60.3% of global production, which has decreased to 50.5% in 2020. China has been the largest manufacturer, now accounting for 31.7% of global production. This is a trend that has been reinforced by the pandemic.

Progress for the least developed countries (LDCs), at the heart of the 2030 Agenda, is a different story. While economic theory and countries’ experiences across the world have established that industrialization is an engine of sustainable growth, progress among LDCs remains very diverse. Asian LDCs are poised to double their share of manufacturing in GDP and thus meet SDG target 9.2, but African LDCs have stagnated.

SDG9 Industry Index

The SDG-9 Industry Index, consisting of five dimensions, covers three targets and five indicators and assigns a final score to countries. In 2018, the top ten consisted of exclusively industrialized economies, with Taiwan, Province of China, Ireland, Switzerland, the Republic of Korea and Germany making up the top five. In general, industrialized economies perform best in all dimensions of the Index.

The countries at the bottom of the ranking are LDCs, in particular those located in sub-Saharan Africa. Although some African countries have been displaying impressive growth rates, growth has been driven by an extended commodity boom and foreign capital inflows, while industrialization and structural transformation have stagnated. Additionally, substantial data is lacking for a significant amount of the countries. In the SDG9 Industry Index, only 24 out of 54 African countries are included, from which only eight are LDCs. It is clear that national statistics offices need strengthening, as data availability helps countries formulate, review and evaluate their development plans and programmes.

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