As we enter a new decade, CEOs are showing record levels of pessimism in the global economy, with 53% predicting a decline in the rate of economic growth in 2020. This is up from 29% in 2019 and just 5% in 2018 – the highest level of pessimism since we started asking this question in 2012. By contrast, the number of CEOs projecting a rise in the rate of economic growth dropped from 42% in 2019 to only 22% in 2020. These are some of the key findings of PwC’s 23rd survey of almost 1,600 CEOs from 83 countries across the world, launched today at the World Economic Forum Annual Meeting in Davos, Switzerland.
CEO pessimism over global economic growth is particularly significant in North America, Western Europe and the Middle East, with 63%, 59% and 57% of CEOs from those regions predicting lower global growth in the year ahead.
“Given the lingering uncertainty over trade tensions, geopolitical issues and the lack of agreement on how to deal with climate change, the drop in confidence in economic growth is not surprising – even if the scale of the change in mood is,” said Bob Moritz, Chairman, of the PwC Network. “These challenges facing the global economy are not new – however the scale of them and the speed at which some of them are escalating is new, the key issue for leaders gathering in Davos is: how are we going to come together to tackle them.”
“On a brighter note, while there is record pessimism amongst business leaders, there are still real opportunities out there. With an agile strategy, a sharp focus on the changing expectations of stakeholders, and the experience many have built up over the last ten years in a challenging environment, business leaders can weather an economic downturn and continue to thrive.”
CEO confidence in own revenue growth declines
CEOs are also not so positive about their own companies’ prospects for the year ahead, with only 27% of CEOs saying they are “very confident” in their own organisation’s growth over the next 12 months – the lowest level we have seen since 2009 and down from 35% last year.
While confidence levels are generally down across the world, there is a wide variation from country to country, with China and India showing the highest levels of confidence among major economies at 45% and 40% respectively, the US at 36%, Canada at 27%, the UK at 26%, Germany at 20%, France 18%, and Japan having the least optimistic CEOs with only 11% of CEOs very confident of growing revenues in 2020.
When asked about their own revenue growth prospects, the change in CEO sentiment has proven to be an excellent predictor of global economic growth. Analysing CEO forecasts since 2008, the correlation between CEO confidence in their 12-month revenue growth and the actual growth achieved by the global economy has been very close (see exhibit4 in notes). If the analysis continues to hold, global growth could slow to 2.4% in 2020 below many estimates including the 3.4% October growth prediction from the IMF.
China looks beyond the US for growth
Overall the US just retains its lead as the top market CEOs look to for growth over the next 12 months at 30%, one percentage point ahead of China at 29%. However, ongoing trade conflicts and political tensions have seriously dented the attractiveness of the US for China CEOs. In 2018, 59% of China CEOs selected the US as one of their top three growth markets, in 2020 this has dropped dramatically to just 11%. The US loss has been Australia’s gain, with 45% of China CEOs now looking to Australia as a top three key growth market compared with only 9% two years ago.
The other countries making the top five for growth are unchanged from last year – Germany (13%), India (9%) and the UK (9%). A strong result for the UK given the uncertainty created by Brexit. Australia is just outside the top five boosted by its increased attractiveness for China CEOs.
Worries about uncertain economic growth on the rise
In 2019 when asked about the top threats to their organisation’s growth prospects, uncertain economic growth ranked outside the top ten concerns for CEOs at number twelve. This year it has leapt to third place, just behind trade conflicts – another risk that has risen up the CEOs agenda – and the perennial over-regulation, which has again topped the table as the number one threat for CEOs.
CEOs are also increasingly concerned about cyber threats and climate change and environmental damage, however despite the increasing number of extreme weather events and the intensity of debate on the issue, the magnitude of other threats continues to overshadow climate change which still does not make it into the CEOs’ top ten threats to growth.
While CEOs around the world express clear concerns about the threat of over-regulation, they are also predicting significant regulatory changes in the technology sector. Globally over two-thirds of CEOs believe that governments will introduce new legislation to regulate the content on both the internet and social media and to break up dominant tech companies. A majority of CEOs (51%) also predict that governments will increasingly compel the private sector to financially compensate individuals for the personal data that they collect.
However, CEOs are in two minds as to whether governments are striking the right balance in designing privacy regulation between increasing consumer trust and maintaining business competitiveness, with 41% saying it does strike the right balance and 43% saying it doesn’t.
The upskilling challenge
While the shortage of key skills remains a top threat to growth for CEOs and they agree that retraining/upskilling is the best way to close the skills gap, they are not making much headway in tackling the problem with only 18% of CEOs saying they have made “significant progress” in establishing an upskilling programme. This sentiment is echoed by workers. In a separate survey by PwC, 77% of 22,000 workers around the world say they would like to learn new skills or retrain but only 33% feel they have been given the opportunity to develop digital skills outside their normal duties.
“Upskilling will be one of the key issues discussed this week at Davos and business leaders, educators, government and civil society must work together to ensure that people around the world stay productively engaged in meaningful and rewarding work. Leaders have a key role to play; although people may have fears about the future, they want to learn and develop and they are looking to leaders to provide a trusted path forward,” added Bob Moritz.
Climate change – challenge or chance?
Although climate change does not appear in the top ten threats to CEOs’ growth prospects, CEOs are expressing a growing appreciation of the upside of taking action to reduce their carbon footprint. Compared to a decade ago, when we last asked this question, CEOs are now twice as likely to “strongly agree” that investing in climate change initiatives will boost reputational advantage (30% in 2020 compared with 16% in 2010) and 25% of CEOs today compared with 13% in 2010 see climate change initiatives leading to new product and service opportunities for their organisation.
While views of climate change driven product and service opportunities have remained relatively stable in the US and the UK, there has been a dramatic shift in views in China over the last ten years. In 2010, only 2% of China CEOs saw climate change leading to opportunities whereas in 2020 this has risen to 47%, by far the largest increase of CEOs in any country included in the survey. However, for these opportunities to turn into long term success stories the principles of climate change need to be embedded right across a businesses’ supply chain and customer experience.
Capabilities fit is a winning formula for M&A: PwC’s “Doing the right deals” study
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.”
Companies may be overlooking the riskiest cyber threats of all
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.”
Are we on track to meet the SDG9 industry-related targets by 2030?
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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