Geopolitical Threats Rise as CEOs’ Confidence in Global Growth Declines

Two-thirds of CEOs (66%) believe that they face more threats in business today than they did three years ago. Just over a quarter (27%) believe that global growth will improve in the next 12 months, a decline of 10 percentage points compared to last year.

Additionally, findings from PwC’s annual global CEO survey indicate that just over a third (35%) are completely confident in their company’s growth in the coming year, a drop of four percentage points (39%) compared to last year and even one percentage point lower than in 2013.

 The results of PwC’s annual CEO survey “Redefining Business Success in a Changing World” clearly outline the bleak outlook for the global economy in the next twelve months. More than 1,400 CEOs were interviewed for the survey, which is published today at the opening of the annual meeting of the World Economic Forum taking place in Davos, Switzerland.

China’s economic rebalancing, falling crude oil prices, and concerns about geopolitical security are contributing to an overall increase in uncertainty regarding the prospects for global economic growth. Globally, just over a quarter (27%) of CEOs, down from 37% last year, believe that global growth will accelerate in the next 12 months, while 23% believe it will slow down (2015: 17%). The level of optimism among North American CEOs is only half (16%) of the most optimistic regions (Western Europe 33% and the Middle East 34%). Nearly a third of Chinese CEOs (33%) believe that global economic growth will slow in 2016.

Decline in Confidence in Revenue Growth

There has also been a decline in confidence in revenue growth for companies in the next twelve months (35% are “very confident” compared to 39% last year). In contrast to this pessimistic outlook, more optimistic CEOs are highlighted in India (64%), Spain (54%), and Romania (50%). The biggest turnaround occurred in Taiwan, where only 19% are very confident in short-term company growth, an astonishing drop of 46 points from 65% last year. However, Switzerland records the lowest confidence rate, with only 16% of Swiss CEOs very confident in revenue growth, a significant drop from 24% in 2015. Confidence in revenue growth has also declined compared to last year in almost all major global economies: in China 24% (2015: 36%), in the USA 33% (2015: 46%), in the UK 33% (2015: 39%), and in Germany 28% (2015: 35%). Italy 20% (2015: 20%) and Japan 28% (2015: 27%) remain unchanged. Only in Russia is there a contrary trend of increasing confidence from last year’s very low 16% to this year’s 26%. When it comes to investment opportunities, CEOs still consider the USA, China, Germany, and the UK as the most important for growth in the next 12 months, while Mexico and the United Arab Emirates have replaced Indonesia and Australia in the top 10 list.

Commenting on the survey results, Dennis Nally, global chairman of PwC, states:

– There is no doubt that business leaders’ confidence in the growth prospects of the global economy and their companies has taken a hit. Regardless of the size of the company, the threats they face are becoming increasingly complex and crossing the boundaries of geopolitics, legislation, cybersecurity, social development, people, and reputation. A new spectrum of risks has emerged for CEOs that poses threats to national and commercial interests. Pessimistic forecasts are further confirmed by the renewed status of the USA, China, Germany, and the UK as the most important countries for growth. The fact that CEOs continue to point to these countries as ‘safe havens’ underscores the general uncertainty about which countries will be long-term sources of real growth.

CEOs See More Threats

With increased concern for geopolitics, two-thirds of CEOs (66%) believe they face more threats in business today than they did three years ago. As in most previous years, overregulation is seen as the biggest threat to companies’ growth prospects. For the fourth consecutive year, 79% of CEOs have highlighted that concern about regulation has increased. However, geopolitical security has jumped from fourth place last year to second place this year on the list of concerns for CEOs. It was mentioned by 74% of business leaders. This has led to a drop in the availability of key skills from second to fourth place. However, nearly three-quarters of CEOs (72%) remain concerned about it. Concerns about currency volatility rank third (73%). Additionally, 61% of CEOs are worried about cybersecurity, which poses a threat to national and commercial interests. The highest level of concern is recorded among CEOs in the USA, Australia, and the UK (74% and above) as well as in the banking, technology, and insurance sectors.

Skills and Employment

Almost half of CEOs (48%) plan to increase their workforce in the next 12 months, a slight decrease from last year (50%). The highest hiring rates are recorded in India (70%), the UK (66%), and China (57%).

Concerns about the availability of key skills remain high (72%). In some sectors, particularly in entertainment and media and the technology sector, concerns are at a very high level, and sectors traditionally associated with STEM skills, including manufacturing, pharmaceuticals, and natural sciences, also appear in this category. Geographically, concerns are highest in Asia and the Pacific Rim (81%), the Middle East (83%), and Africa (86%), while the lowest is in Western Europe (59%).

Almost half of CEOs stated that they are changing the way they develop future leaders (49%), indicating that business leaders recognize a broader range of skills that the next generation of CEOs will need to tackle a more complex environment encompassing technologies, broader threats, and stakeholder expectations for their organization. The general attitudes of CEOs regarding increasing stakeholder expectations and issues with business confidence are also reflected in a greater focus on workplace culture and behavior, mentioned by 41% of them.

Government and Business

The government’s main priority should be a clear and effective tax system, says 56% of CEOs. This should be followed by a skilled, educated, and adaptable workforce (53%) and infrastructure (50%), both physical and digital. However, CEOs generally do not rate their governments highly, especially when it comes to the effectiveness of the tax system and income equality. Two-thirds (67%) believe that a stable tax system is more important than low tax rates. About a third (33%) believe that governments are ineffective in protecting personal data (26% effective), with the highest level of concern recorded in China (46%), the USA (60%), Brazil (72%), and Argentina (52%).

Technology

The survey highlights the power that technology has in business in terms of change and better understanding of customers and stakeholders. Nine out of ten CEOs (90%) state that they are changing the way they use technology to assess and meet customer and general stakeholder expectations. The greatest changes are recorded in sectors where expectations for customer service are traditionally high, including the banking and capital markets (90%), the insurance sector (95%), hospitality and tourism (94%), and healthcare (93%). Overall, more than three-quarters (77%) believe that technological advancement will change what is expected from business in the next five years.

Data processing tools, analytical tools, and CRM systems are believed to yield the highest return for stakeholder engagement needs. They are followed by research and development and innovation, which 53% of CEOs globally have prioritized. CEOs in Taiwan (76%), Brazil (72%), France (71%), and Germany (67%) have given them higher priority than the global average. However, technology and data analytics still have untapped potential internally. Only 4% of CEOs mentioned using predictive workforce analytics in talent management, while 16% use it to focus on productivity. Concerns about the speed of technological change as a threat to growth prospects are most strongly felt in the banking and capital markets (81%), which is 20% higher than the global average (61%). This is followed by the entertainment and media sector (79%) and the technology sector (66%), reflecting CEOs’ concerns about skills in those sectors.

Confidence in Business and Its Purpose

This year’s survey analyzes how CEOs are preparing to respond to changing customer and general stakeholder expectations of business. The need for companies to invest more effort in communicating their purpose and values was mentioned by 59% of CEOs. Confidence is certainly a cause for concern when CEOs consider the changing needs of stakeholders. More than half of CEOs (55%) are worried about the lack of trust in business compared to 37% just three years ago.

However, there are barriers to responding to changing expectations. A large number of CEOs (45%) say that additional costs prevent them from taking steps to respond to higher expectations. Unclear or inconsistent standards and regulations are also cited by 42% of CEOs as a significant barrier. More than three-quarters (77%) believe that technological advancement will change what is expected from business in terms of communication, reporting, investment, and planning in the next five years. Additionally, 71% of CEOs believe that the guiding principle of successful companies in the next five years will be creating value for a broader circle of stakeholders. 87% believe that companies will prioritize long-term over short-term profitability. Overall, they believe that in successful organizations, the needs of customers and other stakeholders will be more important than the needs of shareholders.

Dennis Nally adds:

– The environment in which CEOs operate is full of challenges. They recognize what stakeholders expect from their business in a broader sense. Transforming companies built on profit into companies where profit and purpose merge is neither a quick nor simple process, but it is a transformation that has already begun and with which companies must keep pace.