4 minute read 8 Oct 2018
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Why executives see upside in the global economy and want familiarity with trade post-Brexit

Strong corporate earnings underpin positive outlook for capital markets according to our latest mergers and acquisitions report.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

Global growth desynchronizes, but still running at an elevated level. Amid rising tensions over international trade, the broad global expansion that began two years ago has leveled off and become less balanced. But executives remain confident that global growth in the next 12 months will remain solid.

Economic activity continues to accelerate in the United States, driven in large part by recent tax cuts. In contrast, while growth continues in most major economies, it has slowed in many of them, including countries in the euro area, Japan and the United Kingdom. 

The US dollar has already appreciated broadly through 2018, and financial conditions facing emerging economies have become somewhat more challenging. Were the Federal Reserve in the US to raise rates faster than is currently expected, many emerging market countries could feel more intense pressures.

Executives report a more favorable view on the global economy than local (85% say improving at a global level versus 67% at local), which highlights the threat to overall growth if more barriers to the current integrated global market are raised.

What is your perspective on the global economic growth?

Strong corporate earnings and open credit markets point to a continued upswing in equity markets. 

Stronger-than-anticipated earnings in the first half of 2018 are underpinning executives’ outlook for capital markets and improved valuations.

Despite occasional tremors, underlying stability in many asset classes is in place and executives do not expect this to change in the coming months at a global level.

However, potential pressures on emerging market economies may increase volatility in some equity and credit markets, with a potential for cross-asset contagion through the latter months of 2018 and into early 2019.

What do you believe to be the greatest near-term risk to the growth of your core business?

While not capturing as many headlines as trade and tariff policy, disruptive forces, especially technology, remain at the heart of the known risks.

The pace of change wrought by technologies, especially those that enable customers to adapt preferences or buying behaviors, cannot be underestimated. Executives are continuing to focus on these disruptive forces, even as they negotiate other risks.

Increasing, and evolving, government and regulatory intervention in business issues and M&A is an emerging risk for executives. New policies on trade, tariffs and anti-trust need to be understood amid heightened policy uncertainty.

What is your expectation for the global M&A market in the next 12 months?

Policy uncertainty the biggest headwind to dealmaking in the near-term.

Policy uncertainty, both in terms of trade and tariffs and competition rules, are cited as the biggest challenge to dealmakers over the near term by nearly half of our survey respondents.

Certainty about the rules governing trade and market access have been a major driver of dealmaking, in particular cross-border, through the past two decades. As the global market has liberalized and opened up, executives have become more comfortable dealing in new markets.

Any significant changes to the liberalized, open and global markets pose new challenges and companies will need to adapt. As these considerations become clearer over the coming months, companies may be better able to navigate this evolving landscape.

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Spotlight on Brexit

Executives look to established frameworks as the preferred outcome to UK and EU negotiations. 

Brexit is the prime example of previously understood trade and tariff policy being upended. Executives are clearly signaling they would prefer a known framework to replace the existing UK/EU trading relationship.

The preferred options for respondents are ones built on familiar frameworks. Existing EU trade relationships, whether Swiss, Norwegian or Canadian, can be modeled into companies’ plans and operations.

Less favored is the UK’s current White Paper, otherwise known as the Chequers plan. This will be an unfamiliar framework, which may pose new challenges to companies, especially where trade in goods and services is intertwined.

What executives signal they do not want is the continuation of uncertainty that a second referendum in the UK will entail or a fall-back to World Trade Organization (WTO) rules. This “hard Brexit” would be problematic for many companies, as the UK is yet to agree its own position with regard to the WTO and the conditions of its independent membership.

Executives want familiarity, not uncertainty, over trade post-Brexit.
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*The Norway model — the European Economic Area option: access to single market for most goods and services; power to strike free-trade deals; UK must accept free movement of people and make EU contributions
The Switzerland model — the Economic Free-Trade Agreement option: bilateral agreement with EU affording UK select access to single market for goods but not services; UK must accept free movement of people and make specific EU contributions
The Canada and Japan model — the Free-Trade Agreement option: tariff-free access for most goods — services not necessarily included — but custom controls in place; UK does not need to accept free movement of people
The UK White Paper option — UK part of a free-trade area for goods but different rules for services; shared EU-UK customs border but with right to diverge on tariffs and strike own FTAs; free movement of people to be replaced by a mobility scheme with preferential access for EU citizens
Revert to WTO rules — acceptance of EU tariffs on goods exported to single market; UK halts EU contributions and free movement of people
A second referendum in the UK — Article 50 to be halted

The UK’s pre-eminence in financial services looks to be under pressure, post-Brexit.

The negotiations between the UK and EU over the initial withdrawal have still to be finalized, yet alone the shape of any future trading relationship. However, UK executives in our survey are more positive about the impact of Brexit on a range of financial and operational issues than either their EU-based counterparts or those from outside the EU.

This possibly reflects that Brexit has been the lens through which the UK has considered every issue over the past two years since the referendum. UK companies have had to consider their strategies and reshape their portfolios within this environment. They may have been ahead of the curve when considering each strategic decision within an environment of geopolitical flux.

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Brexit introduces new risks, but many UK executives see potential upside.

The negotiations between the UK and EU over the initial withdrawal have yet to be finalized, yet alone the shape of any future trading relationship. And yet UK executives in our survey are more positive about the impact of Brexit on a range of financial and operational issues than either their EU-based counterparts or those from outside the EU.

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Executives see upside in the global economy more so than local or sector growth. However, disruption, technology and shifting consumer preferences continue to pose the greatest near-term risk to businesses. Download the full report (pdf).