Globalisation continues to advance despite uncertain economic outlook: Ernst & Young

Despite faltering prospects for the world economy, globalisation is still increasing among a majority of the world’s 60 leading economies as they so far avoid descent into protectionism. However, 90% of business executives expect to see an increase in protectionist measures if the global economy slides into a double-dip recession, says a report released today by Ernst & Young.

The third annual Ernst & Young globalisation report draws on two sources of original research: Ernst & Young’s Globalisation Index, which measures the world’s 60 largest economies according to their degree of globalisation relative to their GDP, and a survey of 1,000 senior business executives worldwide, conducted in late 2011, canvassing their thoughts on globalisation; as well as a forecast of global and regional GDP growth over the next four years.

While Ernst & Young forecasts that global GDP growth will be just 3.4% in 2012, the index continues to predict that globalisation will continue to advance this year and up to 2015. This is most pronounced for medium-sized emerging markets like Vietnam, Malaysia, Mexico and Colombia and smaller European countries like Belgium, Denmark, Slovakia and Austria.

The UK and the United States are the only major markets where the index forecasts a modestly declining globalisation score in the next three years due to both countries introducing immigration rules that will impact on the hiring of foreign nationals. The only year in the past two decades when this trend paused globally was in 2009 at the height of the financial crisis. However, among the survey respondents, more than half think that a deteriorating economic environment will cause a dramatic increase in tit-for-tat protectionism.

James S. Turley, Chairman and CEO of Ernst & Young comments, “While globalisation continues apace regardless of weaker growth around the world, the spectre of protectionism remains a threat. Businesses and governments have to continue to make the case for globalisation as a positive force for economic and social good and avoid any descent into protectionism.”

Where will economic growth come from?

The performance of the emerging markets, led by the BRIC countries, continues to offset sluggish growth in the developed world. Ernst & Young forecasts that the combined GDP of the emerging markets is set to grow by 5.3% in 2012, continuing to outpace the developed world and increase their share in world GDP.

The GDP of emerging markets (measured on a purchasing power parity basis) could overtake that of the developed economies as early as 2014, with about 70% of total world growth in the next few years coming from the emerging markets, of which over a half will be from China and India.

The outlook in Europe, where Ernst & Young forecasts essentially flat growth in 2012 even if the sovereign debt crisis is resolved, and in the United States, where Ernst & Young is forecasting modest if below par growth of 2.5%, is less positive.

The business executives surveyed were understandably nervous about the current business outlook, highlighting a looming squeeze – slowing growth, increasing competition, significant operational complexity and shortages of talent in key markets – that they believe is diminishing business prospects. They were also more pessimistic than most economic forecasters.

While they remained optimistic about the medium-term potential for emerging markets, slightly more than half of the senior executives questioned believed that the global economy is likely to fall back into recession by the end of 2012. Almost two-thirds consider it likely that there will be a new global financial crisis, triggered by Eurozone debt defaults. And almost 90% of our respondents expect to see an increase in protectionist measures if the global economy slides into a double-dip recession.

What does it mean for business?

As well as the prospect of an increase in protectionism, the sovereign debt crisis in the Eurozone and the global economic slowdown have also raised the possibility of a new credit crunch as banks scale back lending against a backdrop of declining confidence in interbank markets.

John Ferraro, Chief Operating Officer of Ernst & Young, explains the challenge for business, “This daunting scenario presents many problems for global companies, not all of which possess the flexibility, responsiveness or skills needed to overcome them. Our research for this report has uncovered four fundamental business challenges that companies must navigate in the years ahead. These are complex and unlikely to be resolved quickly, but we believe that businesses can tackle them with new responses that rely on flexibility, speed and unconventional thinking.”

The four fundamental challenges

1) Succeeding in rapid-growth markets is harder than it used to be.

Succeeding in rapid-growth markets is becoming more difficult because costs are rising, competition is becoming more intense and growth, while still rapid compared with that of the developed world, is slowing. Companies will have to shed their organisational baggage, devise innovative strategies that will secure a quick payoff and take a broader stakeholder view toward the investment.

2) One size does not fit all markets.

As companies diversify into markets with vastly different prospects and business environments, they face increasing operational complexity. Companies will have to integrate networks according to logically grouped markets, rethink approaches to outsourcing as well as investigate the benefits of near-sourcing.

3) Policy has become more important and less predictable.

An uncertain and dynamic policy environment – especially rising protectionism – is causing considerable concern. Companies should engage with policy-makers to make the right decisions, combine local knowledge with global coordination and build stronger relationships with tax administrations.

4) Good people are hard to find.

Companies everywhere find it increasingly difficult to match suitable candidates with available positions. To help deal with the problem, companies should put the best talent in the most promising markets, promote managers in line with the pace of the market and revamp the expatriate model.

Long-term winners?

Ernst & Young believes that to be a long-term winner in this increasingly uncertain world companies will have to adapt a different mindset. In particular they should understand that managing across highly divergent and fast-moving markets requires focus on execution and operational excellence.

Companies must develop highly flexible business models that enable them to respond to new opportunities and threats. And they must understand why inclusive leadership is increasingly important to thrive in constantly changing conditions.