By Kathy Gibson – The only thing that is certain about South Africa’s economic outlook is uncertainty, and that we are in for a bumpy ride in 2020.
Indeed, around the world CEOs are exhibiting a record level of pessimism about what lies ahead for the global economy – fears that are mirrored by business leaders at home.
This is the word from PwC, presenting findings from its 23rd annual Global CEO Survey this morning.
“There is even more pessimism about the global outlook this year,” says Dion Shango, CEO of PwC Africa.
“We have also noted that in the past, where CEOs, even though they are pessimist about the outlook of the global economy, when asked about the growth prospects of their own companies, they have tended to be more optimist. This has changed this year, which is something that is interesting to note.”
Overregulation remains a key threat that keeps CEOs away at night, Shango adds. Uncertain economic growth is also high on the list.
Geopolitical trade wars continue to rise as well, along with new cyber-threats, Shango adds.
The survey indicates that, as we enter a new decade, 53% of CEOs predict 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 global CEOs projecting a rise in the rate of economic growth dropped from 42% in 2019 to only 22% in 2020.
CEOs in South Africa are also pessimistic about the rate of global economic growth with 44% (compared to 35% in 2019) believing that it will decline over the next 12 months.
In every region – Africa, Asia-Pacific, Central and Eastern Europe (CEE), Latin America (including Mexico), the Middle East, North America and Western Europe – the prevailing sentiment is the same: global economic growth will slow in 2020. In the past two years, the percentage of global CEOs who believe global GDP growth will decline has increased 10-fold (from 5% to 53%).
“No matter where CEOs look or from where they are looking, the path is fraught with uncertainty,” Shango says. “ Pessimism among South African CEOs has deepened this year characterised by a lack of business confidence and a decline in business activity overall. The current state of the economy and socio-political uncertainty is dampening business expectations.
“Despite the current uncertainty, there are still opportunities for South African CEOs to pursue. Faced with uncertainty, business leaders need to act decisively and quickly. Instead of looking inward, they should broaden their field of vision and strive to create a broader range of options to pursue.
“Some of these opportunities include the upskilling, development and training of their people. CEOs also need to look at how they can structure and further enhance their operational efficiencies.
“Making decisions in a way that is more resilient will enable organisations to thrive in the full spectrum of uncertain outcomes.”
Company growth prospects
Globally, CEOs are 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 organisations’ growth over the next 12 months – the lowest level we have observed since 2009 and down from 35% last year.
CEOs in South Africa are more pessimistic than their global counterparts regarding their growth prospects in 2020. Only 14% of CEOs in South Africa are ‘very confident’ about their 12-month revenue prospects compared to 18% in 2019 – 13 points below the global average (27%). Forty-four percent of South African CEOs (compared to 35% in 2019) also believe that global economic growth will decline over the next 12 months.
Despite a significant decline in optimism, South African CEOs – 78%, compared to 56% globally – are more confident about their own company’s prospects for revenue growth over the next three years.
Low confidence in growth
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, and 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 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. 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.
“For the first time, what CEOs think about global prospects, they are applying to their own companies as well,” Shango points out.
CEO prospects are historically an accurate indication of what will happen in fact, so PwC believes we can expect a decline in economic growth for 2020.
Lullu Krugel, chief economist at PwC, points out that the IMF forecast has revised its economic forecast down slightly to 3,3% growth. The World Bank forecast, on the other hand, comes in at just 2,5%.
“The difference in these forecasts is quite dramatic in my opinion,” Krugel says. “CEOs seem to be a bit more pessimistic that the IMF.
“The message this is telling us is that we are seeing a slowdown in growth. Definitely the brakes are on growth in the global economy this year.”
The South African picture is not positive either, Shango points out. The South African reserve Bank aims for over 1% growth, while the IMF and World Bank both expect it be lower than 1%.
“This just accentuates this uncertainty, which makes it so difficult to come up with the answers.”
Top threats
The top five risks and threats keeping South African CEOs awake at night, topped by uncertain economic growth (75%), include social instability (67%), policy uncertainty (67%), over-regulation (53%) and unemployment (50%).
The fact that policy uncertainty is still in the top five risk areas indicates that very little has been done to create certainty, Shango points out.
Social instability and unemployment points to an inability of government to crate an enabling environment for business to flourish, he adds.
Other risks are seen to be populism (44%), availability of key skills (42%), geopolitical uncertainty, exchange rate volatility, volatile energy costs (36%) and cyber threats (22%)
Policy uncertainty
This year, the world is seeing by far the highest levels of uncertainty driven by policy uncertainty since the World Uncertainty Index began measuring in 1996.
The high levels we see today reflect the impact of uncertainty around trade wars and US policy uncertainty, as well as issues around Brexit. Elections around the world have also had an impact, Shango explains.
A study by North West University shows that South Africa is also recording the highest levels of policy uncertainty ever, which drives business confidence goes down, Krugel points out.
Plans for growth
CEOs plan to grow their businesses in this challenging environment mainly through operational efficiencies and organic growth. “We are seeing an inside-out approach to growth,” Shango says. In this scenario, companies try to exploit their own strengths and supply chains rather than partnering outside the organisation.
Lower down on the scale, about 30% of South African companies are looking to new products or services, with about the same number looking to new strategic alliance of joint ventures. There is smaller appetite for entering new markets or looking to new mergers and acquisitions.
“The one positive is that management is in the area of operational efficiencies,” says Krugel. Typically this would indicate a cut in jobs, but South African employers have indicated that they are planning moderate reduction in headcounts, and 40% of companies actually expect to employ more people.
South African companies are now looking to growing opportunities in neighbouring countries, together with the UK and Asian powerhouses. The top 10 areas where local organisations expect to grow are Namibia (19%), Australia, Botswana, UK, Kenya, ivory Coast, Ghana, India, Zambia and China
The upskilling imperative
CEOs have recognised that growth can only be ensured by upskilling people – and increasingly it is recognised that this has to be done by companies themselves.
While the shortage of key skills remains a top threat 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 globally and 6% of South African CEOs saying they have made ‘significant progress’ in establishing an upskilling programme. This sentiment is echoed by workers.
The Fourth Industrial Revolution has ushered in new business models and new ways of working that require critical new technical, digital and soft skills. Those skills are in very short supply.
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.
“Workers need to be convinced that companies are engaging in upskilling efforts to improve their employability, not just to improve the bottom line,” says Machaba.
Cyber-threats and the impact on business
Cybersecurity is seen as a threat by companies around the world, even though they are often overshadowed by the bigger perceived threats around the economy and uncertainty.
Shango points out that the PwC CEO Survey indicates that regulators are expected to take a bigger role in cyber issues.
“Cyberspace is a key risk on the agenda of boards around the world,” Shango says.
Globally, 83% of CEOs compare to 75% in South Africa stated that the increasing complexity of cyber threats is shaping their businesses, followed by growing public concern over data privacy (Global: 61%; South Africa: 48%), and vulnerabilities in supply chains and business partners (Global: 61%; South Africa: 48%).
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, 78% of CEOs (compared to 71% of South African CEOs) believe that governments will introduce new legislation to regulate the content on both the internet and social media to break up dominant tech companies.
In addition, 51% of global CEOs (South Africa: 50%) predict that governments will increasingly compel the private sector to financially compensate individuals for the personal data that they collect.
Machaba adds: “It is becoming increasingly clear that many societies will no longer tolerate self-regulation. CEOs will increasingly need to collaborate with a diverse range of governments to shape appropriate solutions that deploy technology and leverage data in a safe way – one that protects consumers and respects their values while fostering innovation.”
CEOs take notice of climate change imperatives
The tide has turned on the climate change, with organisations around the world starting to take notice of the issue.
Shango comments. ““However, even with that shift in perception, it is clear that their response in investments and strategies could certainly be a lot more.
“So, while climate change is receiving a lot of airtime, it is quite clear that CEOs are yet to respond adequately in a way that is commensurate with how high on the agenda this topic has come.”
Shirley Machaba, CEO of PwC Southern Africa, comments: “When it comes to climate change, companies have changed. Climate change is critical, and CEOs are likely to see more benefits in investments around climate change.”
Although climate change does not appear in the top 10 threats to global 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.
In South Africa, 19% of CEOs ‘strongly agree’ (versus 10% in 2010) that climate change initiatives will lead to new product and service opportunities for their respective organisations.
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 10 years. China is an interesting case study because it is both the largest market for green products and the most polluting country, from a carbon perspective.
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.