Many factors are impacting economic growth. And volatility tops the list. According to a McKinsey Global Survey of executives, “Over the next five years nearly all respondents expect a disruption in the global economy due to volatility. And they are much likelier now — 43 percent, up from 29 percent in 2013 — to expect that potential disruptions to the economy will be very severe.”

As stated in the report, “This is a greater share even than those who expected very severe disruptions in 2010, in the wake of the global financial crisis.” Importantly, “In two years’ time, the share of respondents identifying geopolitical instability as a factor affecting their businesses has doubled — the largest increase for a given trend since we began surveying executives on this topic a decade ago,” the McKinsey study says.

Trends and Factors To Watch

Trends responsible for heightened levels of volatility and other factors depressing growth include the June 23rd United Kingdom referendum to leave the European Union, greater uncertainty caused by the upcoming November 8th American presidential election and a polarized Congress, the worsening skills shortage, disruptions caused by new technologies, wide fluctuations in energy prices, a China in transition, an unpredictable Russia, rising incidents of terrorism and social unrest, and cyber security failures — to name a few.

Since volatility is the enemy of prosperity, economic growth has been downgraded.

Since volatility is the enemy of prosperity, economic growth in the United States and around the world has continued to be downgraded by major international organizations including the International Monetary Fund (IMF), an organization that promotes international financial stability and monetary cooperation.

The IMF’s most recent estimates project the following gross domestic product growth for 2016: India, 7.4 percent; China, 6.6 percent; emerging markets, 4.1 percent; world, 3.1 percent; advanced economies, 1.8 percent; United States (Federal Reserve estimate), 2 percent; the United Kingdom, 1.7 percent; and the euro area, 1.6 percent.

Brexit and Uncertainty

In his book, The Lexus and the Olive Tree, published in 1999, New York Times columnist Thomas Friedman introduced the term “Golden Straitjacket.” He said countries must recognize the rules of free markets and globalization and abide by them it they wish to enhance national competitiveness. To do this, they need to adhere to strict policies — and put on the “Golden Straitjacket.”

But attempts to drive one-size-fits-all policies in vastly dissimilar countries, like Greece and Germany, has not been easy for members of the European Union (EU), which have vastly different economies, fiscal disciplines, histories, values, work ethics, and cultures. This has led to increased tensions and dissension in the EU.

More recently, on June 23, 2016, British voters delivered a shock to global markets with their 52-48 percent vote to leave the European Union. This decision, referred to as Brexit, has created an enormous degree of uncertainty, raising more questions than answers.

For example, the United States and UK traded $235 billion in goods and services in 2015. After the UK leaves the EU, what tariffs, standards and regulations will be applied to American goods? The U.S. and UK have approximately $1 trillion invested in each other’s economies. Once Britain departs the EU, what legal treatment will U.S. investors receive?

Will American companies interested in pursuing EU markets continue to invest in the UK? Will that investment be diverted to Ireland?

Much of America’s $588 billion invested in the UK for the production of products is destined for EU consumers, not just British ones. Once Britain is no longer an EU member, how will this investment be impacted? In the future, will American companies interested in pursuing EU markets invest in the UK where the EU relationship is unclear? Will that investment be diverted to Ireland or another EU member?

In the referendum, Scotland voted 62 percent to remain in the EU. Will Scotland wish to secede from the UK and independently join the EU? Britain has one of the fastest growth and lowest unemployment rates in the EU. And London is one of the world’s most attractive hubs for finance. Will this continue?

More than one million Americans work for British companies; over 1 million Brits work for U.S. firms. How will they be affected? The resulting uncertainty caused by these issues and others has resulted in the downgrading of the UK’s economic forecast by many analysts. This will continue to impact the United States.

Polarization and Next President

The United States may be more politically polarized than anytime since the Vietnam War. And the inability of Congress to come together to implement policies to enhance competitiveness or provide a glimpse of what’s ahead in terms of corporate liabilities, trade policy, or fiscal and monetary policy continues to add to the climate of uncertainty.

This has had serious consequences since tax policy is partly designed to encourage certain behaviors, while its absence encourages others. Consequently, many chief executive officers have indicated that this environment of uncertainty has paralyzed their decision-making process and resulted in less investment in new technologies and labor.

It may take several months after the November 8th Presidential election to get an accurate read on what the future may hold. As a result, many corporate executives likely will continue to take a wait-and-see attitude before making major investment decisions. In turn, output and economic growth will be adversely affected.

Worsening Skills Shortage

Plant and system operators, engineers, computer positions, and machinists are among the occupations projected to incur the greatest skills shortages in the United States in the years ahead, according to the Conference Board, a global, independent business membership and research association. And the overall projected impact is severe.

A 2015 Deloitte Manufacturing Institute study said six out of ten manufacturing positions were vacant and projected that 2 million manufacturing jobs would remain unfilled over the next decade — a significant number considering the total number of jobs demanded was projected at nearly 3.5 million.

Not finding employees with the right skills impacts output. And this puts downward pressure on economic growth.

According to the Deloitte report, 82 percent of executives surveyed said they believe the skills gap will impact their ability to meet customer demand; 78 percent indicated it will impact their ability to implement new technologies and increase productivity. Executives surveyed also said the skills gap impacts their “ability to provide effective customer service (69 percent), the ability to innovate and develop new products (62 percent), and the ability to expand internationally (48 percent).” In the end, the skills deficit can have a material impact on manufacturers’ growth and profitability, the study says.

That’s not all. The average number of American manufacturing job openings have been rising since 2009 and is at a 15-year high, the Labor Department says. Not being able to find the employees with the right combination of skills impacts output. And this puts downward pressure on economic growth.

The United states isn’t alone. Many other countries, including China, also are experiencing labor and skills shortages. And when economic growth eventually does improve, these shortages will become more severe.

Disruptive Technologies

Today’s new technologies — including green industries, cloud storage and computing, smart phones and tablets, hydraulic fracturing, 3D printing, advanced materials and robotics, energy storage, nano technology, and biotechnology — likely will create trillions of dollars in new economic output. To illustrate how far we’ve come: the iPhone 4 offers roughly the same performance as a $5 million 1975 supercomputer, reports McKinsey Global Institute.

But quickly evolving new technologies are forcing companies and industries to redesign business models. What’s more, Joseph Schumpeter’s process of creative destruction, wherein the new destroys the old even though this means replacing winning products, services and processes while they still are valuable, accelerates the disruption. This process, although extremely beneficial in the long run, creates volatility in the short term as businesses and workers struggle to adapt or go out of business.

Energy Volatility

Continued advances in horizontal drilling and hydraulic fracturing have enabled American companies to exploit untouched domestic unconventional energy resources, such as shale gas, shale oil and tight oil, once considered too difficult to extract. In turn, due to improved recovery rates, assessments of these obtainable reserves have skyrocketed, even in already tapped fields. Consequently, it’s now estimated that a Persian Gulf may lie below Montana and North Dakota.

Lower energy prices have boosted U.S. manufacturing competitiveness — but forced producers to scale back, terminate employees and default on loans.

This abundance has resulted in lower prices. But the larger impact may be caused by less demand from China, the United States, Europe and other countries. The good news: lower energy costs boost U.S. manufacturing competitiveness, especially for producers of iron and steel products, chemicals, plastics, resins, synthetic textiles and materials, and agricultural chemicals. And since gas-fired plants are an important source of electricity, lower electricity prices benefit everyone.

The bad news: the recent precipitous decline in the spot price of a barrel of Oklahoma West Texas Intermediate — down from $108 in June 2014 to under $30 at the beginning of 2016 to about $46 now, according to the U.S. Energy Information Administration — has forced U.S. producers to severely scale back production, invest less in new resources, terminate employees, and default on bank loans.

Importantly, countries like Russia and Venezuela, which are heavily dependent on high oil prices, may become increasingly volatile as their economies struggle and populations grow increasingly dissatisfied.

In The Spotlight

The impact of widely fluctuating energy prices over a relatively short time period will continue to be felt in all corners of the globe. And the fear caused by price fluctuations likely will continue to be reflected in stock market swings further causing businesses to hold onto cash.

China in Transition

Over the last few decades, China has lifted 500 million people out of poverty and achieved double digit growth rates. But that system has many flaws, some of which were revealed last year by devaluations of its currency and the precipitous drops in its Shanghai and Shenzhen stock exchanges.

President Xi has acknowledged that China needs to implement major reforms designed to shift from a state managed system to a more market oriented one, and from an export and investment driven model to a consumer driven one. But the process is fraught with danger.

China’s state-owned enterprises, which number more than 100,000 with assets of approximately $13 trillion, are typically less productive and use capital less efficiently than private firms. And they put a drag on output at a time when growth has slowed below 7 percent. Attempting to reform these companies is very difficult. Why?

China’s ability to deliver — the basis for its legitimacy — appears to be in question.

Reforms are contractionary in nature: they withdraw subsidies and government support mechanisms. When implemented, the impact on an economy and labor is generally negative in the short term, often resulting in slower economic growth and higher unemployment.

As a result, President Xi and the communist leadership likely fear instability to a greater extent than in the past. To head off potential social unrest, President Xi has implemented new restrictions on social freedoms, the media, lawyers and foreign non-profits, and reportedly placed police units at major internet companies to monitor and censor traffic. And to minimize political challenges and further strengthen his grip, he reportedly issued a warning to retired officials to stay out of politics.

Importantly, the Chinese leadership has placed a laser-like focus on job creation. But its capacity to deliver — the basis for its legitimacy — appears to be in question. Understanding this reality, the Chinese communist party, which does not wish to share power, is walking the line in a distinctly Chinese way and trying not to repeat the mistakes of the former Soviet Union. But this could be more dangerous than a high wire act and produce more volatility in the future.


John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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