A lot of people, including business leaders, think the future belongs to China. Globalization is not a zero-sum game, but we need to hone our skills to stay in play. i
—Jon Meacham, former editor of Newsweek and co-anchor of PBS’s new TV and web newsmagazine Need to Know
You may think world economics is overwhelming and “The odds are stacked against me!” Think again. Although the international community of political, economic, and business leaders may be anxious about the global financial system, there is no serious sense of a slowdown in growth or sharp contraction of asset prices in the system. While the United States is gaining strength by global standards, the world economy is slowly moving away from the Great Recession and economic crises in Europe. Although growth in the volume of world trade has been sluggish at 2.8% in 2016, World Trade Organization economists confidently forecast demand for imported goods in developing Asian economies should pick up with global trade growth increasing to 3.6% in 2017.ii The market for labor is improving with employment numbers at a steady climb. Household debt is on the decline and private sector balance sheets are showing improvement. Although there is confidence in U.S. growth, it is clear that few expect a normal recovery evidenced by slower than usual productivity, investments, and economic growth.
Across the “pond” in Europe, the financial landscape in the Eurozone started 2016 on a high note with the zone’s economy growing at a fast pace. The first quarter GDP picked up of 0.6% as experts expect the Eurozone economy to slow to a 0.3% expansion in the second quarter due to labor disputes in France, a depreciated euro, and terrorist attacks. The forecast for growth in the Eurozone economy is 1.5%, not great, not bad either. A loose monetary policy and an improving labor market should cushion this region’s economy against downside risks due to Britain’s pending exit from the European Union. The year 2017 could see growth for half the economies in the region growing a healthy 1.7% resulting from strong incoming data for the common currency block and strong dynamics at home and abroad. However, rising inflation could take a bite out of consumer spending and is a risk to the outlook.iii In addition, countries in crisis, principally Spain and Ireland, have adopted structural reforms, restored public finances, and cleaned up their banking systems to achieve better economic prospects. Ireland, Luxembourg, Malta, and Slovakia, the fastest growing economies in the region, should experience economic growth above 3%. Finland, Greece, and Italy will not be so fortunate with economic growth stagnating at 1%. Spain at 2.7%, Germany expanding at 1.6%, and France at 1.4% have better economic prospects.
Even after the World Bank projected a rise in its 2017 global growth forecast to 2.7%, there is the prospect that in 20 years global gross domestic product (GDP) could almost double. Many Asian and African countries will grow between 2.9 to 6.1% or more per year, and high growth countries will quadruple their GDP over the next two decades.iv Thus, growth over the long term is reducing poverty and the emerging middle class of the world’s industrial countries will become a powerful consumer force. With oil prices falling and central banks keeping interest rates low, one would think there is no reason for the international community to be worried. So why are you and the international community anxious about the domestic and global economies? There are a couple of explanations.
First, the absence of a coordinated monetary policy worldwide creates a lot of turmoil in currency markets and the more vulnerable emerging markets, in particular.
Secondly, since the United States is leading the recovery, the Federal Reserve (Fed) will relax some of the unconventional monetary measures it adopted during the Great Recession. At the same time, the European Central Bank (ECB) is considering if, how, and when it might expand its balance sheet to be effective in boosting inflation.
The only bright spot is the United States, and even the United States is good, but not great.
So it appears both the Federal Reserve and the European Central Bank (ECB) are moving in the right direction. How and specifically when the financial markets will react to ECB monetary expansion and the Fed’s relaxation of quantitative easing measures is difficult to tell. The economic environment will be challenging for emerging markets. The unintended side effects of new Fed and ECB policy changes will only increase uncertainty, especially for those countries with domestic political problems and exposure to falling oil prices.
Today, geopolitics is a force driving anxiety in the global community. It may have been a low concern after the Cold War, but since the recent conflicts in Ukraine, Syria, and Iraq, there is a general sense of growing trouble. Escalating conflicts cause economic contraction producing even greater anxiety. Accompanied by geopolitical risk is the risk of deflation, particularly in the Eurozone. Central bankers are dealing with anemic growth, low wage increases, price pressure from demand, and low unit labor costs, not to mention tight credit in parts of Europe. With banking going through an enormous regulatory overhaul, it is no wonder there is anxiety in the international finance community.
In general, European economic performance is stagnant. Brazil, Russia, and China are no longer the economic performers they once were.
It is genuinely difficult, but not impossible, for businesses to navigate a slow global recovery and geopolitical/economic risk. The only real bright spot is the United States, and even the United States is good, but not great. Consider the findings of the Global Cities Initiative, a joint annual project of the Brookings Institution and JPMorgan Chase in their joint report, Export Monitor 2017.v In their analysis of goods and services exports in 381 U.S. metropolitan areasvi U.S. exports in 2016 did not drive significant economic growth in most parts of the country. The findings indicate a shifting balance toward services exports, signaling the need for an updated U.S. trade policy strategy that cannot simply rely on a manufacturing strategy. The report finds that exports within that nation’s metropolitan areas declined by 1.9% from 2014 to 2016 totaling $70 billion due to a strong dollar and sagging global demand. The steepest declines occurred in metro areas specializing in aspects of machinery and auto manufacturing, such as Northeast Ohio, Tulsa, Okla., Peoria, Ill., and Columbus, Ind. Only 8 of 35 industries experienced export growth led by educational and medical services, management and legal services, commodities, travel and tourism, and the technology sector.
The U.S. Economic Outlook 2017
How’s the economy in the United States doing? In 2016 world trade growth slowed at 2.3%vii with import volumes in leading emerging markets, such as China, Brazil, and Russia, especially weak. More recently the slowdown in China’s manufacturing output problems has significantly impacted the global economy. That downturn was more cyclical than structural, leading to the prospect of stabilized economic conditions in these economies and prospects for a moderate recovery in 2017. Even though there appear to be economic challenges facing emerging markets like Singapore and Hong Kong in the near term, economies in emerging markets are likely to be important drivers for global economic growth in the medium term. Still, hedge funds across the industry are seeing a relatively strong start in 2017.viii Any increase in interest rates in the United States is not anticipated to help the rest of the world’s economy.
Economies in emerging markets are likely to be important drivers for global economic growth in the medium term.
Trade flows should accelerate over the next few years. The recent negative shocks coming from China, the United Kingdom’s Brexit, and emerging markets have been mitigated by domestic policy stimuli governments are implementing and lower bond yields in financial markets. The United States and Eurozone countries like Germany and the United Kingdom will continue to support world trade over the next couple of years as their economies are expected to expand modestly at a similar pace in 2017 at a rate of 3.0%, whereas Asia, led by China, appears to be headed for weaker growth.ix An increase in investment growth through 2016 in the United States and the three largest Eurozone economies—Germany, France, and Italy—should spur demand and trade in the capital goods sectors. In 2017, consumer spending in the developed economies should grow at 2.3%.x This is not to say there will not be risks. The cyclical rebound in China’s manufacturing sector may take longer, demand in the United States and Europe may soften, and political or social strains in emerging markets could complicate any improvement in their economies. Thus, the Organisation for Economic Co-operation and Development (OECD) predicts growth around 3.5% in 2018 boosted by fiscal initiatives in the major economies.xi HSBC Bank, another global player, expects positive growth of around 1% in 2017 with growth in services accelerating toward 6% a year in value terms over the next 15 years with total value more than doubling by 2030 as reported in its December 2016 Trade Forecast Report.xii The forecast is looking up, but what about Britain’s exit from the EU. “Won’t that dampen my efforts in global markets?,” you ask. Let’s take a closer look.
Britain’s Exit from the EU (Brexit), Global Trade, and SMEs
In advance of Britain’s Brexit referendum to leave the European Union, many economists repeatedly warned Britain’s electorate that Britain would lose favorable access to European markets, 1 to 6% of its gross domestic product, business investment, and ultimately tumble into recession, should it vote to exit the European Union. On June 23, 2016, Britain’s establishment, including then UK Prime Minister David Cameron, woke to the reality of the unthinkable—the “Leave” vote had won by 51.9%. Cameron would ultimately resign as prime minister, the British pound’s value dropped in value, and international financial markets sharply declined to trigger dire forecasts of a recession in the United Kingdom, if not a global recession.xiii Trouble you are thinking?
Although the initial drop in the value of British pound and global stock markets were severe, they were not as immediately as devastating as predicted. The Bank of England and its foreign equivalents declared their readiness to cover any temporary cash outflows and foreign capital remained. The exact timing of a formal exit notice to the EU remains unknown and it is not likely to be delivered before the end of 2017, according to Prime Minister Theresa May. When Britain does give its formal exit notice, the real impact of Brexit will emerge over a two-year period according to European Union regulations, specifically Article 50, which governs exit and negotiating out of member status.
For the time being, Brexit’s global impact is unlikely to generate a global recession since the United Kingdom accounts for only 3.6% of global imports of merchandized goods and 4.1% of global imports of commercial services.xiv Within the United Kingdom, the outcome of the British referendum is anticipated to affect the British pound against other currencies leaving the British consumer with less buying power, British companies becoming targets of M&A deals, and the British manufacturing sector sorely affected. Outside of the United Kingdom, the economic damage from the United Kingdom’s vote to leave the European Union is expected to be most profound in the Eurozone in which 2017 growth for half the economies in the region could slow to a 1.4% increase as a result of the more pronounced effects of Brexit.xv
For 2017 the U.S. economic outlook is not meteoricxvi with continued uncertainty dragging down several key U.S. metrics. The GDP growth rate will plod along at about 1.0% in the first quarter of 2017 and 2.1% for 2017 as a whole, a scenario in which growth is neither inflationary nor so low that the United States heads toward a recession. Job growth will gradually slow to 175,000 jobs per month because as the labor market tightens, it becomes harder for employers to find suitable candidates. The unemployment rate dropped in May 2017 to 4.4%, the lowest since 2007. It will likely end the year at 4.3% and drop further next year, nearing 4%. There isn’t too much inflation or deflation on the horizon as well. The big news as we began 2017 is the increase in U.S. shale oil production. The good news for the economy is that increased shale oil production, possibly leading to a glut in the oil market, will lower the cost of transportation, food, and raw materials for business; and this will raise profit margins, giving you and consumers more disposable income to spend. With strong domestic production and relatively flat demand, United States crude oil production may increase to make the United States a net exporter by 2026.xvii How’s that for a rosy economic picture? The outlook for doing global business, however, is bright! The appetite for “Made in the U.S.A.” is global, trade is expanding and, if your growth-oriented small business has been slow to jump into the global marketplace, now is the time to jump in!
The Real Shape of Entrepreneurs and Small Business
You might think where does that leave me? In December 2016, the National of Independent Businesses reported its small business optimism index rose to 105.8xviii from 98.4 the previous month based on expectations for better sales and more favorable business conditions under then President-elect Trump. The sharp rise in small business optimism comes on the heels of consumer confidence hitting a 15-year high in late December 2016. That increase was also attributed to high hopes for Trump’s economic agenda.
Your small business counterparts and competitors reflect on the overall state of the economy: unemployment is at a six-year low, the stock market is performing well, and the availability of credit has broadly improved. Even with these positives, you recognize there is room for improvement especially in Washington, DC, given the rise in health care costs and increasingly stringent regulations imposed by the U.S. Environmental Protection Agency and the Occupational Safety and Health Administration. Other issues addressed included tightening national borders with a priority on creating amnesty or a path to citizenship. Tech companies endorsed more visas for skilled, educated, and entrepreneurial workers.
Small and start-up businesses are struggling to overcome unprecedented regulatory and statutory burdens.
So, overall, you and other entrepreneurs are mostly confident, somewhat cautious, and broadly annoyed with the political scene and systems that burden their efforts to be successful. As to the state of entrepreneurship, the business environment is as a whole great, but challenging. More than half welcome the rise in incubators, accelerators, and business-plan competitions, with a smaller number endorsing the increasing number of entrepreneurship programs at many universities.
Noteworthy was the absence of responses addressing the state of entrepreneurship in the United States and U.S. entrepreneur reluctance to “go global.” High-tech companies are reducing more head-count than they are adding. The number of initial public offerings (IPOs) remains substantially below those of the previous two decades and business exits now exceed new business formation. Other indicators of entrepreneurial health indicate small and start-up businesses are struggling to overcome unprecedented regulatory and statutory burdens. Consequently, job creation, productivity improvements, and innovation have slowed. The contributing factors for this decline are many and can be dealt with partially through regulatory and statutory changes across a wide spectrum of public policy. In February 2017, SMEs, like you and others, reported they are optimistic about their prospects, but the enthusiasm has yet to be translated into impressive increases in spending and hiring.xix
Are you reluctant to “go global” because it’s easy to serve “local” U.S. markets without the annoyance of dealing with international regulatory and trade barriers, language, and cultural differences? Aside from these issues, you don’t know a second language and foreign markets, not having traveled abroad to the same extent as business people from many other countries. It is time to change and do what you can to “globalize” yourself and your business. What about the strength of the dollar you wonder?
Export Strategies for Surviving a Strong U.S. Dollar
In March of 2015, a prominent bank reported the U.S. dollar’s dramatic gain in strength over the last 18 months and still another bank reported that the strength of the U.S. dollar increased 14% in value since 2015.xx This remarkable growth in the dollar’s value directly reflects the dollar’s strength over other struggling currencies in Europe and the Orient. The pace of the dollar’s rise possibly convinced you and others that a slowdown in the dollar’s ascent is not in the making anytime soon. The U.S. dollar, as measured by the Bloomberg Dollar Index, traded in negative territory from mid-February through mid-November 2016, not reaching positive territory until after the November 2016 U.S. elections.xxi Certainly, no one here at home frowns on the dollar’s climb with the U.S. labor market making a comeback in a burgeoning economic recovery. Right?
The dollar’s strength has negatively affected the profits of U.S. small businesses that export, manufacture overseas, or sell to large multinational companies, making their products more expensive.
Foreign sales are either lost or producing losses as firms convert their overseas sales back into dollars hurting U.S. exporters and those employed in exporting. Taking advantage of the opportunity, domestic competitors in foreign markets are offering products for substantially less, making it tough for their U.S. competitors. Customers in these markets can readily tell the smart move—buy for less or pay more for your preferred U.S. product, even though the dollar has shed some of its strength since the start of 2017, falling nearly 3% against a basket of global currencies.xxii
Small- to medium-sized businesses can do better if they step up to the challenge of “going global.”
How can U.S. small business exporters compete in foreign markets today? U.S. small business exporters riding out the strong dollar in currency markets should keep a close eye on the cost of their operations and pass the importance of cost management to their employees. While remaining calm in the face of the dollar’s rising strength, you should broaden your horizons and seek export opportunities outside your domestic markets. With a diversified export base, you should maintain domestic sales while avoiding foreign and domestic business risks.