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Viewpoints: Volatility roils the global economy

By John Manzella

SPECIAL TO THE NEWS

U.S. economic growth is anticipated to remain poor for the foreseeable future. There are many reasons for this – and volatility tops the list. According to a McKinsey Global Survey of executives, nearly all respondents expect volatility to disrupt the global economy. And 43 percent, up from 29 percent in 2013, believe that potential disruptions to the economy will be very severe.
What to watch
Trends responsible for heightened levels of volatility and other factors depressing growth include greater uncertainty caused by the Nov. 8 U.S. presidential election, the June 23 United Kingdom referendum to leave the European Union, a volatile China, wide fluctuations in energy prices, a worsening skills shortage, disruptions caused by new technologies, an unpredictable Russia, rising incidents of terrorism and social unrest, and cybersecurity failures – to name a few.
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. As of late, economic growth in the United States is unlikely to exceed 2 percent for the foreseeable future.
Polarization increases
The United States may be more politically polarized than at 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.
What’s more, it may take several months after the 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.
Brexit and uncertainty
In his 1999 book, “The Lexus and the Olive Tree,” 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 if 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, have not been easy for members of the EU, which have vastly different economies, fiscal disciplines, histories, values, work ethics and cultures. This has led to increased tensions and dissension there.
More recently, British voters delivered a shock to global markets with their 52 to 48 percent vote to leave the EU. This decision, referred to as Brexit, has created an enormous degree of uncertainty and problems for the United Kingdom.
Much of America’s $588 billion invested in the United Kingdom for the production of products is designed to gain access to the EU’s 500 million consumers, not just British ones. Once Britain is no longer an EU member, an American firm once contemplating investing in the United Kingdom, for example, may invest in Ireland instead – an EU member and Brexit beneficiary.
In the Brexit referendum, Scotland voted 62 percent to remain in the EU. Will Scotland now wish to secede from the United Kingdom and independently join the EU? Britain has had 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? Whatever occurs in Europe impacts this side of the Atlantic.
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 Jinping 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?
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, Xi and the communist leadership likely fear instability to a greater extent than in the past. To head off potential social unrest, Xi has implemented new restrictions on social freedoms, the media, lawyers and foreign nonprofits, 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 global volatility in the future.
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.
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 nearly $50 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.
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.
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 10 manufacturing positions were vacant and projected that 2 million manufacturing jobs would remain unfilled over the next decade.
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 has 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.
Disruptive technologies
Today’s new technologies – including green industries, cloud storage and computing, smartphones and tablets, hydraulic fracturing, 3-D printing, advanced materials and robotics, energy storage, nanotechnology 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.
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.

John Manzella is an author, speaker and president and CEO of the World Trade Center Buffalo Niagara.

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