Research Report: Constellation's Futurist Framework (PESTEL) - The Economic Outlook Pre @Davos #WEF18
2018 Davos Focuses On Creating A Shared Future In A Fractured World
The World Economic Forum (WEF) kicks off January 23rd to 26th in Davos-Klosters, Switzerland. This year's theme is about "Creating a Shared Future In A Fractured World". From the program notes for this year's event, WEF sees the following:
PESTEL Approach Powers The MegaTrends In Constellation's Outlook
Ever three to four years, Constellation publishes its futurist framework based on the PESTEL model of systems thinking. Constellation approaches 2020 with this systemic point of view. The full PESTEL report examines the political, economic, societal, environmental, and legislative (PESTEL) macro trends that will affect the business disruption ahead. This framework serve as the basis for Constellation’s research foundation across seven business themes. These PESTEL trends can be summarized as:
- Political (P) outlook reflects governments’ quest to quell unrest not resolve structural issues
- Economic (E) trends reflects global optimism
- Societal (S) shifts showcase the digital divide ahead
- Technological (T) trends boost digital opportunities
- Environmental (E) factors frame long-term scenarios
- Legislative (L) lethargy drives knee jerk reactions
Success in navigating these trends will require executives to develop a strategy for dominating digital disruption. Board rooms must be cognizant of such changes in order to make the tough decisions required to thrive in the disruption ahead. This blog post focuses on the second area Economic Outlook
Economic (E) Trends Show Global Optimism
In a world where the cost of capital is effectively zero and financial institutions such as pension funds must return 10 to 12 percentage annual growth, the economic outlook remains challenging. Almost ten years after the global financial crisis of 2008, Western economies have printed their way out of shock by providing short-term liquidity. With improving economic conditions in sight, monetary authorities must reverse quantitative easing without creating inflation or economic collapse. Meanwhile, countries with good population dynamics will drive consumer gains while those aging populations must address man power and rejuvenation. Population gains and a new middle class power Malaysia, Indonesia, Nigeria and Turkey (the MINTs) on to the global economic scene. Amidst this backdrop, moderate inflation appears around the corner as high debt to GDP ratios and stimulus policies accelerate growth.
- Expect US tax plan to drive greater investment in the United States (2018). Constellation estimates between $353B to $417B of overseas cash to be repatriated in the United States. Long term investment in US infrastructure will also mean a modernization refresh budget cycle. Meanwhile, rising U.S. interest rates and the pullback from quantitative easing will result in declining foreign investment in BRICs and MINTs without population growth as investors seek to capitalize on higher returns in the U.S.
Constellation’s POV: The changes in the US tax code and the emphasis on fair trade by the Trump administration will result in the collapse of tax havens and less investment outside of the US. With overseas revenues no longer taxed by the US government, organizations will expect more headquarters to remain and move to the US as tax conditions have improved.
- Merger and acquisition activity will accelerate (2018). The influx of cash into the US will lead to an accelerated round of inorganic growth with record mergers in the next 18 to 36 months. The US can expect the reduction of inversions while foreign based companies will see an increase. Corporate boards will be on point to enforce efficiency on metrics such as return on cash and inorganic growth rates. The impact on global employment will result in reduction of jobs as mergers and acquisitions will fuel stock growth but not employment growth.
Constellation’s POV: The rush to mergers and acquisitions must be paired with regulatory requirements for reinvestment of savings in innovation. Since 1950, the growing reinvestment of profits into stock buy backs and dividends from 50% to almost 100% at the expense of research and development has led to stagnation.
- Long term growth continued to be short changed by short term gain (2018). Short termism continues as shareholders seek operational efficiencies and higher profits at the expense of innovating new offerings. This risk averse nature has hampered overall growth as profits have been mostly reinvested in stock buy backs, dividends, and mergers and acquisitions instead of new product development, innovation, and infrastructure.
Constellation’s POV: Shareholders and board of directors must take a tougher stand on the long term view of an organization. While operational efficiency and cost optimization must be part of the overall plan, increasing investment levels in new offerings development must be prioritized to create sustainable growth and defend from non-traditional competitors. Boards must emphasize this balanced approach to the investment portfolio and resist the calls for short term stock buy backs.
- Cryptocurrencies pave the way for block chain trusted commerce (2018). Despite the hype around bitcoin, the benefits of block chain will create new opportunities in trusted commerce. Block chain applications include land titles, cold food supply chains, academic transcripts, healthcare records, and more. By reducing the friction in establishing trust, efficiency will be brought back to trading networks.
Constellation’s POV: Leaders must move beyond the hype of bitcoin and understand how block chain will transform commerce. Expect trading networks to emerge as the back bone of new network economies and business models.
- War for talent and brain power amidst wave of automation and AI (2018). With the cost of capital effectively at zero, the war for human capital will intensify. Top talent will command massive premiums while automation, AI and robotics will drive down commoditized talent. Hard skills and left-brain prowess will be table stakes. However, organizations will pay premiums for right-brain expertise with a focus on creativity, soft-skills, and and leadership.
Constellation’s POV: A massive dichotomy in pay for talent will create the new digital divide as humans compete with machines. With a very limited pool of top talent, organizations must be prepared to pay regardless of location. Expect manu mergers and acquisitions to be acquihires for top talent.
- Cost of human-based employment drives a push to automation (since 2014). Legislative and regulatory burdens on employment lead to increasing investment in technology to automate or eliminate the human factor. A November 2013 poll from The Wall Street Journal’s Real Time Economics blog showed that 86 percent of organizations did not intend to hire in 2014. Hiring will be limited to the highly skilled and extremely talented. Budgets will prioritize human work that can be automated. Investment in automation has led to the growth of kiosks and chat bots for customer service. A simple walk into any global McDonald’s will show how orders are now kiosk not human based. Expect automation to go up the stack from manual labor to professional positions such as accountants, lawyers and physicians.
Constellation’s POV: Augmenting humanity remains a large focus for organizations relying on human employment. In cases where machines lack fine motor skills, physical presence, or still do not understand the algorithms human based employment will prevail
- Population dynamics and open markets play a key role in growth strategies (since 2014). Brands and organizations must focus on rapidly growing markets. Traditionally, Brazil, China, Malaysia, Nigeria, India, Indonesia and Turkey hae led the way due to population growth and the rise of a middle class. According to the International Monetary Fund, the size of emerging market economies surpassed more than half of the world's GDP in 2013. These markets represent the future of hyper economic growth and are a leading indicator for enterprise growth. Investment in Western economies and more developed economies will continue to remain from flat to up 7.8 percent.
Constellation’s POV: Along with population growth, political stability plays a key role in overall growth strategies. Growth projections must be balance by political unrest in Brazil, China, and Turkey.
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