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The global economic system is undergoing fundamental changes, ending thirty years of relative stability. As geo-political rivalry and competition intensifies, companies and countries need to rethink their decision-making processes, and economic policies must also adapt.
New Zealand businesses need to ensure their risk frameworks consider the broader ramifications of this changing landscape. Below, we highlight some areas for consideration and three questions leaders should be asking of their Boards and leadership teams to ensure they are prepared for managing through ongoing disruption and uncertainty.
Planning for global ‘shifts’ and ‘shocks’
Business leaders must differentiate between shocks and shifts to better navigate both. Shocks are unexpected events like the COVID-19 pandemic, inflation spikes and supply chain disruptions. These increase business risks and need careful management. Shifts are medium-term changes in the global system, with many starting with underlying geopolitical motivations. For example, global economic fragmentation due to growing geopolitical rivalry between the United States and China. With more frequent shocks, companies and countries must understand and adapt to the shifts to remain resilient, as they both become a staple feature of the global system.
Increased fragmentation of the global economy
The global economy is changing, with trade flows shifting and countries aligning trade with geopolitical preferences. The rivalry between the United States and China, intensified by the Western response to the conflict between Russia and Ukraine, is primarily economic, shaping trade, capital, and technology flows. This fragmentation has major implications for New Zealand and New Zealand companies, which must navigate these changes and reassess risk appetite.
Proactive risk planning
New Zealand has historically had a reactive approach to managing risk. Although the country has responded nimbly to events like the pandemic, forward-thinking strategies are still needed. Today’s risks require proactive measures, not just reactive responses. Boards and Finance Leaders must give equal attention to financial, economic, and geopolitical risks. The focus should be on improving processes, scenario planning, backup plans, and stress testing market portfolios, supply chains, and capital investment.
Scenario planning for the US election
The upcoming US election could be a significant event with wide-ranging impacts. Other major elections, like those in India, Taiwan, Mexico, and Europe, have also had substantial commercial and market implications. The US election is particularly important, and New Zealand companies should prepare for different scenarios, given the potential economic and geopolitical impacts of another Trump administration.
Three questions Directors and leaders should ask their Boards and leadership teams
- What are the top 3-5 global economic and geopolitical shocks our firm faces in the next 12 months?
For example: The US election outcome; a sharp slowdown in China’s economy; global supply chain costs and disruptions in the Middle East and South China Sea. - What are the key long-term global economic/geopolitical shifts (5-10+ years) that will impact our business risks and return?
For example: Sharpening global economic fragmentation that requires New Zealand firms to make choices on markets, supply chains, and technology, particularly around China; a structurally higher inflation and rates environment; a shift towards more closed policy settings across many advanced economies. - How should we invest to capitalise on emerging market opportunities and reduce geopolitical risks?
For example: In response to changing locations of global growth in ways that align with geopolitical positioning; opportunities from the ‘great reindustrialisation’ around net zero, technology, industrial policy, and new global supply chain locations.
This article is based on a recent session we held with Dr. David Skilling, and we thank him for sharing his valuable insights.
If you’d like to talk about any of the topics covered, please reach out to one of our team.
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