2016: A year to remember?

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A photograph of Donald Trump campaigning for president, representing the rise of political populism in 2016

The EU referendum, a US presidential election, global unrest and the rise of disruptive innovation, 2016 promises to be momentous. But amid the volatility there are signs of optimism…

Time is linear; minutes follow minutes, hours follow hours. But history is not linear; the speed of change, the importance of events, all differ across decades. Take 1961, for instance. It was a year that included the botched, US-backed Bay of Pigs invasion of Cuba, the overnight building of the Berlin Wall, the Soviets exploding the largest ever nuclear weapon and the beginning of western involvement in the Vietnam War, with President Kennedy sending 18,000 ‘advisers’ to south-east Asia. In the skies above, Yuri Gagarin became the first human in space; Kennedy responded by promising to put a man on the moon by the end of the decade. On the ground, the Freedom Rides in Mississippi – protesting against continued civil rights abuses in the southern United States – brought a white-and-black coalition together for the first time; the UK applied for membership of the European Economic Community; and the Beatles played their first gig.

Or take 1989, with the fall of the Berlin Wall foreshadowing the collapse of the Soviet Union and the beginning of radical changes to the world – and economic – map. Dramatic pictures of the Exxon Valdez oil spill caused a sea change in the priority with which the environment was treated in the West, and in the East, Tiananmen Square protests signalled a turning point in Chinese history. Closer to home, the poll tax was introduced in Scotland, and Tim Berners-Lee wrote a proposal for a ‘world wide web’ – the former signalling the beginning of the end of one period of government, the latter the start of a technological revolution. For a time it was even credible to claim this all amounted to the “End of History,” in the words of American academic Francis Fukuyama. For those who preferred an imaginary world, Nintendo launched the Game Boy, and introduced a wave of video game technology that was to become the bane of parents’ and teachers’ lives everywhere.

Similarly, 2001 can be included in this list of seminal years as well. The September 11 attacks signalled years of unrest in the Middle East, the effects of which can still be felt today. Yet it was not just the attacks and the ensuing war in Afghanistan that defined the year; not only was China finally admitted to the World Trade Organisation, but Steve Jobs unveiled the iPod, both of which could be argued to be the defining economic and business events of the early 21st century.

Could 2016 be such a year? In the next two months, we’ll have decided whether or not to stay in the European Union, and the EU itself will have to deal – again – with an almost unprecedented movement of migrants from its south-east, as new fissures develop between Brussels and 28 different governments. In the US, an election could be won not on messages of openness and enterprise but on retrenchment, isolationism and anti-globalisation. Russian and American foreign policy could both radically change, against a backdrop of Islamic State violence. The global economy is fragile; oil prices are low, emerging markets are slowing, and western central banks have few levers to pull.

These are potentially big changes, but what impact will they have on the UK economy, and indeed the small and medium-sized businesses that form its backbone? Time will tell, but for now, we’ll look ahead to what could be a year to change the shape of the 21st century…

European Union

A photo of Boris Johnson campaigning to leave the EU, representing the changing political landscape of 2016

In 2010, Private Eye magazine carried a spoof headline that seems as true now as it was then – “Greece on brink of being on brink of brink.” It’s fair to say that the last few years have seen doom-laden predictions of the coming end of the European Union, but 2016 sees it facing numerous potential crises that must be answered.

From a British perspective, the key question is the 23 June referendum. At the time of writing, the poll of polls, compiled by What UK Thinks, has Remain on 54 per cent to 46 per cent for Leave. It remains to be seen how those polls will shift as the substance of the argument moves away from reactions to the renegotiation ‘deal’ to the fact of our membership; even those advocating exit are open that there could potentially be years of uncertainty as a result of a vote to leave.

The business argument, at least, boils down to this: do you stay in, with the accompanying regulatory headaches but single-market access to a huge trade bloc, or do you vote to leave in the hope that trade deals can be struck, the economy doesn’t slow too much, or fearing that pressures on the EU as a whole – of which more later – are a bigger risk than that of the uncertainty connected to leaving? On balance, IoD members are, for now, siding with the Remain campaign; after David Cameron’s deal, some 60 per cent said they would vote to stay in, compared to 31 per cent who would vote to leave.

Already, we have seen the short-term effect on markets; the very announcement of the referendum date, and the high-profile capture of Boris Johnson by the Leave camp, saw the pound tumble against the euro and the dollar. Mark Carney, governor of the Bank of England, has described a Brexit as the “biggest domestic risk” facing the UK economy. The Brexiteers will argue that this is a price worth paying in the long term.

This year will also see the continuing migration crisis. It is safe to say that EU leaders proved unequal to the task in the way they dealt with the surge of migrants across Europe last summer, and their failure has led to a fundamental reshaping of the relationship between Brussels and the 28 capitals of the member states. Already, the signs do not look promising that a real solution has been found; despite new deals struck in recent weeks, there is little sign that the situation will be resolved anytime soon. Further north, the country that did most to encourage visa-free travel via the Schengen agreement – France – was one of the first to reinstate border controls.

How the EU responds to this influx of migrants has the potential to define its future, whether we are in or out of the EU. We can be almost certain that this summer more than a million people will attempt to settle in Europe. If those people find jobs quickly, settle readily, and infrastructure builds up around them, then an injection of mostly young, often well-educated human capital into the labour market may have lasting positive effects on the EU economy, and Britain’s – ultimately, a strong European economy is good for the UK, whether in or out. That is the challenge facing policymakers right across the continent.

The European economy remains frustratingly stagnant. While there are bright continental spots – Spain, in particular, seems to be moving in the right direction, though political instability could threaten that progress – Italy, Greece, Portugal and others remain mired. Fears of Grexit have abated with the need for immediate funding having been met, but the added pressure of its still-fragile government, its geography – on the frontline of the migration crisis – is unlikely to help. Another economic crisis, to add to a migration emergency, could change the shape of the EU, and the relationship between its composite parts, for decades.

The 2016 US election

A photograph of Donald Trump campaigning for president, representing the rise of political populism in 2016

Whatever the surprise that Jeremy Corbyn’s ascension to the Labour leadership may have caused, it is nothing as compared to the seemingly inexorable rise of Donald Trump to become the Republican candidate for the presidential election in November 2016. It is not worth stating here why he is best described as an unorthodox candidate, for that was made abundantly clear when he announced that his first policy would be to build a wall at the Mexican border to be paid for by Mexican taxpayers. There is a chance that the Republican party may engineer for a challenger to achieve the nomination at the party’s convention in July, but if Trump continues his winning streak, it is difficult to see how they could do so without taking a match to a party that seems keen to coat itself in gasoline.

His constant outbursts against Mexico, China, and free trade and globalisation in general, have struck a chord with some voters; the Economist Intelligence Unit fears that if elected president he could begin a trade war with US partners, endangering the American economy. It ranks his election – the first time a single individual’s rise to power has been included in the list – as the sixth greatest risk facing the global economy, higher even than the threat of jihadi terrorism.

But even if Trump were to be dethroned as the Republican candidate or defeated by Hillary Clinton, we should not expect the anti-trade, anti-globalisation and at times almost anti-capitalist rhetoric to disappear from the campaign trail or the White House. Clinton, dragged leftwards by the success of her left-wing challenger Bernie Sanders, has borrowed plenty from the copybook. She has already pledged to pull the US out of the Trans-Pacific Partnership (TPP), a free trade deal between the US, Mexico, and selected countries across Latin America and the Pacific Rim; all the more remarkable as this was a deal that she herself began negotiations on when serving as Barack Obama’s secretary of state.

A photograph of Hilary Clinton campaigning to become president of the US, representing the changing political landscape of 2016

While Clinton’s foreign policy experience would calm markets compared to a Trump victory, her increasing willingness to attack trade and globalisation does not bode well for the mooted Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU, which already seems to be moving at a worryingly slow speed. Some nine out of 10 IoD members back TTIP; the fear is that a restless US electorate and political imperatives could see it put to the back of the American queue.

Foreign policy

A Tank in Moscow representing the volatility of international relations in 2016

It is not a stretch to say that the world is in arguably the most tense state since at least 2003, when western tanks rolled into Iraq. Between Isis consolidating bases in Libya, Iraq and Syria, significant Russian aggression and sabre-rattling in the South China Sea, the fears of some doomsayers that we could be on the cusp of a major conflict do not seem overblown. The biggest fear, according to most analysts, is Russia’s increasing willingness to intervene beyond its borders, and the sheer strength of its forces combined with ethno-Russian populations does not bode well for any country – like Georgia and Ukraine before
them – that Moscow might have in its crosshairs.

Further incursions on the eastern frontier of the EU would surely provoke Nato into a more vigorous response than that with which the Crimean invasion in early 2014 was met, with potentially significant results; sanctions on Moscow are already hitting Russians hard, but the risk of retaliation – including the cutting-off of gas to eastern Europe – could have a serious effect on economies increasingly linked to British businesses.

Across the Middle East and North Africa, the Isis threat increases. Whatever the militant group’s geographical footprint at the end of 2016, its ideology and the terror that brings has consequences far beyond the Middle East. A brittle global economy could be another casualty of its ghastly world view.

And across the foreign policy landscape, the spectre of full-blown cyber warfare is becoming ever more real. While the best-known hacks so far have been for commercial gain (or even just for kicks), 2016 could be the year that the analysts’ fears of an electronic shutdown come true.

A photo of refugees arriving by boat, representing the shifting global landscape in 2016

The global economy

Chancellor George Osborne has warned for some time about a global “cocktail of risks” which could result in a slowdown at home. Certainly the UK’s continuing dependence on foreign capital financing its deficit – and the level of debt across much of the economy – is an ongoing concern. The UK now has a national debt of more than £1.5trn, and an average interest rate on that debt of just three per cent. Were interest rates to tick up even marginally, there would be a significant impact on the government’s day-to-day debt servicing costs, with a knock-on effect for public spending.

He is not alone. The Economist has talked of a global economy that may be “out of ammo”. There are fears of a Chinese slowdown (or, perhaps worse, artificial growth based on further debt spending) combined with a “chronic” eurozone and a US economy that far from providing a life raft for the world economy “may not even be strong enough to keep itself afloat”.

This paints a darker tone on the government’s entirely correct claims of being the fastest-growing economy, by some measures, in the G7+1. But the prognosis on the world stage is not good, and while the doom-laden predictions from those whom Boris Johnson might describe as “gloomadon-poppers” may prove overblown, it’s clear that in concert with the other risks outlined here 2016 could be a fragile year for British businesses.

The consequences here of global unrest and the economic shock that would cause with such a weak global economy could be two-fold. For individual businesses, recession or slowed growth in the eurozone and the US – IoD members’ top two trading markets – could have a knock-on effect in the form of reduced demand for goods and services. A similar fall in demand in emerging markets would be a challenge for those businesses that rode out the financial crisis and ensuing recessions in western markets by looking east and south.

If that fall in trade resulted in a slowdown here, the effect on the Treasury could be significant. It is difficult to predict volatility, but the growth forecasts the chancellor is using to predict balanced budgets by 2020 are markedly serene. If a slowing of the world economy gave the British one a cold, reduced tax revenues would leave the Treasury in a tight spot with a stark choice between commitments to achieve a budget surplus by 2020 and promises to ringfence budgets for health, schools, international aid, defence spending, along with no plans for further welfare savings and few efficiencies left to find in the public sector.

The obvious but politically unpalatable solution could be tax increases on individuals and businesses or a reduction in planned capital investment. Neither would be particularly easy for British businesses to bear after the imposition of the national living wage, the apprenticeship levy, the start of pensions auto-enrolment for small businesses and the reduction in the annual investment allowance. 2016 could be a tough one, then, but it could also be transformative; if government is forced to look for efficiencies in ringfenced areas to achieve long-term financial sustainability, we could see much-needed reform. Businesses will hope that’s the case.

The Chinese slowdown and the global economy cannot be separated from the huge fall in oil prices that we have seen in recent years; though it is likely that the prospect of Brent crude slipping below $10 a barrel will not be realised, governments across the world which rely on the black gold will be wondering about the impact.

In countries where oil revenues have historically been used as a palliative for other forms of freedom – not least Venezuela, Saudi Arabia and indeed Russia – the repercussions could be significant. On a global scale, cheap oil has the potential to delay investment in other forms of energy, potentially making liquid natural gas or even shale gas less immediately viable propositions. Further, the unpredictability of Opec – the council of nations with significant oil reserves – could in the worst case see a serious oil shock; if the taps are suddenly turned off and the price rockets, companies which have based their own investment decisions on cheap oil could find their plans scuppered.

All is not lost for 2016

This article has not painted a pretty picture of 2016; everywhere there seems to be financial fragility, political instability and change on the horizon. But there are positives. The world has adapted to powerful change before, and so have British businesses. On 5 May 2016, Londoners will elect their third mayor to lead a city that by almost all measures now qualifies as the global city.

Across the rest of the UK, many cities and regions will receive significant new powers that will allow them to set their own destinies. There are bright spots all over the country, from Scarborough – where a new university technical college is soon to become a cyber-security hub, alongside a hugely exciting entrepreneurial revolution – to the south-west, where a ‘Bristol is Open’ scheme could revolutionise the way citizens and businesses are able to grow businesses.

We will – finally – get a decision on airport capacity, and changes to the curriculum introducing coding and technical skills could well be seen in 15 years’ time as the moment that Britain capitalised on its early adoption of the digital economy. A refocusing on government spending, forced by potentially lower tax revenues than expected, could see sensible reform that retrofit the organs of government for the 21st century.

Given that risks are a global issue, the prognosis doesn’t necessarily have to be bleak. While 2016 could be a big year of transformation, and dangers could spill over from anywhere, era-defining changes do not necessarily always signal bad news.

Changes made since 2008-09 could, potentially, ensure that the next recession is not as deep; so too could 2016 signal the arrival of a transformative technology. With pressure on business and governments invariably comes innovation. The world may be uncertain, but all is certainly not lost.

The IoD Annual Convention, at the Royal Albert Hall on 27 September 2016, will bring together business and political leaders to ask whether 2016 will become a defining year in history. For more information and to book tickets, visit iod.com/annualconvention

Snapshot

In the next two months, we’ll have decided whether or not to stay in the European Union, and the EU itself will have to deal with an almost unprecedented movement of migrants.

How the EU responds to the 2016 influx of migrants has the potential to define its future.

The business argument in the EU referendum boils down to: do you stay in, with the accompanying regulatory headaches but access to an impressive if imperfect single market, or do you vote to quit and hope that trade deals can be struck not just with Europe but the rest of the world?

In the US, an election could be won not on messages of openness and enterprise but on retrenchment, isolationism and anti-globalisation.

A restless US electorate and political imperatives could see the signing of the Transatlantic Trade and Investment Partnership (TTIP) delayed.

The global economy is fragile; oil prices are low, emerging markets are slowing, and western central banks have few levers to pull.

Across the foreign policy landscape, the spectre of full-blown cyber warfare is becoming ever more real.

If government is forced to look for efficiencies in ringfenced areas to achieve long-term financial sustainability, we could see much-needed reform.

Innovation invariably follows when pressure on business and governments mounts.

For similar articles see

The EU referendum: 5 questions you should ask

Why the IoD must remain neutral in the EU referendum debate

Listen to the crowd – the growth of alternative finance in the UK

Connecting Britain faster – the UK’s broadband future

The new age of automation

About author

Andy Silvester

Andy Silvester

Andy Silvester is the IoD’s head of campaigns

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