Companies are now operating in an environment of increased uncertainty on the global, domestic and political stage. Now, more than ever, companies have to be exceptionally engaged to plot a steady course and manage their political and economic risk.
As 2019 gathers pace, the outlook is for greater uncertainty as state and federal political leaders grapple with volatile and impatient voters. Understanding these changes and addressing the impacts that they have will be a business imperative over the medium term for many businesses in Australia.
National political disquiet
Currently, the Australian electorate, like the business community, is restless, yearning for a return to stability but also change for the future. This climate has concerns about state and federal governments of any political colour. Voters have recently demonstrated their preparedness to use the ballot box to punish and even change governments, especially where they believe their elected representatives are not meeting expectations. Dissatisfied with the lack of listening to or acting on concerns, the failure to demonstrate competence and the failure to implement their mandate – voters are making their views heard through the ballot box. The rise of micro parties and independents has also provided a vehicle for voters to demonstrate their dissatisfaction. The current Coalition Government was elected in 2013, in part, on the promise of a return to stable government after the tumult of the Rudd and Gillard governments. Voters were assured that “the adults would once again be in charge”. However, in 2019, leadership changes and repeated public displays of disunity have created increased public dissatisfaction for the government and opinion polling shows public displeasure with the leadership in Canberra. While the Coalition can claim success on implementing its key long-term election commitments on the Economy, Tax Reform, Debt Reduction and National Security, polling would suggest that many voters believe the Government is not listening to their current concerns and they are looking at voting for a change.
Contributing to the Government’s troubles has been its struggle to find a rhythm in its economic narrative during its two terms. Traditionally, first budgets for new governments can be tough and used to set a solid economic foundation. However, a hostile Senate to many of the Government’s changes stalled some budget reform measures and there were questions about a true mandate for many measures from the Coalition. In addition, the public vented its anger at unpopular measures, the Government not able to effectively bank any of the economic dividends and suffered much from the polling and credibility fallout. As we move into 2019, we have had a total of three Coalition Prime Ministers (Abbott, Turnbull, Morrison) but have also had three different Treasurers with each change (Hockey, Morrison and Frydenberg). These changes meant that the Coalition lost focus and ground in the area of its core Economic narrative and focus. The Government now faces a very difficult task: does it continue driving economic reform, deliver the long-promised surplus or does it pivot to a more popular budget to improve its standing with voters? It is a challenge to achieve all three in an election year. Many commentators are unsure that the electorate will reward the government for its economic management. A predicted Labor win, will likely see another mini Shorten/Bowen Federal Budget before the end of the year. A new Labor government would then bring in the usual May 2 budget in 2020. This would equate to three Federal Budgets in 14 months. This uncertainty about the overall future economic direction of the country is also impacting business and consumer confidence.
It is not just instability at the federal level that is feeding voter discontent and business uncertainty. At a state and territory level, voters have changed a number of governments over the past few years while others have internal challenges and look unstable. Both Victoria and Queensland have had one term governments. In the Northern Territory there have been attempted and sometimes successful leadership coups, frequent ministry reshuffles and members switching political allegiances from one party to another. Tasmania has also faced resignations and instability.
The recent re-election of the Berejiklian Coalition government in NSW does appear to go against this trend. On a first and optimistic glance, the electorate appears to have rewarded a stable and unified administration with a strong policy and economic track record. A deeper look, however, reveals that New South Wales has also overcome a change in Premier, Deputy Premier and Treasurer three times each in the current Coalition government. Despite its success, it has only just won the election and govern. It will need the support of a number of cross benchers in both the lower house and the upper house to ensure stability over their next term. The sheer volume of micro parties and independents in the new NSW Parliament, mostly at the expense of the National Party, foreshadows challenges ahead.
Mitigating the risk for business
So what does this mean for business? CEOs depend on stability, both within their organisation, the sectors they operate in and the wider economic and political environments in which they operate. Many are facing difficult challenges of their own and the uncertain political climate is adding to their concerns.
This year at the annual World Economic Forum in Davos Switzerland, PwC’s 2018 Annual Global CEO survey results were released (www.pwc.com/gx/en/ceo-agenda/ceosurvey/2019). This survey is carried out each year by PwC and gives a useful indicator of CEO thinking around the globe. The results both on a global level and also on the Australia sub-set are quite interesting, especially looking at the variations and trends year to year.
Concerns on growth: The PwC results the previous year saw a record jump in optimism regarding global growth prospects in 2018, and this exuberance translated across most of the regions. However, this year, there was a sharp adjustment and a big jump in pessimism for 2019, with nearly 30% of all CEOs projecting a decline in global economic growth, up from a small 5% last year. This is a record shift. CEOs also reported a significant decrease in confidence in their own organisations’ revenue prospects over the short (12-month) and medium (three-year) term. If CEOs’ confidence continues to be a leading indicator, which it has previously, global economic growth will likely slowdown in 2019.
Political & policy uncertainty: Across the global survey results there was a consistent theme of bunkering down as CEOs adapt to the government responses to the strong nationalist and populist sentiment across the globe. The threats the CEOs view as most concerning are less existential (e.g. terrorism, climate change) and more related to the ease of doing business in the markets where they operate (e.g. overregulation, policy uncertainty, availability of key skills, trade conflicts etc).
In the 2019 survey business leaders considered that Over-regulation (35%) and Policy Uncertainty (35%) were the greatest threats to business growth prospects. Also rating highly were Geopolitical uncertainty (30%), Protectionism (30%) and Populism (28%). Issues like Terrorism (13%) and Climate Change (19%) have decreased considerably in the minds of the CEOs.
Not surprising for many is that the Australian CEOs are more concerned than their global counterparts on the same issues especially Protectionism (62%) and Populism (63%). They also consider the main threats to growth in Australia to be: Policy Uncertainty (89%) and Over-reregulation (84%) and Geopolitical uncertainty (73%). These are differences of more than 30% in some cases.
A number of companies’ have tried to adapt to this tide of change. Back in 2015, PwC’s Annual Global CEO survey highlighted that 85 percent of CEOs agreed that government and regulators have some or a significant influence their business, with only 14 percent saying that they had little or no influence. Unsurprisingly, 67 percent of CEOs said they are making some or major changes to strengthen their engagement with government and regulators.
Mitigating the downturn
Clearly, the current economic and political climate requires a renewed focus, increased communication and stronger engagement. So, with the current political and economic instability in Australia, what should smart businesses be looking to do in 2019 to mitigate their political and policy risks?
1) Firstly, business needs to closely monitor what both state and federal governments are doing, especially with reforms and budget changes. Tracking potential changes is crucial to being able to engage in a timely and pre-emptive manner and mitigate any changes. In turbulent political times, government tends to make decisions in a shorter time frame; early warning and detection systems are critical.
2) Secondly, despite the uncertainty, business should strengthen their direct engagement with the politicians and their advisers, especially around important areas of interest and concern. This should include the cross-bench parities where appropriate. Educating key political leaders on business and the impacts of policy change is the best way to protect policy stability for business.
3) Thirdly, in order to further mitigate risk of sudden political changes, companies should also spend more time with its regulators and the key departments that impact its external environment. In times of turbulent political leadership, the bureaucracy plays an even more important role. Especially in areas where there is limited consultation with business, the public service can advise elected decision makers of some of the implications and downstream effects of policy change.
4) Finally, and probably most importantly, what is needed internally within businesses is a change in mindset, increased resourcing, and senior leadership focus to ensure success. To many companies, government is one of their most important shapers of their business environment. They need to be treated as such. While companies can rely some practical steps through industry associations, chambers of commerce, forward thinking companies also need direct advocacy and engagement on key policy areas or issues.
Now more than ever, business needs to be vigilant and engaged as it charts its course through the current political and economic headwinds.
Nick Campbell is the Chair of the Nexus APAC Group. He has worked across the private sector and government on Strategy and Public Affairs. Find out more by visiting www.nexusapac.com.au