This week the UK ambassador to the European Union resigned from his post. It is an event that may mean a lot or may mean nothing at all. However, it does increase the uncertainty as to the type of Brexit the UK government will opt for: will it be a hard Brexit or will it be soft Brexit? Either way there will be shock waves, but the strength of such shock waves is not known.
This really leads me to the uncertainty that still exists in the new year around a number of issues. The uncertainty could be termed as political but it is likely to have an impact on the economy, generating economic uncertainty.
In December, terrorism reared its head again with the incidents in Berlin and Istanbul. To this one has to add the not so small number of conflicts around the world, such as Libya, Egypt, Ukraine, Thailand, Venezuela and India.
With each new incident, various parts of the world become less safe, and encourage individual countries to be become more insular.
There will be elections in Germany, France, Italy and the Netherlands during 2017 and possibly referendums similar to that which the UK had last year. Europe could end up with a number of eurosceptic governments that will become more inward looking and more assertive. Such an approach will send shock waves in the eurozone.
Relations between the US and China are not as good as they used to be, while those between the incoming US administration and Russia are perceived to be better. This could lead to new economic alliances. However, until such alliances are formed, stabilised and consolidated, uncertainty is likely to prevail.
The Paris climate deal is also likely to come under attack. If US President-elect Donald Trump reneges on the deal – as he has hinted he would – it would scupper the whole arrangement. Other countries would follow suit and blame the US for it. Global regulation on climate would go down the drain, but so would other elements of global regulation such as finance, again generating shock waves.
Businesses need to review their risk management strategies or risk getting caught by an increasingly volatile world, and hence a volatile economic situation
The cyber attacks, whether real or presumed (but probably all too real), are a constant threat to businesses wherever they come from, even though the perpetrators of such attacks would have a political intention. Moreover, conflicting data laws in the US, China, the EU and Russia could force companies to store data locally at a much increased cost.
The volatility has also been very evident in financial markets. Two pieces of information are examples of this. First, the world’s foreign exchange markets have shrunk for the first time in history. This is indicative that currency markets are becoming more volatile and more prone to what are being termed as ‘flash crashes’, resulting from unusual price moves occurring in a matter of minutes if not seconds, such as the one experienced by the pound sterling last October.
Second, company flotations in the EU have halved in 2016 when compared to 2015. Conditions in 2017 are likely to be equally uncertain and as such no pickup is expected. This means an even more restricted access to finance.
The impact of all this is that businesses need to review their risk management strategies or risk getting caught by an increasingly volatile world, and hence a volatile economic situation. This applies to Malta as well.
Any fallout from this uncertainty could impact a number of local businesses, and this is not restricted just to foreign-owned ones. Foreign-owned businesses have a multiplier effect on our domestic economy and it would be foolish of anyone to think that we are insulated from what happens beyond our shores.
We need to keep in mind that exports of goods and services account for 140 per cent of the country’s gross domestic product.
This makes us very much exposed to any shock waves around us, and ignoring such shock waves could deal a severe blow to our economy.