UK CEOs warn ‘return to protectionism’ is number one threat to growth

The rise of protectionism poses the greatest risk to future growth, according to the CEOs of some of Britain’s biggest businesses.

KPMG surveyed 150 UK leaders and a further 1,150 CEOs from across the world about their future investment plans and the challenges and opportunities facing their companies.*

Two thirds of UK leaders (64 per cent), and more than half of international CEOs (55 per cent), said a return to territorialism posed the greatest threat to the future growth of their business.

“Many governments and businesses are still grappling with unforeseen developments, such as Brexit and the rise of economic nationalism, which are having a seismic impact on their decision-making.” said Catherine Burnet, senior partner for KPMG in Scotland.

“There is a pervasive sense of public frustration that globalisation is not working for broader society. We are already seeing the results of this unfold across the globe, with developed countries considering withdrawing from major trade agreements, and the advent of Brexit. As a consequence, many of our clients are rethinking their strategies.

“If world trade doors continue to close, there will be an inevitable impact on global growth; this persistent retrenchment is of huge concern to the business leaders I speak to.”

Whilst in the short term, protectionism is cited by some as a method to protect jobs, industries and boost local economies, business leaders are concerned that the long term ramifications could outweigh the benefits. Prolonged protectionism can lead to a lack of competition, increasing costs for consumers and stifle innovation.

Ms Burnet said: “We need a connected economy, both internationally and domestically, for Britain to thrive. It must be a priority to increase collaboration between business, Government and academia, drive social mobility and unlock the talent British businesses need.”

Advancements in technology, and the associated threats presented by new market entrants and changing consumer behaviour, were named by 34 per cent of CEOs as a pressing risk to their business. Many were considering a wholescale restructure in response, with 67 per cent of CEOs stating they were personally prepared to lead a radical overhaul of their business’ operating model.

However, KPMG’s survey revealed increasing tension between the CEO, the Board and the management team when tackling these transformation projects.

The majority of CEOs said they were frustrated by short termism and the pressure from their Board to deliver results on multi-year digital transformation projects: 72 per cent cited unreasonable expectations for return on investment related to digital transformation.

Instead leaders wanted their Boards to take a long term view of tech investments, with 64 per cent advising the company would only begin to see a return on investment in Artificial Intelligence (AI) three to five years after the initial outlay.

Meanwhile one in two CEOs expressed doubt in the skills of their wider management team, confessing they were not confident their immediate team had the right experience to oversee the radical change the organisation needed.

CEOs were also uncertain about the long term impact technology would have on the size and shape of the workforce, advising that it would not necessarily result in a smaller workforce in the immediate future. In fact, 71 per cent of UK CEOs said in the short term AI would create more jobs, because firms needed new experts to use the technology being introduced into the company. As a result, data science (69 per cent), emerging markets (57 per cent), and emerging technology (55 per cent) were the most sought after skills needed to drive the company’s future growth.

Ms Burnet said: “While much has been said about the negative impact of AI on the job market, in the short term we expect it to create jobs in some sectors. Companies are hiring in technical experts to oversee the implementation of new systems, before they make wholescale changes to their workforce.”

The combined factors of geopolitical risk, increasing regulation and the sheer scale of investment required to upgrade their business has driven UK CEOs to revise down their growth forecasts for the next three years.

Most leaders KPMG spoke to eschewed ambitious targets to predict conservative top line growth. The majority (61 per cent) said their business would grow only modestly over the next 12 months, with revenues increasing by 0 per cent – 1.99 per cent.

UK, and other European CEOs, were notably more pessimistic about their country’s growth prospects in comparison to their global peers. While 85 per cent of CEOs in the US, 80 per cent in Japan and 74 per cent in Australia said they were confidence about their country’s future growth potential, just two thirds of UK CEOs said they were confident or very confident in the growth prospects for the UK, a fall of 11 percentage points on last year’s figures.

Ms Burnet added: “Businesses are balancing complex regulatory and geopolitical change, while technology continually reshapes their markets: the pressure from these combined factors will not abate in the short term and this will depress growth.

“For many, the shift to a new business model will also see them take a short term hit to their profits. As traditional products and services become obsolete, it will take time to replace historical revenue streams.”