Disruption from above and below

By Zanny Minton Beddoes

Virtually every firm in every industry is being shaken up by the digital revolution. No chief executive can ignore the onslaught of mobile computing, big data, artificial intelligence and the like. These new technologies offer the promise of huge efficiency gains, but also the threat of being walloped by some upstart from Silicon Valley.

So far, this turbulence has taken place against an unusually placid backdrop. The world economy has been sluggish, but relatively stable: global GDP has grown at almost exactly the same (slow) pace of around 3% every year since 2012. Financial-market volatility has been low, and share prices have mostly marched upwards.

Slow growth is not normally good news for business. But, oddly, the broad economic stability has helped counter the turmoil from technology. Rather than make difficult decisions about new capital spending in fast-changing industries, CEOs have ploughed their profits into buying back their own shares. In America, the pace of such buybacks hit a record annual rate of some $500 billion in mid-2014. Buoyant profits have also boosted mergers and acquisitions (M&A). The value of such deals is likely to have exceeded $3 trillion in 2014, as firms from media to health care try to protect their positions amid the tech tumult (and, in some American cases, cut their tax bills) by buying each other.

The double squeeze

In 2015 this complementarity will come to an end. Bosses will no longer be able to count on financial-market stability as a buffer against disruption in their industries, because the macro-environment will become more volatile even as the microeconomic upheaval gets worse.

The digital revolution will gain pace. Some 4.5 billion people will have a smartphone by the end of 2016, up from 2.8 billion today. Half of all the money that firms spend on information technology will be spent on cloud computing by 2016. Ever more jobs will be displaced, or remade. Uber, a San Francisco firm that is disrupting taxi services in cities across the globe, has 7,000 drivers in London today; by early 2016 it expects to have 42,000.

Meanwhile businesses will also face disruption of a more conventional kind in 2015, as share prices, interest rates and currencies all become more volatile. One source of instability will be the growth gap: America and Britain will enter 2015 with their economies in relatively good shape and their central bankers hoping to start raising interest rates. The euro area, Japan and much of the emerging world will start 2015 with growth slow or even negative. Both the European Central Bank and the Bank of Japan are likely to loosen monetary policy further in 2015. This growth and interest-rate gap will push the dollar higher against the yen and the euro. At some point in 2015 the dollar-euro exchange rate will hit parity.

A stronger dollar and slower growth in the emerging world will also hit share prices. (The firms in America’s S&P 500 make 40% of their profits abroad.) And as confidence falters, the pace of buybacks and M&A will slow. Financial markets will be jittery. Rather than shrug off shocks, as they have in recent years, investors will react strongly to bad news.

Not all firms will be affected equally. Those in emerging economies will have a particularly hard year, caught in the double vice of slower growth and a stronger dollar. They will also be squeezed by technology, as more and more tasks are automated, reducing the relative advantage of cheap labour.

Companies in the euro zone are in for a rough time, too. Politicians there will bicker and do little even as the economy flirts with recession and deflation. Regulators will hamper firms’ efforts to keep up with the digital revolution. There will be shamefully little progress towards creating a single market in digital services. Instead, European competition authorities will crack down on big technology firms with heavy-handed investigations.

Businesses have not had an easy ride for the past few years. Steering companies through a technological revolution is testing, even when financial markets are kind. But steering them through simultaneous disruption from above and below is much harder still. Get ready for the toughest year for global business since the recession of 2008-09.

Zanny Minton Beddoes: business affairs editor, The Economist