Geopolitical uncertainty, trade restrictions and divergence on AI top risks to growth for global companies

New KPMG International report reveals the three key risks to growth in 2024 and beyond

• Divergence on AI governance, geopolitical vulnerability and trade policy restrictions threatening long-term sustainable growth for many organizations
• Energy and natural resources sector ‘most exposed’ industry group in 2024

Toronto, ON (June 1, 2024) – Businesses operating across borders are facing slowing growth and an increasing battle for long-term sustainability, according to a new report from KPMG International.

The findings in KPMG’s Top risks forecast: Bottom lines for business in 2024 and beyond shine a light on the multifaceted, complex challenges facing companies looking to grow internationally at a time of increasing divergence on regulation, conflict, technological advancement and political uncertainty.

The report’s analysis identifies the three most critical risks for businesses right now, known as ‘bottom lines’, likely to impact operations this year and beyond:

1. Trade policy restrictions: Global trade restrictions have been on the rise, with approximately 3,000 restrictions imposed, nearly tripling since 2019. This trend of protectionist trade policies poses challenges for organizations operating in international markets. Such restrictions can create barriers and hinder economic growth, affecting supply chains and market access. Organizations should be prepared to navigate these trade policy restrictions and explore alternative strategies to mitigate potential disruptions.
2. Vulnerability calling for operational resilience: The geopolitical landscape is characterized by increasing vulnerability, driven by various factors such as rapid technological advancements, climate change and geopolitical tensions. In 2023, a staggering 91 countries were involved in some form of conflict, a significant increase from 58 in 2008. This escalation of conflict has a profound impact on the global economy, with conflict estimated to have a 12.9 percent impact on global GDP. To mitigate the risks associated with vulnerability, organizations must prioritize operational resilience. This involves implementing proactive risk management practices, conducting scenario planning, diversifying supply chains and strengthening cybersecurity measures.
3. AI Governance Gaps: Artificial Intelligence (AI) has become a transformative force across industries, with investment in AI increasing more than fivefold between 2013 and 2023. While AI presents immense opportunities, it also brings about governance gaps that organizations must address. Ethical and responsible AI deployment is crucial to maintain trust among stakeholders. Organizations should prioritize transparency, accountability, and fairness in their AI systems to mitigate potential risks and ensure its responsible integration into their operations.

KPMG’s team of geopolitical experts and global sector heads have also developed a heat map looking at the impact of the top risks on individual key sectors. The analysis reveals the world’s Energy and Natural Resources industry is the most exposed to risks, driven especially by uncertainty in the Middle East and the increasing politicization of access to minerals and crucial resources. The Infrastructure industry and Financial Services are second and third, with both facing threats from AI governance gaps and growing economic headwinds.

In KPMG’s analysis, the Energy and Natural Resources sector also recorded the lowest Financial Performance Index (FPI) score amongst all sectors. The FPI, a measure of financial health, is based on data from over 40,000 companies globally. A lower score suggests underperformance and potential financial instability within the sector. This underperformance highlights the urgent need for companies within this sector to reassess their strategies, manage risks effectively and adapt to changing market conditions to improve their financial health.

“Last year alone, 91 countries were involved in some form of conflict, which led to an almost 13 percent hit on global GDP, according to data from the Institute for Economics & Peace,” says Stefano Moritsch, Global Geopolitics Lead at KPMG International. “To some extent the COVID-19 pandemic was a rehearsal for some of the broader risks and profound threats facing companies today. Leaders have developed a degree of resilience but, for the first time in modern history, they’re facing challenges on multiple fronts – from conflict to complex regulation, climate change and a ‘patchwork’ adoption of AI in different nations and regions.”

With IMF data revealing that global trade restrictions have nearly tripled to 3,000 since 2019, it’s clear that companies are facing a new reality.  The KPMG report sets out 5 first steps CEOs can take today:

1. Conduct a comprehensive risk assessment
2. Stay informed and monitor geopolitical developments
3. Diversify supply chains
4. Enhance operational resilience
5. Foster strong stakeholder relationships.

“The data may make for some sobering reading for business leaders, but there are actions they can take today to ensure long-term viability and sustainability,” adds Stefano Moritsch. “CEOs and other senior execs need a laser focus on supply chains efficiency and security, while navigating complex national industrial policies and trade measures. On politics – something companies have often shied away from – it’s simply a consideration that now needs to be in the board room. Profit alone can no longer be the only consideration. On AI policy, it’s also evident that we’re seeing different approaches in different territories. It’s incumbent on companies to take AI strategy into their own hands, rather than waiting for a harmonized global regulatory framework in the context of a multipolar world. And on regulation, including ESG, business leaders should develop or embrace the tools available to provide live analysis of threats and new rules to stay ahead of the game. To effectively navigate the geopolitical risks, organizations and their leaders ultimately need to take proactive steps today to mitigate tomorrow’s potential challenges.”

Read the report in full: Top risks forecast: Bottom lines for business in 2024 and beyond.

About KPMG in Canada

KPMG LLP, a limited liability partnership, is a full-service Audit, Tax and Advisory firm owned and operated by Canadians. For over 150 years, our professionals have provided consulting, accounting, auditing, and tax services to Canadians, inspiring confidence, empowering change, and driving innovation. Guided by our core values of Integrity, Excellence, Courage, Together, For Better, KPMG employs more than 10,000 people in over 40 locations across Canada, serving private- and public-sector clients. KPMG is consistently ranked one of Canada’s top employers and one of the best places to work in the country.

The firm is established under the laws of Ontario and is a member of KPMG’s global organization of independent member firms affiliated with KPMG International, a private English company limited by guarantee. Each KPMG firm is a legally distinct and separate entity and describes itself as such. For more information, see kpmg.com/ca

About KPMG International

KPMG is a global organization of independent professional services firms providing Audit, Tax and Advisory services. We operate in 146 countries and territories and in FY20 had close to 227,000 people working in member firms around the world. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International Limited is a private English company limited by guarantee. KPMG International Limited and its related entities do not provide services to clients. Learn more at www.kpmg.com.

Source: KPMG LLP

Tags: Artificial Intelligence (AI), growth, KPMG, top risks