Global economy on an upward trajectory, but caveats remain

BY Richard Summerfield

The pace of growth of the global economy has surpassed earlier estimations with a marked improvement under way across nearly all the world’s major economies, according to the International Monetary Fund’s World Economic Outlook report.

In 2015, the global economy grew a disappointing 3.2 percent, but the world is on track for 3.6 percent growth this year and 3.7 percent next year, according to the IMF. It upgraded its growth forecast by 0.1 percent for this year and next from the last full Economic Outlook in April and the update to its forecasts in July.

However, there are some black clouds on the horizon. The UK’s growth forecast has been cut by 0.3 points to 1.7 percent since April as a result of the consumer-led slowdown in activity in the first half of the year, caused by the pound’s depreciation.

The IMF has also scaled back the expected growth predicted for the US economy due to uncertainty surrounding president Trump’s ability to institute his proposed tax cuts. As a result, though the IMF still expects the US economy to grow this year, the speed of that growth will be reduced. The IMF forecasts that the economy will see 2.2 percent growth in 2017 and 2.3 percent in 2018; in April it projected 2.3 percent growth this year and 2.5 percent in 2018.

“The downward revision relative to April forecasts reflects a major correction in U.S. fiscal policy assumptions,” the IMF wrote in its latest World Economic Outlook report. Because of “significant policy uncertainty,” the IMF felt it could not count on Congress and the president passing lower taxes.

Regardless of uncertainty in the US and other regions, the global economy is still performing above expectations. The pace of its recovery from the global financial crisis of the 2000s is faster than anticipated.

"The picture is very different from early last year, when the world economy faced faltering growth and financial market turbulence. We see an accelerating cyclical upswing boosting Europe, China, Japan, and the United States, as well as emerging Asia," Maurice Obstfeld, an economic counsellor and director of research at the IMF, wrote in a blog post accompanying the report. "The current global acceleration is also notable because it is broad-based – more so than at any time since the start of this decade."

All 15 countries the IMF tracks individually are expected to grow in 2017 and 2018, with China and India set to lead the pack. China is expected to regain the fastest-growing nation crown with 6.8 percent expansion this year, slightly ahead of India's 6.7 percent. However, India is forecast to take the lead in 2018.

Report: World Economic Outlook, October 2017

Leading companies lack transparency over risks of modern slavery in supply chains, reveals new report

BY Fraser Tennant

Transparency among major companies relating to the risks of modern slavery in their global supply chains is severely lacking, according to a new report by corporate watchdog the CORE Coalition.  

The report – Risk Averse: Company Reporting on raw material and sector-specific risks under the Transparency in Supply Chains clause in the UK Modern Slavery Act 2015’ – examines the statements of 50 companies, as under the terms of the UK Modern Slavery Act, all firms with an annual turnover above £36m are required to publish a slavery & human trafficking statement.

Of the 50 companies under the microscope, 25 source raw materials known to be linked to labour exploitation – cocoa from West Africa, mined gold, mica from India, palm oil from Indonesia and tea from Assam. The other 25 operate in sectors known to be at-risk of modern slavery, such as clothing and footwear, hotels, construction, football and service outsourcing.

The report’s key findings include: (i) top cosmetics companies make no mention in their statements of child labour in mica supply chains, even though a  quarter of the world’s mica (a mineral used to create a shimmer in make-up) comes from mines in Northeast India where around 20,000 children are estimated to work; (ii) chocolate companies do not provide information in their statements on their cocoa supply chains, despite acknowledging that they source from West Africa, where child labour and forced labour are endemic in cocoa production; and (iii) jewellery firms do not include any detail on the risks of slavery and trafficking associated with gold mining, although estimates by the International Labour Organisation (ILO) suggest that close to one million children work in gold mines worldwide. 

“With an estimated 24.9 million people in slavery globally, the level of complacency from major companies, particularly those that trumpet their corporate social responsibility, is startling,” said Marilyn Croser, director of CORE. “Genuine transparency about the problems is needed, not just more public relations.”

While the report focuses in the main on companies that do not report specific risks of slavery and trafficking within their supply chains, some examples of good practice are noted.

Ms Croser continues: “These firms are acknowledging the drivers of modern slavery and situating their response within a broader strategy to respect human rights. We expect other businesses to step up to the mark in the second year of reporting under the UK Modern Slavery Act.”

Report: Risk Adverse: Company Reporting on raw material and sector-specific risks under the Transparency in Supply Chains clause in the UK Modern Slavery Act 2015’

European M&A dealmakers in positive mood, claims new survey

BY Fraser Tennant

Dealmaking sentiment for the year ahead across the European M&A market is positive despite the ongoing impact of last year’s Brexit vote, according to a new report by CMS in association with Mergermarket.

The report, ‘Changing tides: European M&A Outlook 2017’, which canvassed the opinions of 230 Europe-based executives from corporates and private equity firms, found that 67 percent expect European M&A activity levels to increase over the next 12 months while 5 percent anticipate a slowdown.

In comparison, last year’s survey, which was conducted shortly after the Brexit vote, was met with a subdued response from dealmakers as to upcoming European M&A, with 66 percent expecting activity to decrease over the forthcoming year and 24 percent anticipating an increase.

That said, M&A in Europe has been showing signs of stabilisation this year, with Mergermarket data revealing that M&A deals in H1 2017 sharply increased in value compared to the same period in 2016, rising 33 percent to €443bn.

“The mood among deal makers is markedly different in 2017,” confirms Stefan Brunnschweiler, head of the corporate/M&A practice group at CMS. “While acknowledging some of the challenges they face, respondents are largely optimistic about deal making prospects for the coming year, with many suggesting they are ready to take advantage of opportunities stemming from dislocations that result from Brexit and from a return to economic growth in the eurozone.”

In addition, survey respondents indicated that European financing conditions are currently favourable and that this will drive large, transformational deals over the next 12 months. Indeed, 88 percent expect similar or more favourable financing conditions over the coming year. Furthermore, 66 percent of survey respondents expect to engage in M&A, including acquisitions, divestments or both.

The report also notes that overseas buyers have been setting their sights on the European market, with four of the top 10 European deals in H1 2017 led by bidders located outside the EU – a trend that 90 percent of executives believe will continue.

“European M&A in the first half of 2017 shows positive signs of recovery, with momentum gathering as we move through the year," said Kathleen Van Aerden, head of research EMEA at Mergermarket. “The €246bn total value recorded in Q2 2017 was up 25 percent on the previous quarter and was higher than any quarter in 2016.”

A market newly refreshed with confidence, dealmakers are currently adapting to a new normal in European M&A activity.

Report: Changing tides: European M&A Outlook 2017

Global Logistics expands with $2.8bn European acquisition

BY Richard Summerfield

Global Logistics Properties, which manages around $39bn of logistics assets in Asia-Pacific and the Americas, has expanded into the European logistics market by acquiring Gazeley for around $2.8bn from Brookfield Asset Management. The transaction is expected to be funded by about $1.6bn of equity and $1.2bn of long-term, low-cost debt.

Global Logistics itself is in the process of being taken over for $11.8bn by a leading Chinese private equity consortium which includes Hillhouse Capital and the Hopu Investment Management Company, and is backed by senior executives from Global Logistics. The consortium, which is known as Nesta, will take Global Logistics private in Asia's largest private equity buyout of the year. According to Global Logistics, the deal for Gazeley is not expected to impact the timeline for the company’s privatisation.

In a statement announcing the Gazeley deal, Ming Z. Mei, co-founder and chief executive of GLP, said: “We have been looking to expand to Europe and this portfolio presents an attractive entry point given the quality and location of the assets. This transaction adds a premier operational and development platform for us in Europe and is part of our long-term strategy to expand our fund management business.”

Gazeley’s existing management team, as well as the company’s brand, are both expected to be retained when the deal has been completed.

Global Logistics will be acquiring a considerable asset portfolio in the deal. The company will gain around 32 million square feet of property currently owned by Gazeley, which is concentrated in Europe’s key logistics markets, with 57 percent in the United Kingdom, 25 percent in Germany, 14 percent in France and the remainder in the Netherlands, according to Global Logistics. Europe has long been a focus for Global Logistics; indeed, the company has been talking about expanding into the market for more than 18 months.

The company, much like the wider logistics industry, has seen a rising demand for facilities, driven by a boom in e-commerce. Earlier this year, private equity group Blackstone agreed to sell European warehouse firm Logicor to China Investment Corp for $14.4bn in a deal which further reinforces the burgeoning interest in the global logistics sector.

News: Global Logistic Properties buys European logistics firm for $2.8 billion

EU queries proposed $54bn eyewear merger

BY Richard Summerfield

European competition regulators have launched an in-depth investigation into the proposed $54bn merger between eyewear maker Luxottica and lens manufacturer Essilor, amid concerns the move could stifle competition.

If approved, the deal, which was announced in January, would create a global eyewear powerhouse with a combined current market value of around €45bn, combined sales of about €15bn and staff of more than 140,000. The merged company could have a dramatic impact on the growing global eyewear industry. Luxottica, is the world’s leading consumer eyewear group and owner of Ray-Ban, Oakley and Sunglass Hut, while Essilor is the biggest manufacturer of lenses in the world.

The companies had hoped to have the deal completed by the end of 2017, but this now seems unlikely as the European Commission has until 12 February 2018 to approve or reject the proposed merger.

According to a statement announcing the probe, the Commission's initial market investigation raised several issues relating to the combination of Essilor's strong market position in lenses and Luxottica's strong market position in eyewear. The Commission is concerned that the combined organisation may “use Luxottica's powerful brands to convince opticians to buy Essilor lenses and exclude other lens suppliers from the markets, through practices such as bundling or tying. The Commission will investigate whether such conduct could lead to, adverse effects on competition, such as limiting purchase choices or increasing prices".

Margrethe Vestager, EU competition commissioner said: “Half of Europeans wear glasses and almost all of us will need vision correction one day. Therefore we need to carefully assess whether the proposed merger would lead to higher prices or reduced choices for opticians and ultimately consumers.”

Neither Luxottica nor Essilor opted to offer concessions to allay any of the EU’s competition concerns prior to the investigation annoucement. The companies had until 19 September to offer concessions to the European Commission after initial concerns were voiced by the EU about the deal.

Both Luxottica and Essilor declined to comment on the EU’s concerns. Competition regulators in the US are also examining the deal, which has already won approval from authorities in Russia, India, Colombia, Japan, Morocco, New Zealand, South Africa and South Korea.

News: EU to investigate $54 bln Luxottica, Essilor deal

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