ICAS Insights: Coronavirus and its impact on the global economy
Catch up on the ICAS Insights webinar: Coronavirus and its impact on the global economy. James Barbour, ICAS Director of Policy Leadership, speaks to Trevor Williams and Scott Hanson about the social and economic impact of COVID-19.
In this webinar our panel discusses what the lasting effects of COVID-19 on the global economy and society may be.
Trevor Williams, Professor of Economics and Finance, looks at how former pandemics have led to global recession, widened inequality and social change. Will COVID-19 have the same effect?
Trevor takes us through what we can expect to see, what is currently happening to the global and UK economy, the winners and losers and the opportunities.
Hear from Scott Hanson about the the impact of the COVID-19 pandemic on IFAC member professional accountancy organisations, what IFAC has been doing to respond and how IFAC is engaging at the global level. Scott also shares his thoughts on the future of the profession.
Watch the webinar here:
During the seminar we received a few questions that we didn’t have time to answer. Please see answers to your questions below.
Q: Please comment on the medium term (three to four years) and long term impact of the impending recession and recovery activity on pension funds.
Trevor: Yields or returns to pension funds from government bonds and other fixed income assets will be low for the next few years. Recall, that the number of these loans that are negative yielding has risen from nothing in 2007/8 to $14 trillion last year. That means pension funds will need to invest in equities, on a relative return basis, and other assets to meet their long term obligations to pensioners.
The good news for these funds though in the longer term is that the UK has an aging population and so the funds under management will rise, meaning that they will have money rolling in, and meet their short term claims from that inflow. But a long term mismatch may exist, requiring investment in riskier assets further ahead or reliance on growth markets and more diverse portfolios.
Q: I presume Trevor would not support changes to, or scrapping of, tax relief for corporate debt? For the overborrowed consumers, does he see any prospects for more quantitative easing for them through "a debt jubilee" or other policy innovation? And what about the elderly with capital but no interest on their savings and perhaps inflation impairment?
Trevor: Indeed, I do not support debt forgiveness for corporates - though I would for some emerging markets where debt was accrued through corruption. But the real relief for highly geared companies and consumers is that borrowing costs will remain low for many years, maybe too many. Of course, low rates will hit savers and those reliant on interest income, as well as for those who have to buy annuities in the years ahead.
Q: Your prescription for recovery is based on deregulation which, if I picked you up correctly is designed to encourage entrepreneurship and innovation. The flip-side of this is that deregulation is considered to offer business the opportunity to be less concerned with the environment, their employees and society more generally. You also seem to be subtly advocating a shrinking of public spending - i.e. austerity. Overall, this sounds like a Kuznets curve scenario in which most of the population have to suffer for a period until big business engineers sufficient growth to deliver wider prosperity. Is this a correct interpretation and do you believe there is a realistic alternative? Secondly, what do you think of the emerging literature regarding the prospects of a 'green recovery'?
Trevor: I think I may have answered online but deregulation does not to me mean damaging the environment. Far from it, I mean deregulation that promotes growth industries and allows companies to start up and register more quickly, bringing ideas to markets and so on. I did not and do not believe in austerity but in increased public spending where required on infrastructure, and capital.
The latter means in people and road, rail, trains and planes. But it means expanding say the green belt further out from cities also that council homes can be built for those that are 'essential workers’ but low income relative to house prices. they should be helped top live where the jobs are. It means more buildings with green technology embedded. Incentives to invest in green technology but not driven by government deciding which area but by small competing firms. The two can go hand in hand. Private sector innovation is what is required.
Also, I would invest in technology colleges, bring back nursing colleges and polytechnics. The future is about growth so that incomes can rise but in way that that reduces carbon emissions. It can be done.
Q: Given Scott's past experience, not a surprise to hear about anti-corruption measures, but should the accountancy profession not do more to look at corporate "leakages" in other places - transfer pricing, intercompany and cross-border lending, excessive executive remuneration in all its forms (bonuses, share plans, other benefits borne by shareholders, etc.)
Scott: As mentioned during the webinar, when conduct crosses the line from legal to illegal, professional accountants have an ethical duty to act under the NOCLAR provision of the IESBA Code (as adopted at the national level). With respect to legal conduct, professional accountants within the organization are positioned to raise their concerns with those charged with governance (TCWG). With respect to independent external auditors, this is why it is critical that the Board consider the audit as a process that adds value rather than merely a compliance exercise. Active engagement between the independent external auditor and the Board should serve to identify and communicate these issues to those with the authority to act. We explore this in more detail in the IFAC Point of View: Achieving High-Quality Audits. .
Q: Can you give some examples please of the last point re judgements becoming of more importance?
Scott: A key area where judgment is gaining in importance is with respect to professional accountants service small- and medium-sized enterprises (SME) clients. These clients are certainly engaging their client for their core accountancy skills, at least from the outset. But as the relationship develops, SMEs increasingly look to their accountant for business advice. Over time, the accountant’s judgment and ability to serve the client more broadly become the cornerstone of the relationship. So while the core accountancy knowledge and skills are a prerequisite, long term success is driven by the ability to add value to the client through judgment and insight. We go into significantly more depth on the topic in The Role of SMPs in Providing Business Support to SMEs.
Q: Trevor has indicated the problems facing pension plans in a future of low or negative yielding "safe" assets (aka government debt). Is this not an opportunity for ICAS as a PAO to approach not the UK's pensions regulator but UK government - HM Treasury and DWP - to move away from a "balance sheet" exclusive lens for DB pensions funding and adopt more "cash flow" modelling, including investment in "less safe" assets? Unless this happens, more and more corporate capital will be directed towards shoring up legacy DB and leaving little or nothing to address DC saving levels by younger employees.
ICAS: This is an issue which has been examined and debated previously at some length, including by ICAS during its Challenging Conversations campaign in 2018. We are aware that there are strong views on this topic across the pensions industry and amongst the ICAS membership, but with no consensus around the solutions. ICAS has no plans to revisit this topic at this time, but we will maintain a close interest in any developments and keep our position on revisiting this topic under review.
About the speakers
Scott Hanson is a Principal in Public Policy & Regulation at the International Federation of Accountants (IFAC), where he leads policy work around anti-corruption, AML and sustainability. Scott also represents IFAC on the B20 and Business at OECD Anti-Corruption Committee. Prior to joining IFAC, Scott was at the Central Bank of Ireland where he led on FinTech policy and launched the Central Bank’s Innovation Hub.
Scott began his career in market supervision, first at the New York Stock Exchange and then at FINRA in the United States, where he transitioned to international regulatory policy. Scott is admitted to the bar in New York and holds a BA from University of Chicago and a JD from Brooklyn Law School.
Trevor Williams is the former chief economist at Lloyds Bank, a position he held for around 15 years. Trevor runs his own consultancy – TWC: www.trevorwilliams.biz. He blogs and presents at conferences and other client-focused events, representing economic views on a range of topics.
He explains the impact of these trends on individuals, households, industry sectors, financial and banking markets, and businesses in plain language. He regularly writes articles for publications such as Moneyfacts and The Voice Newspaper.
He is a visiting Professor at the University of Derby, Chairman of the Institute of Economic Affairs – Shadow Monetary Policy Committee (SMPC), and author of Trading Economics.