Former Governor of the Bank of Canada, Stephen Poloz, discusses the volatility currently disrupting the global economy
By CA magazine
28 April 2022
The era of global volatility is demanding rigour and quick thinking from finance professionals. Stephen Poloz, former Governor of the Bank of Canada, charts a course through the noise
The title of Stephen Poloz’s book, The Next Age of Uncertainty, is a wink to a formative text in his life and career as an economist – John Kenneth Galbraith’s The Age of Uncertainty, published in 1977. You might remember the BBC documentary series that accompanied the book – and the derision it attracted from the conservative press and future Prime Minister Margaret Thatcher. Such was the furore over “liberal” programming being aired on public television that Milton Friedman was even flown over from Chicago to present a rebuttal. Plus ça change…
Much like Galbraith before him, former Bank of Canada Governor Poloz is not interested in generating controversy for its own sake. His book is a reflection of his speaking style as he sits down with CA magazine to discuss the volatility currently disrupting the global economy – straightforward but precise and detailed, and with a patient understanding that not everyone becomes their country’s foremost monetary policymaker.
Central to his thesis is that the world is grappling with unprecedented uncertainty. Poloz believes that five “tectonic forces” – population ageing, technological progress, rising inequality, growing debt and climate change – are ripping up the rulebook for how economies and policymakers function.
“The important thing to understand is those conditions are shifting through time – it’s not about isolating them and understanding where they’re headed. It’s too complicated and, I believe, unmodellable,” he says. “If so, our job is understanding those forces so you can prepare for any catalyst. It could be a bat in Wuhan or a lunatic in Moscow causing these things to interact and give us a completely unpredictable outcome, which is hugely damaging.
“It’s about resilience. Having a more conservative financial posture and a stronger balance sheet means not only can you defend against bad risk, but you can capitalise on something that turns out to be a positive for you. Shareholders will put a higher value on resilience in the future, because they’ll understand volatility is coming and there’s nothing governments can do about it.”
Poloz’s message about equipping oneself with the skills to weather the storm will resonate with many CAs. As well as sharing his insight on the five forces transforming our lives, he explains how the accounting profession can provide vital stability.
1. Population ageing
Poloz explains that economic growth has two sources – population growth and productivity growth. In most developed economies, with birth rates trending below the “replacement rate”, population growth is dependent on immigration. In Canada, that’s no problem, says Poloz, who is “confident that all those job vacancies are going to get filled by new arrivals”. But the situation is more difficult in the UK, as Brexit and waves of restrictive immigration policies threaten what was once a healthy pipeline of talent.
“It poses much more of a challenge for economic growth, longer term,” explains Poloz. “And it’s going to become a bigger issue because of the ageing population. Immigration is the only way to ease this constraint and, globally, it’s a zero-sum game. Countries are going to come to the realisation that they’re going to be competing with each other to attract immigrants, rather than saying that there are too many.”
But, in the meantime, slowing population growth means productivity – and therefore technology – will have to pick up the slack if the UK economy is to continue growing. It’s a “tough place” that Japan has been navigating, with mixed success, in recent decades.
“There’s a huge amount of pressure on a large firm to say how they’re going to grow. And they’re going to have to increase the capital spend line,” says Poloz. “I think you’ll see more and more intangible investment because it can actually produce productivity out of thin air.
“You may think that advertising your brand is simply pouring money down the drain. But if you can get, say, 5% of customers to switch from Coca-Cola to Pepsi, you’re scaling up – and you can have an amazing impact on your productivity. It’s not the kind of mechanical output-type of productivity that most people think of but, in terms of the bottom line, you can suddenly have a major leap.”
2. Technological progress
Poloz believes the current era of rapid technological advances constitutes the Fourth Industrial Revolution. He references a study by the World Economic Forum that 15% of the global workforce will be disrupted by rapid digitalisation. The good news, however, is that more jobs are expected to be created than lost. It necessitates a pivot of skills and responsibilities that accountants have already been experiencing.
“I do think accounting services will be a growth area because there’s going to be a lot of growth in business. We put so much effort into making sure the numbers are right. And the basic numbers for a company might be 40 pages long – and then an annex because every company has its own measures,” says Poloz. “Imagine there’s a parallel universe where ESG needs to be talked about in the same way and you want to say ‘we’re going to reduce our carbon footprint by x% per year’. The CA is going to verify that information. They’re going to attest to those numbers in the same way as the dollars.”
It reflects a change in the scope of accountancy, powered by technology, that is well under way. And with accountants increasingly freed from the manual and repetitive tasks of yesteryear, Poloz sees the profession as a natural home for providing a wider offering of assurance services to business.
“It’s a huge growth area because not every company can do this on their own. Five years from now, we’ll be sitting here looking at two sets of numbers and it will be just as elaborate, with just as many customised measures, to help people understand firms better,” says Poloz. “You’re going to need a really great audit firm to do a professional job and have your shareholders say, ‘I’ll keep that stock in my portfolio’. Audit firms are investing in this technology and starting to negotiate what they earn.”
3. Rising inequality
One side-effect of rapid technological innovation is that “the gains initially go mainly to capitalists”, writes Poloz in The Next Age of Uncertainty. Typically, governments are expected to intervene, adjusting incentives and redistribution in line with ideology and to ensure income inequality does not spiral to a point at which it threatens growth. In an era of political polarisation, however, that mechanism seems to have broken down.
“The share of income going to workers globally has never been this low before. It’s broadly historically cyclical and, at previous low points, something has always changed to cause the share going to workers to go up – such as the surge in unionisation following the Industrial Revolution,” says Poloz.
“It is basic arithmetic that wealthy people spend a lower share of their income than ‘regular’ people. If you keep siphoning more and more income to the wealthy, that means the trend line for consumption spending as a share of GDP will drift down and, therefore, GDP growth itself will drift down. The counter argument is that regular people don’t invest as much. So that’s why there’s a balance to be achieved. We don’t know what the optimal is – but it looks to me that we’ve gone beyond the optimal. And the evidence is around us and in politics.”
Poloz references the election of “unusual personalities”, including Donald Trump and Boris Johnson, as the result of an “underlying angst around having been left out, either by technological change or globalisation, or the two together”. And, crucially, income inequality is a key driver of that angst.
4. Growing debt
The UK’s mounting debt pile – with public debt now at its highest since World War II – is the result of unprecedented fiscal intervention to navigate the economy through the pandemic. The wide-ranging measures demonstrated the sophistication of modern-day policymaking and the lessons learned from past decades and downturns. Poloz is a keen advocate of policymakers using every tool at their disposal. But while he writes that “economies have missed out on some of the ‘cleansing effects’ associated with economic downturns”, the responsibility, he says, lies squarely with the private sector.
“I got into economics because I wanted to see if I could make policy even better. And that means minimising the economic disruptions around cycles – maintaining an environment that’s predictable so people can make good private sector decisions. The notion of having a recession to ‘cleanse’ weak companies out of the economy is kind of a cop-out,” he explains.
“If banks are lending to weak companies, that’s their issue. The people extending the credit to weak companies should be the credit police, saying, ‘You’ll get cut off if you don’t clean up your act’. Over time, someone has to cleanse out zombie companies to create the resources for new, emerging ones – we know this as a basic premise. The lender should look at the numbers just as hard as a stock investor does. The cost of borrowing will be higher, the company will get cleansed.”
Poloz warns that rising private sector debt makes economies especially vulnerable to shocks, reducing the influence of central banks and exacerbating periods of volatility. It’s likely why governments have taken on much of the burden of the pandemic, offering private sector firms more flexibility than they would have had otherwise – as well as a critical opportunity to convince investors that they remain a profitable venture outside the context of the pandemic.
5. Climate change
Research by Edelman demonstrates that, in this age of uncertainty, people broadly have more trust in business to enact change than government. That’s partly because of the vicious circle of legislative inertia and political polarisation, but also because business can more easily work to timelines beyond the current electoral cycle.
“People look to firms: ‘I know that CEO, I’ve seen them in the news, they get it.’ And it’s not just them saying it – it’s verified by their CA – so it’s validated,” says Poloz. “You can imagine a world where corporate voices are louder – perhaps not as loud as political voices, but more prominent in terms of policy directions and to act as the rallying point. Companies lead on the things that matter to people because governments can only get so much of their job done, given the inability to reach a true consensus.”
Nowhere is this more evident than the struggle to control climate change and promote sustainability. With reference to the long and winding road to consensus, Poloz points out Cop26 got its name because “it’s the 26th time” the conference was held. But when it comes to business, he sees the investor channel as the place to bring about change, influencing the ability of firms to raise finance due to green credentials. Again, it’s an area where CAs have a pivotal role.
“ESG is a breadth of ‘report card’ concepts. How do you treat your people? Where’s your supply chain? That’s hard to ferret out as a regular investor – you need somebody to do that or make it clear and have a standardised framework,” he says. “The standards that emerge might be challenging for firms – you’ll need an advisory firm to walk you through. Everybody’s got an accounting firm – it’s the natural place for that expertise to emerge. I’m seeing those conversations already.”