Treasury Today Country Profiles in association with Citi

What you need to know about the future

Future render of a city

At last week’s annual ACT conference, the theme was all about ‘cutting through the noise’. Here we consider some of the economic and commercial predictions that might raise the volume for treasurers.

Straw polls are always a good, if rather rough and ready, means of testing the immediate emotional condition of the respondents. At this year’s ACT annual conference, most delegates seemed to be in a good place, or at least were not in a worse place, than they were five years ago.

‘Much more satisfying’ was how about 28% of voters described their daily lot, compared to a few years ago. With about 39% and 21% claiming a ‘somewhat more’ or ‘same’ value respectively for their general level of professional well-being, all it seems is well. At least it left only small numbers to grumble about more frustration (about 10%) or much more (2%).

This is surely good news for the profession. The ‘do more with less’ mantra has perhaps been tackled head-on with a blend of technology, well-chosen external partners and increased professionalism. Today’s treasurers are rising up the ranks of importance and, industry cliché though it now is, are of more strategic value now than ever before. But what’s in the pipeline?

Inflation is the key

With crystal ball in hand, the key metric cited by one commentator is US inflation. It will be the glue that either holds the markets together, or breaks them, over the next 12 to 18 months. This is a contentious issue, with some economists arguing that US inflation is not going to rise much higher than its current circa 2% level.

However, post-crisis, inflation had not been much of an issue. But in the last year or so, with the US quoting full employment, and tax cuts being offered as a stimulus, most economic theories suggest inflation is inevitable, even if economists can’t agree by how much.

If it does rise notably, it will indeed have a big impact, given the huge amount of debt in the global economy. This debt is serviceable in a low-rate environment. If US interest rates start moving up to control inflation, then the serviceability of that debt becomes a concern.

Global shift

That said, the global economy is continuing to grow at a sustainable and robust pace. The Eurozone, the US and China have all played a part in driving this growth, even if the data coming out of the Eurozone is starting to tick downwards slightly it does so from quite high levels.

Italy’s recent political changes might accelerate that descent though, with the market already pricing in risk stemming from the elected populist parties’ possible driving-up of the country’s fiscal deficit. But then expected upheavals in France and Spain came to little, the markets appearing to have become ever so slightly immune to certain political events. This does not include Brexit.

Most economists agree that there will be some long-term cost to the UK’s withdrawal from the EU. With the UK government focused on the deal, it is diverting some attention from other key aspects of political decision-making (housing or health for example) which arguably puts life on hold for many individuals and businesses. But the continued lack of clarity in general around the arrangements is making predictions of an outcome rather more difficult.

Wage growth

With wage growth being low in the US, its relative economic stability has created the second longest expansion the country has ever seen. The lack of wage growth has in part been attributed to the progressive integration of China into the global economy, and the explosion of the working-age population in many other parts of the world, notably Asia and Africa.

The march of technology is a key element here too but only as an agent of change. The threat of machines taking over jobs has been hanging over humanity since the industrial revolution but humans adapt and new jobs emerge in technology’s wake, at all levels. People will still be needed.

Notwithstanding the rise of the robot, everything that could have pushed down the price of labour over the past three decades has taken effect at a global level. Every stage where normal economic cycles suggest a rise is due has been more or less countered by this downward pressure. As these cycles have extended longer and longer, it has allowed central banks to keep interest rates lower and has pushed the accumulation of debt.

The current ‘super-cycle’ may soon end. The working-age population is plateauing. Over the next few years this demographic will stagnate or even decline. If economic growth continues in this environment, and technology creates new jobs, wage pressure will rise. Inflation is then inevitable and interest rates will follow, keeping the lid on it. Jerome Powell, the new US head of the Federal Reserve, is expected to deliver three more rises this year (on top of his predecessor’s March rise). Perhaps three more are expected next year.

Maintaining stability

Since the last financial crisis, the world has been obsessed with monetary policy, as central banks try to gain control (QE programmes have been huge, especially from the ECB). However, fiscal policy has thrown petrol on the fire in some regions, in Europe, for example, tightening by austerity arguably driving some countries to the brink. It seems the need is to gain a better balance between the fiscal and the monetary going forward.

Of course, the first rule of most central banks is to maintain stability and do no harm. But it is easy to make a monetary policy mistake. Even a steady progression of rate hikes can have an impact. The relatively modest changes in the US so far have already created pockets of stress, for example, in Argentina. It may be that two or three modest hikes down the line, more pockets may begin to emerge, the unintended consequences of which may be felt closer to home.

Central banks have a tough job. The ECB has to balance the economies of some very different member states. In the UK, the Bank of England (BoE) faces a tough job too with Brexit. The economy has not played ball and is subject to many ebbs and flows, making predictions somewhat erratic.

Indeed, this has caused the BoE to try to respond and communicate perhaps too much, causing it to offer a stream of seemingly mixed messages. Its forecasts for growth in the medium term are relatively hawkish. It likened the weakening in Q1 to noise, and it seems untroubled by softer wage growth to date. But then it revised down its inflation forecasts both in the short and medium term, while reducing growth this year by 40 basis points, with its governor, Mark Carney, then telling the BBC that a rate hike was “likely by the end of the year”.

Planning perils

For UK businesses, the uncertainty makes life difficult, and it shows. Around 22% of straw-polled delegates have not yet started planning for the UK’s exit from the EU. About 32% are in the analysis stage, 27% are exploring options, 12% are implanting changes and just 7% are ready.

Some economists feel the outcome of Brexit will be relatively benign, with an agreement eventually being reached. Whatever happens, all businesses should be looking to increase their resilience in the face of uncertainty, not just around Brexit but globally.

Looking at a range of scenarios and possible outcomes, and regularly stress-testing these, is one way to help mitigate that uncertainty. And with economists sensing a change in rates, planning for a world when they are notably higher makes sense.

Being able to cut through the noise means an holistic view of the enterprise and a co-operative approach to other functions is rapidly becoming the required state for the treasurer. Treasury Today will continue to write extensively on what this means in practice. Quite how much more satisfying the role of the treasurer will be in the future will be based on how prepared he or she is right now.