COP 28 is underway in Dubai but what responsibility do business leaders have for beating climate change? How will trade benefit from from US and European efforts to improve relations with China? And can companies in the EU, and elsewhere, expect an interest rate cut for Christmas?
Mark Kennedy, partner and member of Mazar’s group executive board, alongside George Lagarias, Mazars’ chief economist, offer their thoughts on global trends to Board Agenda’s Gavin Hinks in this edition of Macro Memo.
Welcome to The Macro Memo, a Board Agenda podcast exploring the impact of macroeconomic and geopolitics on business with Mark Kennedy, George Lagarias, and hosted by Gavin Hinks. To access thousands of articles, guides, reports, and our upcoming events, sign up or log in at boardagenda.com. That's boardagenda.com.
This episode is brought to you by Mazars, the international audit, tax, and advisory firm, helping businesses around the world operate and grow with confidence.
Hello, and welcome to this episode of The Macro Memo. My name is Gavin Hinks, editor of Board Agenda, your essential source of corporate governance news and insight. And this is our regular briefing on the macro trends affecting business and trade. We've a packed agenda to work through in this programme, with lots of big issues that could affect your bottom line. Top of the agenda, as always, is a hearty welcome to our two resident Macro maestros.
First, Mark Kennedy, joining us from Dublin. Mark, where have you been and what have you been learning? I understand you've been on your travels to Berlin.
That's right. Yes. I was in Berlin last week. For a meeting which was about AI. AI was the main purpose of it. So I learned a lot about AI. Actually, the interesting thing on my visit to Berlin—or maybe the thought provoking point—was how bad the traffic was.
And it took me a long time to get from the airport into the city centre and back again when I was returning home. And what I was thinking about as we were crawling through miles of traffic was I've had the same experience in Paris, which is always bad; London, recently.
And something is up, you know. I’d love if people can think about this.
In Europe, particularly, I suppose, with half our workforce is working from home. The traffic in every city I come to is insane; Dublin, the same, coming to work this morning.
Productivity is not as good as it should be. We’re, you know, we’re struggling a little bit on the economic front, and it just doesn’t add up. So that’s what I was thinking about in Berlin sitting in the traffic.
That's a very interesting comment. I was speaking to someone earlier this week who was in Kampala, Uganda, who was bellyaching about exactly the same thing. So we've got a global issue there for governments and planners to resolve.
Now the second half of our Macro maestro duo is George Lagarias, who comes from us down the line in Athens, George, what are you going to tell us about? You've got some news from Argentina, I believe.
Yes. So, on a recent trip to Argentina, what I saw was, first of all, inflation is rampant. It runs at about 120 percent per annum, which is a crazy number.
And as a result, we see evidence of a completely distorted, foreign exchange market. So you buy dollars to be able to sustain yourself and do daily transactions, but it costs you a lot now to get your hands on those dollars.
So it's a very bad and a very distorted market after Milei was elected.
What we have is some optimism, part of it fuelled by the fact that Milei has stepped back a little bit and is thinking about alliances and he's being more pragmatic. And part of it is because, well, people when they're confronted with big changes, they tend to become more optimistic about them. Nobody wants to believe that something bad will happen to them. And so I've seen it, seen it in my own country in 2015.
So you don't know exactly how it's going to play out, but the fact that he has backed down from some of his previous pledges right after he got elected shows that it is quite possible that some of it was an act to be elected.
Well, let's hope he remains a little bit more moderate than he made out in that election campaign. Now, George and Mark join us from Mazars, the professional services firm, and we're here to talk about macroeconomic and geopolitical developments and how they'll affect business. And what I really want to know from you guys is since the last programme: Are you feeling more bullish and bearish on economics?
We've had the autumn statement from the UK, Mark. There were more giveaways than we anticipated in that statement in the budget from Jeremy Hunt. So are you feeling more bullish or bearish about the UK economy at least?
Well, maybe to start with the autumn statement I have to say I thought it was a very clever, positioning by the chancellor. I thought, great to see the full expensing continued, and that was something we'd talked about.
Didn't anticipate the adjustments to NIC, but for self employed and employees, but that was very clever, and it should have a positive impact on consumer spending in the coming months. So from that point of view, I think, and it gave him that kind of angle on allowing people to spend more, people feeling a little bit better off. So but he did a good job from that perspective, both politically, and has opened some things on the business side, which we really wanted to see.
Sadly, I remain bearish. I'm feeling that the fundamentals, not just in the UK, but when you look around the world, they're still not quite in the right place. So I'm always an optimist that I think next year, hopefully, we'll see some good things, but feeling a little bit bearish as we approach Christmas.
George, are you equally split?
First off, on the on the autumn statement, The chancellor figured out a way to give money today and, take it from tomorrow, and he did it without borrowing, which is the usual way you do this thing, right? And he did it with a fiscal drag. If you don't change the, the limits, on your income tax bands, that means that as inflation goes up and it's gone up roughly 15, 20 percent in the last two or three years, then people, maintain the same purchasing power, even though they're making more money. But because now they're making more money, they're being taxed for it because the income bands don't change.
So basically, that was a clever way to, to to borrow from the future as as as you would have it and and give it to to growth now. So in terms of I would agree perfectly with Mark, in terms of being a little bit more bullish. Look, the global economy is slowing down. So I’m bearish for the first half of the the year, possibly even into September, October. But after that, we should see we could possibly begin to see rate cuts or at least the expectations for rate cuts.
You know, if I expect rate cuts to happen, then I will be more inclined to spend money even though, you know, for the next two, three months, I'll be spending the same thing on my the same money on my mortgage. I'll be more inclined to spend for Christmas 2024 because I know rate cuts are are on the way. So I think I would be positive into the latter part of the year for the economy; a little bit more bearish into the, beginning of the year.
Well, I wanna come back to rate cuts later in this programme.
But first, I want to turn to our first big agenda item: COP28 under way currently in Dubai, a gathering of world leaders, hopefully, attempting to produce an agreement that will accelerate the reduction of combat emissions around the world. We await the deal. In the meantime, it's worth reflecting on the business response to climate change and how businesses should see this responsibility. George, if I can come to you first. How do macro agreements at the level of of a COP affect individual businesses?
They do a lot because micro agreements are going to form the basis of a regulatory environment where upon companies will have to abide and and, reduce emissions.
Having said that, what we need to know is that both the US and China, the world's biggest polluters generally favour growth today over concerns on the environment tomorrow.
And you know, I'm not super optimistic, not about the outcomes and about the agreements, but rather about you know, pragmatically about whether we're going to achieve, the the emissions targets and the temperature targets.
Most of the pressure on business, today, has come through reporting requirements disclosing what they're doing on sustainability.
Is everyone on board? Are all businesses, playing their part or are there still laggards out there?
I think it's an interesting point to start on. The reporting framework, and particularly in countries like the UK, where there's been quite a, I think, a positive and far-seeing approach by the authorities has set up a kind of a landscape where businesses will have to play their role. And I think that's had a very positive effect on how businesses have learned about what they need to do because it started to put parameters or in a business sense around what change practically needs to be made. I'm quite sure that there's plenty of businesses, particularly if you go to the US and maybe other parts of the work where this is not high on the business leader's agenda, but it's becoming higher.
You know, and we heard Mark Carney recently commenting publicly that He felt it was kind of baked into the business agenda. It's baked into the economic agenda now. And I I think that's right. So that framework has been very positive and I I wouldn't downplay the importance of reporting from that perspective, but we are at early days, and we're going to see that progressively kick in. I mean, for the vast majority of European businesses. It’s only the ones that are currently reporting that are gonna switch on to the CSRD next year. So they’re working through that process now.
Sorry. I just want to point out that’s the Corporate Sustainability Reporting Directive from the EU.
Exactly. Thank you. And the ones that are moving first are the very large businesses who are already reporting under the non financial reporting director with directive, which was the precursor.
The year after that, we’ll see more and more of again larger enlisted businesses around Europe. And it’s only the year after that that you see the large SMEs, which is eighty percent of the business in Europe, you know. So so it’s where early days, I suppose, is my point there. But that reporting framework is gonna take people on a journey and I think will be positive for the, climate in the, in the relatively medium term, I think.
And I think the other important point and then maybe stop there is that having set that institutional framework up, we’re starting to see how business interactions are being influenced by that. And what I mean there is consumers’ ability to understand what businesses are doing, other stakeholders, the availability of finance. It's all starting to focus on that reporting. And again, that's gonna create a positive momentum within for climate change.
George, there's a macro issue underlying this, reporting approach, isn't there? In that reporting is becoming very sophisticated in the EU, but other places are not so hot on these reporting, requirements, including most of the developing world.
Yeah. Well, you call it a macro issue in the sense it is a pro growth agenda: grow or bust.
And, obviously, this has repercussions on the legislation you can put on, and the regulation you can put on carbon emissions.
There is the very simple and plain issue of China.
China is a country that used to have a lot of poor people, and now you have a much larger, middle class, and that middle class tends to consume a lot more meat.
Raising cattle for meat consumption purposes is one of the biggest polluting practices currently in the globe: methane emissions.
Okay. So it's it's all well and good on paper to to to put those restrictions, but how are you going to tell poor people, well, you guys shouldn't eat any meat?
Okay. So these are very tough macro choices because this isn't some high minded game. It will take sacrifices from a lot of people across all classes to to be able to achieve that target of, 1.5 degrees higher by 2030, and it's still a target that might be elusive.
So, Mark, coming to you, what can business do to get on the front foot when it comes to, climate change and sustainability?
And I think Gavin, there's two things that businesses should be focusing on. First of all, it's very specific to the business. But if you take the example of say, a manufacturing business. You've got a a number of real world issues that you've gotta start thinking about, and those centre around things like substitution of products, as George has mentioned, you know, say you’ve taken the food sector moving from meat away from that.
So in some manufacturing businesses, that’s gonna be quite important. And having a greener kind of supply chain that that feeds whatever their product is. The second is around distribution. And, clearly, there's a lot of focus about being efficient in that regard and how we distribute goods around the world and for larger businesses. That's a key question.
And the third area is probably around risk management and how you're engaging with the risks that climate change is gonna bring you. So they're very real world elements that I think every business should be thinking about. And maybe on top of that taste changes, and we can reference maybe consumer interests in different products. And the green story that goes with them.
The second thing is recognising that this change is bringing, a parameter change to how we do business. And what I mean there is things like access to finance, insurability of particular activities, supply chain management in the more ESG sense, They're all very firmly on the agenda now. And I think any business that isn't looking at how their business operates from that perspective is making an error in their long term planning. And the reporting element that we touched on at the very start of this segment is gonna make all that very obvious in terms of what business decisions are being made, which is going to drive investment.
Well, the world is changing. It's best to get on board.
Now our second issue, our second agenda item in this programme is China. November saw president Xi China visit Joe Biden in the US, and there's currently a an EU delegation, in China.
There's a lot of discussion about trade and easing relationships between China and the US and China and the EU.
George, there's lots of reasons to try and improve the relationship between China and these two big trading blocks, US and EU.
Why are they trying to fix things right now?
Well, they don't have a choice. China and the US are codependent.
We've spent 25 years where China exported deflation to the rest of the world. They made cheap stuff. And in turn, they got a higher rate of growth.
Now, you know, we we might be trying to disentangle ourselves from China, but this is a big country and has some resources, especially around you know, electric battery, electric vehicle batteries and and some resources, which can be found mostly there.
It is the world's second biggest economy. It is a hub of technology. Quite frankly, we can't ignore China.
So, and we can't cancel China. So we have to learn to work with them in China has to, has to, not learn to work with the rest of the world, but has to adapt its present agenda to some degree to the norms of possibly Western countries.
Okay. So they they need to find some common ground.
And is the issue here what the EU and US are exporting to China? Because I'm looking at a couple of charts in front of me whilst, EU exports to China are pretty flat, Chinese exports to EU are growing, and there's a relatively similar story between China and the US.
Well, look, obviously, what it it does matter what, who exports to whom and what, and every country is cherry picking the industry it wants to protect, you know, whether it's the auto automotive industry or whether, at least some other industry, they try to protect their workers. So, of course, yes, that matters because also that that brings vote for Western democracies.
But again, the larger point here is that in the last three years, we have seen a surge of tariffs and barriers: the likes of which we haven't seen possibly in terms of, you know, exponential rise since the 1930s!
So we need to deescalate before we escalate because if we keep escalating, then, (A), at the very least, economic repercussions, are going to be significant. We're all going to be underperforming in terms of growth. Output caps are going to grow. And second, well, if we learn from anything from 1937, 1938, when the US, located export of energy to Japan. At some point, what is a trade war can become something much more warmer.
Okay. And that's that's what happens when tensions build.
That's yeah. That's a rather grim outlook.
Yes. Indeed. Mark, so there's a there's a premium on deescalating or de escalation.
I I wonder, Mark, if if this is achieved, If we can ease the relationship with China, I don't imagine that the tariffs will go away anytime relatively soon, but is there an upside for business if we can smooth things a little bit more?
Of course, there is. And, you know, earlier, I said I'm bearish, and I'm looking out a year. My view is that what you're starting to see politically is that the three big poles are beginning the process of deescalating.
And I think that's going to continue through 2024. And I think for European businesses, you're already seeing in the you're the European commissions agenda on the visits that are going on at the moment is very much centered around business and addressing particular sectors’ ability to export into China. And there will be a quid pro quo, like, with but I suspect we've continued to see growth in Chinese exports into Europe and into, that part of the world. But I I I think there's something positive on the horizon there.
And I think the same in the US. I mean, the the US situation is particularly volatile because of politics domestically and much will come in terms of that election. I don't think you'll see, a lot of of public statements around repositioning China, but I'm pretty sure that from an economic perspective, the US are gonna take the same view. So and that that will then create more opportunities as well.
And I do see the European stance at the moment is is quite focused on positioning Europe as a very strong player in the world and as a kind of a broker in between the east and the west. And I think we're gonna just continue to see that building trade relationships on all sides. So so I think, you know, in the big sectors, whether it's around energy technology, you know, so on and so forth in manufacturing traditionally.
I think there's a good opportunity here going past ‘24 into ’25, ’26 for businesses to profit and do well.
George, who's got the greater motivation to smooth these relationships?
Is it is it China? It's GDP has fallen over the last few years. It's not quite as energetic as at once was, or is it the US and the EU?
Well, from, from just a contemporary perspective, I, in 2024. It is obvious that China does have the bigger problem. And the EU for that matter, the US less so.
So China and the EU are both seeing an economic slowdown.
China, the EU, would definitely need, to see some better rates of growth. The US on the other hand is entering the realm of the 2024 presidential elections, where easing on China might be for this particular round of elections, possibly politically unpalatable.
So I would say that in terms of, you know, policymakers and incentives, definitely the EU and China, but not the US right now.
Mark, just elections always make policy uncertain because, politicians have got to win votes, but I do wonder whether, you know, a business leader looking at the this larger trend of trying to ease relationships should be doing anything right now. Should they be trying to make connections in China start having conversations, or are we still away still some way from, you know, building China into your business development strategy?
I I think, in larger businesses, China remains in their investment strategy.
Whether they're going to do things that are very novel in 2024, I'd question.
But I think that's, and that that it reflects a kind of political instability perhaps, but I I think major businesses have kept China on the map and maybe find new ways of dealing with how you interact with China because some of those political backdrops, but I'm absolutely convinced China remain important for certainly larger UK and European businesses.
And can you see any practical steps for business to take right now?
I think that the the end of the day, business is about people. The most practical thing you can do is get out there. Meet people begin to exert influence. So And again, for most large businesses, they have those networks built already.
Right. Now let's move to our third agenda item. Which we've, humorously called macro Christmas wish. And, and, really, when we spoke earlier, we agreed that we'd talk about interest rates around, on this topic, George, you've already mentioned inflation and interest, but we're we're at a very interesting moment in the development of interest rates both in the UK, EU, and the US.
They've plateaued in the UK, they are holding steady in the, EU, but both central banks, both UK, and ECB are saying they're not gonna do very much else in the near future. George, why are they holding steady on rates And wouldn't we really wanna see a rate reduction as a as a Christmas present?
Well, to do that, we would need to see the most basic of all Christmas wishes, peace on earth and goodwill amongst men because and women and gnomes for that matter because if we do not see that and if we see persistent geopolitical tensions, then inflation could rise again and then central banks, even if they cut, then they'd be forced to hike again. And they don't want to do that because they feel they're going to lose credibility.
So they want to see a meaningful fall in inflation. They want to see meaningful fall in core inflation because so far a lot of the fall has been the year-on-year effect plus the, the food and energy component. But in terms of, for example, wage growth, the UK, especially the UK is, is is very high, wage growth.
So they want to see definitely easing of, wage, of wage pressures but also they want to make sure that the geopolitical environment is a little bit more airtight because God forbid they start to cut, and then they're forced to hike again. It has happened in the past. It happened in the nineties. Greenspan began to cut 1994, 5, ish and then in the US, and then he was forced to hike again. But Greenspan, it was a different age for central banking, and definitely they had not come as much under as much fire as they do now. So now they need to be really, really careful, you know, because they missed inflation in in 2021.
Now they feel that they need to maintain a more hawkish stance until they're certain that, they won't have to have to backtrack. And to do that, we need peace on earth.
Well, amen to that for one thing. But in Europe, just to stay with you, George, for a moment, we've seen, I think this week, inflation in the eurozone fall to 2.4 percent. The 2 percent target is within touching distance. Christine Lagarde, at the ECB, is still gonna hold out a bit longer, you think?
Yes. I think she's going to hold out a bit longer. First of all, didn't raise rates as much as the the US.
So, you know, she's coming off a a lower base anyway or or the UK for that matter.
And second, the EU has a different structure in terms of the labour market. It's much more inflexible.
Which means that, you know, people didn't go to their boss and ask for a raise just because food became 5 percent more expensive. We don't get to do that much in in the EU.
So, they but they what they do need to see is that this persists and Lagarde won't be, I think, the central banker who will start with the rate cuts. If you're asking my personal humble personal opinion, it starts with the US, it ends with the US.
Oh, well, that's a we keep on watching brief on the US then Mark, coming to you, high interest rates are a bit of a deterrent for business investment. If the central bankers are saying they're holding on to their high rates at the moment, is that gonna be an incentive to put off investment?
I think you've gotta look at that that regionally. I think it will be in Europe think of the UK, you probably not. I think that'd be a bit more of a government push to to facilitate and create a a a narrative around stronger investment. So I think, but as a general thing, I think, yes, I think people will be cautious.
I I suppose listening to George, I a hundred percent agree. I think We can't anticipate that Santa is gonna bring the kind of cuts this year. And I think we'd be far better off taking the Rolex off the the wish list and replacing it with, a real deal on COP28. So the equivalent of one of those give for gold or whatever for Christmas, because what we should be wishing for this year.
So, business should be, keep on watching brief, but shouldn't be planning their investment strategies right now based upon a rate cut. Yeah. Exactly. George, when— let let's try and get you to, make a, a claim here. Put put your, put your expertise on the line. When do you anticipate rate cuts to begin?
You know what? Surprisingly, I read the I I was in the camp of in in the US, I was in the camp of bottom end of 2024 and the EU possibly at the beginning of 2025.That's the camp I was in for some time.
And I think the UK would be more in line with the EU rather than with the the US. Exactly because it has a tight labor market could fact even trail the EU because of that.
Happily, the report, the outlook by the OECD City who came, which came out a couple of days earlier, is exactly on those lines. They feel that markets are running a little bit ahead of themselves, when they say we believe that that's going to happen in the first half of the year. We're looking at the back end of 2024 to begin with rate cuts. Now, having said that, I will strongly caveat it.
If a financial accident happens, it very well could because we have tightened for a very long time, and we don't know if some area of the market is broken, and how that might domino into into other areas of the market. So in case we see a financial accident, then I would expect great cuts to to begin, sooner than that. But only if we see something going really, really self.
Mark, do companies sit tight? Or do they try and play a role in reducing inflation themselves?
I suppose they do try and play a role, but I'm not sure they're thinking about reducing inflation per se, but I think, you know, any business would be looking at its costs, looking at trying to make itself as sustainable as possible. I think there is a trend in the marketplace at the moment where you see some major business making announcements, which are of themselves deinflationary, particularly around employment costs.
So I think you'll see that trend continue, but I think it's driven by a very individualistic self preservation, profit enhancement, kind of drive rather than than a public good
Right? So that's the back end of 2024, best we can hope for on interest rates.
Guys, it's been a great program. Really interest thing to hear your views. Let's turn to our last item. A quick look forward to the, the macro diary as it were.
Mark, I believe you wanna mention the, change in leadership of the EU presidency.
Yeah. The EU presidency is something that kinda gets ignored, I think, at times, but it's quite an important element of the institutional framework and the governance framework of Europe. And as it happens, Belgium are going to become the president, at the start of 2024.
And if you go on the EU website, you'll see they've already set out their their plans, and they're coming at a very interesting time, given the volatility in the world and the kind of things we've touched on through this this episode.
And they've they've really set out three goals. One is to look security, defence, and migration. The next is to look at rule of law and democracy, and that really is probably looking internally at some of the things that are happening within the European family.
And then look at economy, internal market, and trade. And I think they're setting up the EU for the next five year period to play that kind of key role in the global economy, as well as dealing with some of the significant social issues that are coming from issues like climate change.
So a a bit of a boom for EU business on the way?
In the longer term, yes, I'm a devout European So I I think, you know, and I think it's important for us to remember the history of the European Union of why it's an important collection of countries, even though it may change in in over time in terms of makeup and its focus, I think it's really important. I think the badge and presidency will set the tone toward the end to the end of this decade. If I'm allowed, I might mention one other date for the diaries, Gavin, which is we had a bit of an announcement ourselves in the last couple of weeks, which was top secret, which is the creation of a a new accounting network called Forvis Mazars. I'll just give you the date. Now we might come back to it, but the first of June 2024 is gonna be the launch date of that. So that's a a day you should mark in your diaries as well.
That's a transatlantic arrangement, is it?
It is. Yeah. Yeah. It's really bringing one of the largest European and rest-of-world firms together, which one of the largest US firms, both relatively young firms, but we're going to be, I think, firmly in the top ten, both globally and in the US now. So that's a big step for both firms.
Well, much luck with that. George, looking ahead at the diary, the big event in January is the annual World Economic Forum shindig in Davos. This year, they're gonna be talking a lot a lot about the role of artificial intelligence.
They are going to be talking a lot about the role of artificial intelligence, which I have to say, Gavin, it's beyond me. We're talking about suits trying to understand something that even some of the world's greatest scientists fail to understand. We stand at the cusp of the fourth industrial revolution and still we do not know what we're looking for. And you know what? This is perfectly normal.
We have no idea how this thing is going to to play out.
This time last year, we're just beginning to hear ChatGPT. And now we're going to be discussing while regulating something?! We don't even understand how it's going to work. No. I think we should just discuss oversight and be done with it for for the time being. Regulation as something very different from oversight.
But I think instead of discussing that, they would be much better off discussing debt. Because right now, to avert even the smallest recessions, we're borrowing heavily, all the Western world does. And it will come a point not very far in the future when the Davos conference will be about who owes what to whom and how they're going to repay.
Oh, well, that's, that's quite a Davos to look forward to then! I'm sure that'll be a happy event…
And let's also look forward to the day when artificial intelligence is not taking part in this programme because it's a pleasure to speak with you, George Lagarias, and Mark Kennedy. Thank you, guys.
That's all for this programme. Thanks to the guys, and thanks to all of you for downloading and listening to the macro memo. I've been Gavin Hinks. Goodbye.
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