PLACE FINANCIÈRE & MARCHÉS — Marchés financiers

PODCAST – SHAPING FINANCE

Laurence Boone, chief economist at OECD



Tous les 15 jours, Nicolas Mackel, CEO de Luxembourg for Finance, invite des leaders de haut niveau des secteurs européen et mondial des services financiers à partager leur point de vue dans le podcast Shaping Finance. L’invitée du huitième épisode est Laurence Boone, chef économiste à l’OCDE, l’Organisation de coopération et de développement économiques.

Welcome to the podcast that shares the views of high-level leaders in the European and global financial services industry.

Nicolas Mackel. – “Welcome to Shaping Finance. A podcast which offers a platform to high-level decision makers and shapers in international finance. My name is Nicolas Mackel. I’m the CEO of Luxembourg for Finance and the host of this podcast.

I’m joined today by Laurence Boone, Chief Economist at the Organization for Economic Cooperation and Development or OECD. This is an international organization that was set up after the Second World War to help distribute the Marshall plan funds. But obviously up to today, it has morphed itself into a very important economic actor on the international sphere. And it describes itself today as working to build better policies for better lives. More on this in a minute. Before joining the OECD in 2018, Laurence was the chief economist at AXA, one of the world’s largest insurance companies and investors. Besides other positions in the world of finance for major firms like Barclays and Merrill Lynch, Laurence has also served as special advisor to the French President. Furthermore, she has been active in academia, teaching at different elite schools in France and authoring numerous articles. Laurence holds a PhD in applied econometrics from London Business School. As you can see from this very impressive resume, she is quite the right person to discuss what the financial industry can expect from 2021. Welcome Laurence to Shaping Finance.

Laurence Boone. – “Thank you, Nicolas. And thanks for this very kind introduction.

Nicolas Mackel: Laurence, the OECD has set itself, and I quote: ‘the goal to shape policies that foster prosperity equality, opportunity and well-being for all’. Through what concrete actions do you at the OECD, help bring these ambitions to the reality of our economies and to the life of citizens?

Laurence Boone. — “So, as you say, the OECD ambition is really to use the best policy analysis and experiences of its member States to provide recommendations to all of them on the best policies to achieve higher goals, higher welfare and sustainability and that’s a concern for finance as well. So, we draw basically on almost 60 years of experience and insight into our member states deep discussions and analysis with them to prepare what’s needed for the world, I would say, of tomorrow, post Covid. We work on establishing evidence-based international standards and finding solutions to a wide range of social, economic, and environmental challenges. What we’re trying to do is provide advice to improve economic performance, foster job creation, fight international tax evasion. And as you know, it is a unique forum of like-minded members who share knowledge for data analysis, experiences, best practice and advice on public policies.

And here in the economic department, which I lead, we’ve set up the hub for the analysis of the house. We identify areas for reforms, which could advise short term, medium term and long-term challenges, for the political economy. And obviously, we also provide projections for the global economy in the twice-yearly economic outlook. And the last one was released on the 1st of December.

Nicolas Mackel: And we will certainly come back to this economic outlook and you will give us some of the main elements. But before that, the Covid crisis is currently raging not only through Europe, but also the US and other parts of the world. What scars will the pandemic have left in the economies of your member countries? And how will the economies of industrialised countries recover from the current slump?

Laurence Boone. — “So as you say, I think there will be some scars. As you know, we now have vaccines in sight. But it will take between six to 12 months for vaccines and other public health policies to actually put a halt to the virus or keep it in check. And in the meantime, some restriction will persist. There will be restrictions on some sectors that you know, leisure to reasonable hospitality. Everything that involves human to human interaction. So, what that means is not on the 2020 with a terrible recession of more than 4%, but in 2021, the recovery cannot be full. It has to be partial. Just because of restrictions on mobility and movement of people will continue. So, that will inevitably have some effects on unemployment and firm failures, in spite of all the policies that have been deployed since the beginning of the crisis. And let me say that we’ve been super impressed by the efficiency, the speed and the magnitude of the policy support for the economy during this crisis. But it’s not the end of it.

We will need to continue throughout 2021 and continue, but to limit further shocks and limit discounting effect. One of the things we worry the most about is how much this will increase inequality. As you know, a significant proportion of all of the support that was provided to people has been saved, which we can understand. But that has gone massively to higher income households where they lower the amount and propensity to consume conversely. And the sectors which are the most affected have the highest concentration of low-skilled people with precarious contracts, low-paid workers. And they usually had to use their saving or become more indebted. So, this is something we had seen before the crisis, which was already having an impact on our economies and economic policies. And this is likely to be stronger after the crisis.

So there is inequality. Also, we’re seeing those sectors being more affected than the others. And when we look at past crisis, unemployment continues to rise, bankruptcies continue to rise throughout a couple of years after the drop in GDP. So, we’re going to see that ahead at first, and we would have to deal with this and the consequences of this. And finally, but not last, but not least, many emerging market economies have been hit particularly hard by the pandemic. Some of them had high private or public debt, limited fiscal space or a significant exposure to debt denominated in foreign currency. We know that the IMF had to intervene and to quite a large extent support these countries. We also know that a lot of them have difficulty raising funds on the market it is super important, actually for the international community, to take care and addresses the issues of the less advanced economies. We wouldn’t want a financial crisis after the economic and health crisis.

Nicolas Mackel: And Covid-19 has accelerated several phenomena that were already ongoing. One of them might be the de-globalisation of our economies. Or is the recent signature of the comprehensive regional economic partnership between 15 countries in the Asia-Pacific region evidence that news of globalization’s demise was maybe premature.

Laurence Boone. — “So, I think I agree with you. I’m not very convinced about the arguments of de-globalisation. But there will likely be changes to globalisation. Some of those changes will be regional. Some of them will be that policy makers will pay more attention to the fallout of globalisation. What it means for people in their local constituencies. But I think globalisation is here to say. And by the way, it was not the… It was not the consequence. The virus was not the consequence of globalisation. Often we talk about the issue of masks, but what happened is that there was a global surge in demand. That was massive when there was a shortage of supply. Because never had we imagined that we would need that many masks. And I think, with that reflex is we need a lot more attention on resilience on what we call, just in case instead of just in time supply chains.

So, resilience rather than too much efficiency. But globalisation is needed first to solve the crisis. We won’t be out of this if vaccines are not deployed throughout the world. Not only advanced economies, but also emerging market ones. Otherwise, there would be resilience of the virus. It would come back to haunt us, so to speak. So, the third thing is, this is a very concrete action where multilateral institutions can help. The second thing is, you mentioned the comprehensive regional economic partnership, and it’s actually very good news. It will have trade growth and much more freely among 15 member countries. And that will support goals in all of Asia. And it’s good news for them, but I think it’s also good news for the world. Because they contribute an increase in the share of global worth, more than one third in our current projection.

Laurence Boone. — “And so that’s good news for them, good news for us. And then there are a couple of challenges, which we will not be able to address without globalisation and multilateral institutions. Think about the environment and climate change. For example, think about a fair taxation updated for the digital age. As you know, OECD is working on an agreement with 137 countries to ensure that forfeit are being taxed more where the customers are located. Which obviously is more complicated in the digitalised environment we live in. That could bring about $100 Billion globally. I’m sure there’s a lot of good news that we can think for all this money. So, not only I don’t think it’s fastest but, I think it really can help on a number of topics.

Nicolas Mackel: And another trend that has certainly been accelerated by the current crisis is that of a sustainable finance. Our economies need to transition to a more sustainable growth. Is the financial industry embracing sustainability fast enough to help bring this about by helping to finance this transition? What would be needed to ensure a more rapid mainstreaming of sustainable finance products and thus a more rapid transition towards a sustainable growth?

Laurence Boone. — “So, that’s… I think that’s a super exciting topic. And we can see how much and how fast things are actually changing. We have collected evidence. So, we have evidence that financial institutions and markets are really embracing forms of sustainable finance in particular ESG investing, central banks, supervisors. They all see the need to assess climate risks to stress this exposure of banks, pension funds, insurance for potential losses, unfolding asset values, which would be due to physical and climate transition risks. So, there is increasing concern and people are really paying a lot more attention and acting on it. Having said that, the assessments we do at the OECD find that if there has been a rapid adoption of ESG investing in recent years, it’s fair to say that ESG disclosures and metrics have lacked consistency, comparability and transparency across the world.

So, what we’re trying to push at the moment, is a focus to ensure that financial markets can contribute to an orderly transition to low-carbon economies, and that all companies, institution who embark on the path to reduce their carbon footprint also find the capital available to invest in this transition. Let me suggest a few things,what I think we need to see and what we are trying to push. Three points on this. The first is improvement in ESG metrics and methodologies. And what we want is to show that investors can assess the financial and environmental significance of a monumental pillar scores and their ESG, in a consistent way. Which is why we’re going to be working on the development of more precise and transparent tools to invest in the transition from climate indices and climate transition funds to wider use of green bonds.

And lastly, we are fostering the monitoring and verification of who fought against climate transition plans. We think this will be very important to limit greenwashing. And on your side, and just to conclude on this institutional investors, we think need to engage with both, to ensure that condition plans yield tangible results, to reduce carbon intensity.

Nicolas Mackel: So, something to look forward to in 2021. Another issue that has arisen with the crisis is that of global debt, which saw unprecedented levels being reached this year in response to the pandemic. Should this worry financial markets in the long term as this could be unsustainable? Will we see a return of austerity as countries try to bring back that to more normal levels? Or have we indefinitely moved the goalposts into new territory?

Laurence Boone. — “So let me… Let me share a view on this. The first one is, we need this fiscal support today. We needed it in 2020, we will need it also in 2021. Which was the point I made for the projections. The second point is, we needed to support jobs and the firms and avoid catastrophe while they are some restrictions to economic activity. The second point is, we can afford it today. Even if we have much higher debts, none was the case in 2014, interest payments on public debt across the OECD engine were much lower today, then they were back in 2014. This is obviously due to record low interest rates, but what’s worse is then saying is that, we also expect central banks and markets to keep rates at different maturity, very low for some time. Given the huge slack in the economy and a very 70th outlook on inflation.

It’s super important that we don’t repeat the mistakes of the previous crisis and consolidate too quickly. Which is why we’re insisting on this. And on the fact that the exits from governments for this higher debts the plans for how we’re going to look at taxation and spending in the future start today. But that implementation is clearly not for this year or next year until momentum is regained. Now, there’s one issue that we are following quite closely, which is the corporate debt level and leverage in some countries. You know that in many countries these have risen to very high level. Actually they’re back to the level we had in 2009.

And there are some concerns that we have in particularly forms of market-based financing such as high-yield debt, loans, which were mostly ineligible for existing programs or when purchase is programmed. So, we don’t want to minimise those concerns. But the one thing I would say, in conclusion, is that, the best medium-term way to ensure that sustainability is to boost GDP growth today. And then I think we need to do it wisely and with targeted measures to make sure that when we step back and investors will look at sovereign debt and corporate debt, they will ask where the money has gone and they will have seen that it has gone to strengthen both and institutions.

Nicolas Mackel: And to stay with investors, going forward, what should the financial industry worry about more? Continued low interest rates, or maybe a return of inflation?

Laurence Boone. — “So, that’s the toughest question of all. I think… at our central scenario, inflation is unlikely to return with a bang as long as there is less demand than supply in the economy. So, there’s unemployment, some production capacity not utilised, and wages both remain subdued and that globalisation is ongoing. So, I think… I’m sure we can find cases and we’re worried about pouring liquidity but, so far inflation seems to go into asset prices and not consumer prices. The central scenario as well, is based on the continuation of low interest rates to enable both monetary and fiscal policy to lift growth. It doesn’t mean that we are blind to the distortion, this may create on the financial market. But first that people look for more risky assets is a desired effect from these voices. And some on the way have a lot of macro-prudential tools and supervision, supervisory tools that policy makers should use a lot more monitor very carefully and make sure that, I would say, financial excesses are kept in check.

Nicolas Mackel: As we conclude, what book have you recently read that you would like to recommend to our audience?

Laurence Boone. — “There’s actually something which is… which dates from the previous financial crisis aftermath. But I was rereading them this weekend and I think all of all your audience would really enjoy it. It’s « Lords of finance », for those that haven’t read it. By Liaquat Ahamed and it’s this story of the 1930s craziest times through the life of four central bankers. The US, UK, German and French one. And I think it’s very enlightening about what we are, what we go through and what we may go through again.

Nicolas Mackel: “Thank you very much Laurence Boone for sharing your insights on the economic perspectives with our audience. Thanks also to our listeners who have tuned in again to our podcast. In our next episode, I will have the honour of speaking to Jean-Claude Juncker. Former Prime Minister of Luxembourg and former President of the European Commission. If you would like to be up to date and don’t miss out on one of our latest episodes, please feel free to subscribe to our podcast on iTunes, Spotify, and Google. You can also find more information on our website, luxembourgforfinance.com.”