FINANCIAL REPORTING & IR

Forces beyond our control are affecting our personal and professional lives in ways that have not been seen for generations. Notwithstanding strong equity markets and increasing optimism as vaccination programs ramp up in a number of countries, the full impact of the COVID-19 pandemic on national economies, sectors and businesses around the world remains very unclear.

KPMG International released its Global Economic Outlook last month, in which Chief Economists from KPMG member firms around the world, including the U.S., China, Japan, India, Eurozone, Nigeria, Saudi Arabia, and the U.K., identify and discuss some of the risks and opportunities that are facing their local economies, governments and organizations.

With the effects of the various containment measures – health and fiscal response strategies taken by governments over the past 12 months – countries are all performing differently. The contraction in overall performance and employment levels has been universal but how, when and if countries will rebound remains uncertain.

Public spending after COVID

One of the legacies of the COVID pandemic could be a generational shift towards higher government spending, as fiscal policymakers adjust to the new reality of rising demands for government support while interest rates remain low.

The shock of the COVID pandemic has pushed governments to increase spending to record levels, with over US$10 trillion being allocated around the world. Much of this effort has been financed by additional borrowing, adding to the already large debt loads that governments accumulated before the pandemic began. However, as interest rates have also fallen around the world, the cost of servicing that debt has remained low, which could mean that some of the extra spending may remain until the crisis period of the pandemic has passed.

The arithmetic of debt and growth

In a world where interest rates are low, the traditional view of national debt has less relevance. As long as the rate of interest is below the rate of economic growth, the total stock of debt will tend to decrease as a share of GDP without the need to run fiscal surpluses. This may result in an assessment of whether a given level of debt is sustainable, which becomes more a question of growth paths and interest rates than one of a balance of government revenues and spending.

Low interest rates are expected to persist well into the next decade. Historically, the overall decline in the interest rates took place gradually over a 30-year period and across multiple economies, but more recently, the impact of COVID-19 has revised downward interest rate expectations.

Spending in health has been increasing, both in absolute terms and as a share of overall GDP. The frontier of new treatments coupled with the rising cost of healthcare of an ageing population translates into the overall share of public sector spending, which also tends to increase over time. Across the more advanced economies, estimates by the World Health Organization (WHO) show between 6% and 8% of GDP is devoted to health.

Risks of higher debt

Pursuing the strategy of higher spending funded by persistent deficits does carry risks. While interest rates are low, a large stock of debt remains affordable – but even a small increase in rates could see the costs of servicing that debt spiral upwards. These risks are even greater in the countries that face a significant credit or exchange rate risk. For many, the space afforded by low interest rates may be far more limited.

Economic recovery forecasts

World GDP declined by 3.1% in 2020 as a result of the pandemic. As many countries have rolled out their vaccination programs and business activities start to recover, KPMG forecasts that world GDP will increase by 5.0% and 4.4% in 2021 and 2022, respectively. Inflation will remain low and the unemployment rate will be slightly improved. A detailed analysis and forecasts by country over the next two years are available in KPMG International’s Global Economic Outlook.

CEOs’ view on return to normal

The 2021 CEO Outlook Pulse Survey conducted by KPMG in February and March of this year asked 500 global CEOs about their response to the pandemic and the outlook over a three-year horizon. It finds that almost half of global executives do not expect to see a return to a ‘normal’ course of business until sometime in 2022, as opposed to nearly one-third who anticipate this will happen later this year. The changes prompted by the pandemic have resulted in one quarter of CEOs saying that their business model has been changed forever by the global pandemic.

The survey also showed a steep decline in the appetite of global executives to downsize their company’s physical footprint. Only 17% are looking to downsize their office space as a result of the pandemic – down from nearly 70% last summer as global CEOs reconsider the need for in-person business to resume when countries emerge from the pandemic.

With the 26th UN Climate Change Conference of the Parties (COP26) taking place this year and the U.S. rejoining the Paris Accord, almost half (49%) of CEOs plan to put more stringent ESG practices in place. A vast majority (89%) of business leaders are focused on locking in the sustainability and climate change gains their companies have made as a result of the pandemic.     

Whatever the futures of companies may hold, one of the things that remains constant is the need to stay connected with constituencies; the role of IROs in maintaining active communications with shareholders, even in the face of an often uncertain future, is fundamental to success, according to the CEOs.

Terry Liu, CPA, CA is a Senior Manager, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.