finance
monthly
Personal Finance. Money. Investing.
Contribute
Newsletter
Corporate

Below, Tamara Lashchyk, a Wall Street Executive and Business Coach, talks to Finance Monthly about the current state of markets in the US and the impact that Trump's Presidency will have on the strength of America’s economy. Tamara has 25 years of experience working at multiple Wall Street investment banks including JP Morgan, Bank of America and Merrill Lynch just to name a few. She also recently authored the book “Lose the Gum: A Survival Guide for Women on Wall Street.”

Over the last 12 months the US Equity Markets have shown steady signs of growth until last November when the US elections sent the stock market soaring into another stratosphere. A 16% market surge over the last six months could have an intoxicating effect on investors, but one should heed a word of warning about using market performance as the sole barometer of economic health. With GDP growth hovering just below two%, the stock market has fast outpaced the growth of the real economy.

Although corporate profits are a contributing factor to this bull-run, much of the current market rally has been fueled by the economic optimism generated by the Trump campaign and his promise to deliver a pro-business agenda. Any interference in Trump’s ability to deliver against that agenda could halt this market momentum and even send it towards a decline.

But in the wake of an administration riddled with controversy and scandal, the private sector sits anxiously awaiting, to see on how much of this promise Trump can actually deliver. Topping the heap of the Trump strategy is Tax-Reform and a reduction of the corporate tax rate which would stimulate profits; repeal of onerous government regulations particularly in the banking sector; and renegotiation of trade deals.

But the clock is ticking and Trump’s time horizon could be much shorter than the four year term of a presidency. If the all stars and planets align for Trump then he will have the full duration of his time in office to work with a Republican Congress. But with mid-term elections less than two years away, Trump’s opportunity to deliver may evaporate just as they did for President Obama when he lost both the Senate and the House.

At this point however, the mid-terms seem like a distant concern while the greater issue is the dark cloud of political smoke that engulfs this Administration. Whether or not there is actually fire remains to be seen, but in the meantime all the political noise creates an unproductive distraction that pulls Trump’s focus towards political warfare rather than delivering against his pro-business agenda. If any of the countless allegations are proven to have merit, a Trump impeachment could also be on the horizon.

To understand the impact that a disruption of Trump’s presidency may have from an economic standpoint, one should take a closer look at the current state of the economy. If you peel away the market enthusiasm and look at the economic fundamentals, the real economy is on solid ground and has been for quite some time. Unemployment continues to steadily decline although recent figures show signs that the decline is tapering off as underemployment and non-farm payrolls have reported softer than expected numbers. Caution regarding the slowing pace of growth is already priced into the market as seen by the return of the 10 Year Treasury yields back to their November levels. Inflation is under control eliminating the need for aggressive rate hikes by the Fed but a quest for normalization is still at the forefront of the Fed agenda as we balance against the danger of falling into a deflationary trap. Forcing a rate hike however, could send the economy into a tailspin so the Fed will likely play it safe by running the economy hot and dealing with the consequences of more money supply in the market.

So all in all, the fundamentals paint a solid economic picture, but they by no means match the gangbuster returns of the markets. Although the stock market is one of the leading indicators, in the past it has proven itself to be a cautionary tale, especially when considered in isolation. It is therefore important to look beyond the superficial gains of the recent market rally when evaluating the strength of the US economy.

Global middle market organizations, companies with annual revenues of USD 1 million -USD 3 billion, are showing no signs of slowing down in the face of geopolitical uncertainty. Over one-third (34%) of middle market companies plan to grow 6%-10% this year, far outpacing the latest World Bank global GDP growth forecasts of 2.7%, by more than 3%-7%.

The findings released today in the EY Growth Barometer, a first-of-its-kind survey of 2,340 middle market executives across 30 countries, reveal that in spite of geopolitical tensions, including Brexit, increasing populism, the rise of automation and artificial intelligence (AI) and skilled talent shortages, 89% of executives see today's uncertainty as grounds for growth opportunities. What's more, 14% of all companies surveyed have current year growth ambitions of more than 16%.

Annette Kimmitt, EY Global Growth Markets Leader, says: "The global economic backdrop is much stronger than what the prevailing narrative has been telling us. Despite geopolitical risks and uncertainties, businesses being disrupted through new technologies and globalization rewriting the rules of supply and demand, middle market leaders are not only attuned to uncertainty, but are seizing it to grow, disrupt other markets and drive their growth agendas."

Growth ambitions vary across geographies

Despite facing two years of Brexit negotiations, start-ups (companies under five years old) headquartered in the UK are displaying the highest levels of confidence of the countries surveyed. UK start-ups are the most positive on current year growth ambitions with 26% seeking to grow by 11-25% and a further 23% looking at year-on-year growth of more than 26%.

But when looking at the largest markets, there are significant differences between the world's largest economy, the US where slightly more than a third (35%) of all companies plan modest growth increases of under 5%, compared to the world's two tiger economies – China and India – where together 42% of companies are targeting growth rates of 6%-10%. Moreover, a quarter (25%) of companies in tiger economies have current year growth plans of 11%-15%.

Technology and talent top the agenda

Executives identified technology and talent not only as the top two challenges facing the middle market C-suite today, but they are also seen as the tools by which they will overcome challenges and remain agile. Talent (23%) is cited as the top priority ahead of improved operations (21%), cutting red tape (12%) and beneficial agreements (8%) in a ranking of what is critical to meeting current growth ambitions. A staggering 93% of executives see technology as a means of attracting the talent they need. New developments in artificial intelligence (AI) are improving the recruitment and selection process for innovative start-ups to find specialist talent.

To fuel the growth ambitions of their organizations, more than a quarter (27%) of middle market executives plan to increase their permanent headcount and a further 14% plan to increase the number of part-time staff. Reflecting the growing impact of the gig economy on work patterns and a move to a more contingent, skills-based workforce, almost one in five (18%) companies plan to use contractors to help power their high-growth plans and fill specific gaps or needs.

However, under these global results lie significant differences in hiring plans. A majority of US companies (55%) plan to keep current staffing levels flat, compared with 31% of all respondents. These plans are almost reversed among start-ups, 53% of which plan increases in full-time staff. Nearly a quarter (23%) of all start-ups are also the most likely of all organizations to plan to hire more contractors or freelancers.

Kimmitt says: "Middle market leaders are using technology to attract and retain talent, accelerate growth, improve productivity and increase profitability. Uncertainty has become the new normal, and while geopolitical risks and trade barriers are influential factors, middle market companies are moving ahead with hiring plans."

RPA does not spell RIP to talent

While only 6% of middle market organizations are already using robotic process automation (RPA) for some business processes, the dystopian vision of large-scale layoffs is not shared by these business leaders. Fifteen percent of all middle market executive respondents believe that adoption of RPA will result in headcount reductions of less than 10%. This illustrates that middle market leaders are planning on the selective adoption of RPA to bring efficiencies to some routine operations, but as an adjunct to human talent, not a replacement.

Macro risks to growth

Middle market leaders cited increasing competition (20%) as the number one external threat to their growth plans, followed by geopolitical instability (17%) and the cost and availability of credit (12%). These threats were considered far more significant than financial headwinds of rising interest rates (8%), foreign exchange variance (8%) or commodity price volatility (6%). Leaders were twice as likely to cite competition (20%) as a risk than slow global growth (10%).

High-growth entrepreneurs are even more optimistic

As part of the EY Growth Barometer, the survey also measured 220 alumni of EY's widely-acclaimed Entrepreneur Of The Year program. Active for more than 30 years, the network has programs in more than 60 countries and 145 cities worldwide supporting high-growth entrepreneurs.

High-growth entrepreneurs are planning significantly higher growth rates than overall middle market leaders, with one in five planning to grow by 6%-10%, a further 20% by 11%-15% and yet a further one in five by 16%-25%. Nearly one in four (22%) high-growth entrepreneurs are planning current year growth of more than 26%. Additionally, almost two-thirds (61%) of this group plan increases in full-time staff and 9% plan increases in the use of contingent or gig economy workers.

Kimmitt says: "Middle market companies are the engines for global growth, representing nearly 99% of all enterprise and contributing nearly 45% to global GDP. But high-growth entrepreneurs are not only more ambitious in setting growth targets, but prioritize differently from other mid-market leaders and businesses. High-growth entrepreneurs are not fazed by the kinds of seismic shocks that Brexit and other geopolitical upheavals present. They are developing agile and flexible strategies to work with uncertainty as the new normal."

(Source: EY)

According to a new whitepaper from asset management strategy consultancy Casey Quirk, a practice of Deloitte Consulting LLP, the industry is likely to experience "the largest competitive re-alignment in asset management history" through merger and acquisition activity from 2017 to 2020.

According to its new Investment Management M&A Outlook, "Skill Through Scale? The Role of M&A in a Consolidating Industry," Casey Quirk expects strong merger and acquisition activity in 2017 with a continued historic pace of deals through 2020.

Among the factors driving this brisk activity in 2017 and beyond are an aging population, affecting industry asset levels and flows, as well as a broad shift to passive management that has created pressure on industry fees and placed greater value on firms with valuable distribution platforms and those investing in technology. Forty-four deals took place in the first quarter of 2017, and Casey Quirk expects 2017's volume to likely outpace the last two years.

"Investment management has become a fiercely competitive industry, increasingly shaped by the same winner-take-all dynamics influencing other maturing financial services sectors," said Ben Phillips, a principal and investment management lead strategist with Casey Quirk and one of the authors. "Amid this challenged marketplace, the gap is widening between leading and lagging asset and wealth management firms. Unlike deals of the past, consolidation pressures, with a focus on scale, will likely drive the next round of M&A activity to position firms for growth."

According to Casey Quirk, most of the investment management merger and acquisition deals in 2017 and in the next few years should fall in the following categories:

"Economic pressure, distributor consolidation, the need for new capabilities, and a shifting value chain are the catalysts that are fueling M&A activity," said Masaki Noda, Deloitte Risk and Financial Advisory managing director, Deloitte & Touche LLP, and co-author of the paper. "Asset managers are feeling pressure from many corners and are looking for ways to secure a competitive advantage. Strategic deals may be the answer."

In 2016, 133 mergers and acquisitions occurred in the asset management and wealth management industries, down slightly from 145 in 2015, but with a higher average deal value, up from $240.9 million in 2015 to $536.4 million last year. In investment management, about half of the deals rose from the need to add capabilities such as innovative investment strategies or access to new market segments. In wealth management, the vast majority of transactions—64 out of 78—resulted from consolidation, as various smaller wealth managers sought to improve profitability through economies of scale. Merger and acquisition deal volume by category is from SNL Financial, Pionline.com, Casey Quirk analysis and Deloitte analysis.

(Source: Casey Quirk)

Restructuring attorneys and advisers predict that the energy and retail sectors will be the most active for out-of-court restructurings this year, according to The Deal, a business unit of TheStreet, Inc.

Early in the first quarter of 2017, many restructuring attorneys and advisers were certain that the healthcare industry was heading for a wave of out-of-court restructurings and bankruptcy filings because of President Trump's vow to repeal and replace Obamacare.

After Trump's first proposed legislation stalled and a second try at passing a bill squeaked through with minimal support, advisers are no longer certain that Trump's assault on The Affordable Care Act will be a threat to the healthcare sector this year, as they first thought. Advisers are now asserting that companies in the energy and retail sectors will be more active this year seeking out-of-court restructurings than the healthcare industry.

"A long list retailers led a parade of out-of-court restructurings in the first quarter with many of them, such as Macy's, Sears Holding Corp. and J.C. Penney Co., announcing dozens of store closings." said Kirk O'Neil, out-of-court restructuring reporter at The Deal. "The retail sector will continue to be the most active industry seeking out-of-court restructurings in the second quarter, followed by some oil and gas companies that are trying to avoid Chapter 11 filings."

The Deal's exclusive ranking covers the top global advisers involved in out-of-court cases filed between January 1st and March 31st 2017.

Some highlights from the report:

(Source: The Deal)

While challenges face commercial real estate markets, realtors specializing in the sector should have confidence that growth will continue. That's according to speakers at a commercial economic issues and trends forum at the REALTORS® Legislative Meetings & Trade Expo.

NAR Chief Economist Lawrence Yun led a panel discussion about the economic forces shaping commercial real estate markets; the panelists agreed that the market has improved and that continued growth in the economy will further drive activity, but difficulties remain regarding availability of financing for smaller commercial properties.

George Ratiu, NAR director of quantitative and commercial research, said that increased trade and the rise of e-commerce has boosted rents in the industrial and warehouse sector. "During a time of transformation in consumer shopping habit, vacancy rates will still continue to see a gradual decline in warehousing and strong rent growth will continue," he said.

Unemployment has declined to 4.4% and consumer confidence is at its highest point in 15 years. As the economy improves, the commercial real estate market has continued to improve as well, said Yun. "A rising interest rate environment is likely to halt commercial price growth or even cause a minor decline; that outlook is supported by the expanding economy and the over 2 million jobs gained in the past year," he said.

Looking at the global market, Ratiu explained that global commercial investors have hit the pause button on investments, which in the first quarter of 2017 decreased nearly 20% year-over-year; however, certain US markets are seeing good global cash flow with $76 billion flowing to the US. "Overall global investments are down, while the San Francisco, Dallas, Charlotte, Houston and Baltimore markets have experienced large sales volume gains," he said.

With the blip in overall global investments in the first quarter, international buyers are likely to play a greater role in the US market this year. “Over the past five years, a near majority of realtors experienced an increase in the number of international clients. We expect international buying activity to grow in 2017, which will have an overall positive impact on the commercial market's gradual recovery," said Yun.

One major hurdle that continues to affect the market is the lack of available financing to small commercial real estate investors, due in large part to regulatory uncertainty.

"Realtors are seeing evidence of markets being impacted by regulators' increased scrutiny of banks' balance sheet allocations to commercial real estate loans," said Ratiu. "Considering that 64% of Realtor® clients get their financing from banks, this is likely to impact deal flow as lending conditions tightened in 37% of Realtors' markets, a four% increase from last year."

John Worth, senior vice president of research and investor outreach at the National Association of Real Estate Investment Trusts, discussed the performance of commercial real estate investment and its status among other investment sectors. "Real estate investment is currently the best performing asset class. Strong returns and the level of new commercial supply we are seeing today is making up for a lot of missing sectors, following the economic downturn. The first quarter of this year saw a slight decrease, but 2017 is experiencing an overall healthy trend," he said.

(Source: National Association of Realtors)

The European economy has entered its fifth year of recovery, which is now reaching all EU Member States. This is expected to continue at a largely steady pace this year and next.

In its Spring Forecast released today, the European Commission expects euro area GDP growth of 1.7% in 2017 and 1.8% in 2018 (1.6% and 1.8% in the Winter Forecast). GDP growth in the EU as a whole is expected to remain constant at 1.9% in both years (1.8% in both years in the Winter Forecast).

Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, said: "Today's economic forecast shows that growth in the EU is gaining strength and unemployment is continuing to decline. Yet the picture is very different from Member State to Member State, with better performance recorded in the economies that have implemented more ambitious structural reforms. To redress the balance, we need decisive reforms across Europe from opening up our products and services markets to modernising labour market and welfare systems. In an era of demographic and technological change, our economies have to evolve too, offering more opportunities and a better standard of living for our population."

Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs, said: "Europe is entering its fifth consecutive year of growth, supported by accommodative monetary policies, robust business and consumer confidence and improving world trade. It is good news too that the high uncertainty that has characterised the past twelve months may be starting to ease. But the euro area recovery in jobs and investment remains uneven. Tackling the causes of this divergence is the key challenge we must address in the months and years to come.”

Global growth to increase

The global economy gathered momentum late last year and early this year as growth in many advanced and emerging economies picked up simultaneously. Global growth (excluding the EU) is expected to strengthen to 3.7% this year and 3.9% in 2018 from 3.2% in 2016 (unchanged from the Winter Forecast) as the Chinese economy remains resilient in the near term and as recovering commodity prices help other emerging economies. The outlook for the US economy is largely unchanged compared to the winter. Overall, net exports are expected to be neutral for the euro area's GDP growth in 2017 and 2018.

A temporary rise in headline inflation

Inflation has risen significantly in recent months, mainly due to oil price increases. However, core inflation, which excludes volatile energy and unprocessed food prices, has remained relatively stable and substantially below its long-term average. Inflation in the euro area is forecast to rise from 0.2% in 2016 to 1.6% in 2017 before returning to 1.3% in 2018 as the effect of rising oil prices fades away.

Private consumption to slow with inflation, investment remaining steady

Private consumption, the main growth driver in recent years, expanded at its fastest pace in 10 years in 2016 but is set to moderate this year as inflation partly erodes gains in the purchasing power of households. As inflation is expected to ease next year, private consumption should pick up again slightly. Investment is expected to expand fairly steadily but remains hampered by the modest growth outlook and the need to continue deleveraging in some sectors. A number of factors support a gradual pick-up, such as rising capacity utilisation rates, corporate profitability and attractive financing conditions, also through the Investment Plan for Europe.

Unemployment continues to fall

Unemployment continues its downward trend, but it remains high in many countries. In the euro area, it is expected to fall to 9.4% in 2017 and 8.9% in 2018, its lowest level since the start of 2009. This is thanks to rising domestic demand, structural reforms and other government policies in certain countries which encourage robust job creation. The trend in the EU as a whole is expected to be similar, with unemployment forecast to fall to 8.0% in 2017 and 7.7% in 2018, the lowest since late 2008.

The state of public finances is improving

Both the general government deficit-to-GDP ratio and the gross debt-to-GDP ratio are expected to fall in 2017 and 2018, in both the euro area and the EU. Lower interest payments and public sector wage moderation should ensure that deficits continue to decline, albeit at a slower pace than in recent years. In the euro area, the government deficit to-GDP ratio is forecast to decline from 1.5% of GDP in 2016 to 1.4% in 2017 and 1.3% in 2018, while in the EU the ratio is expected to fall from 1.7% in 2016 to 1.6% in 2017 and 1.5% in 2018. The debt-to-GDP ratio of the euro area is forecast to fall from 91.3% in 2016 to 90.3% in 2017 and 89.0% in 2018, while the ratio in the EU as a whole is forecast to fall from 85.1% in 2016 to 84.8% in 2017 and 83.6% in 2018.

Risks to the forecast are more balanced but still to the downside

The uncertainty surrounding the economic outlook remains elevated. Overall, risks have become more balanced than in the winter but they remain tilted to the downside. External risks are linked, for instance, to future US economic and trade policy and broader geopolitical tensions. China's economic adjustment, the health of the banking sector in Europe and the upcoming negotiations with the UK on the country's exit from the EU are also considered as possible downside risks in the forecast.

Background

This forecast is based on a set of technical assumptions concerning exchange rates, interest rates and commodity prices with a cut-off date of 25th April 2017. Interest rate and commodity price assumptions reflect market expectations derived from derivatives markets at the time of the forecast. For all other incoming data, including assumptions about government policies, this forecast takes into consideration information up until and including 25th April 2017. Unless policies are credibly announced and specified in adequate detail, the projections assume no policy changes.

(Source: EU Commission)

Commercial real estate industry leaders participating in The Real Estate Roundtable's Q2 2017 Economic Sentiment Index report that market conditions are stable and will maintain slow, but steady growth over the next several months – yet many respondents are also less optimistic about future conditions due to uncertainty in domestic policy and the geopolitical landscape.

"As the Trump Administration and Congress continue to consider ideas for tax reform, infrastructure investment and financial regulatory overhaul, The Roundtable's Q2 Sentiment Index is tempered by anticipation about what consequences the details of any eventual legislation could have on commercial real estate," said Roundtable CEO and President Jeffrey D. DeBoer. "We continue to remain engaged on the policy front to communicate the vital economic role that CRE provides to communities throughout the country and the industry's ability to create jobs."

A recurring concern among respondents to the Q2 Sentiment Index released today is uncertainty about the prospects for domestic policy and how volatile geopolitical situations may influence the economy.

The Roundtable's Q2 2017 Sentiment Index registered at 52 — three points down from the last quarter. [The Overall Index is scored on a scale of 1 to 100 by averaging Current and Future Indices; any score over 50 is viewed as positive.] This quarter's Current-Conditions Index of 53 decreased two points from the previous quarter, but rose two points compared to the Q2 2016 score of 51. However, this quarter's Future-Conditions Index of 50 dipped five points from the previous quarter – but is up two points compared to the same time one year ago, when it registered at 48.

The report's Topline Findings include:

Although 31% of survey participants report Q2 asset prices today are "somewhat higher" compared to this time last year, only 15% of respondents said they expect values to be somewhat higher one year from now — reflecting the view that the current market cycle is reaching a state of equilibrium. Additionally, 48% of Q2 survey respondents said they expect asset values in one year to be "about the same" as today. Many also noted a healthy availability of capital, predicting that inflows of private capital one year from now will be similar to today's healthy conditions in the equity and debt markets, dependent on the quality of the property.

(Source: Real Estate Roundtable)

The UK’s private sector outsourcing market recorded its strongest quarterly performance in five years in Q1, with businesses agreeing deals worth £2.42 billion, according to the Arvato UK Outsourcing Index.

The research, compiled by business process outsourcing (BPO) partner Arvato and industry analyst NelsonHall, revealed the largest private sector spend since Q4 2011 (£4.04 billion) as companies ramped-up investment in digital transformation.

Of the £1.74 billion spent by businesses on IT outsourcing (ITO) in Q1, 68% (£1.65 billion) was invested in introducing new technology projects, compared with £217 million in January to March last year.

The findings show continued commitment to improving customer experience also led to an increase in spending on BPO deals in Q1. Companies signed customer service outsourcing contracts worth £437 million in the first three months of 2017, with the overall value of private sector BPO deals more than doubling year-on-year to £682 million (Q1 2016: £284 million), according to the research.

Debra Maxwell, CEO of CRM Solutions, Arvato UK & Ireland, said: “The strong start to the year illustrates the resilience of the UK outsourcing market to political and economic pressures, with companies increasingly seeing value in procuring external expertise and experience. From improving customer experiences to delivering new efficiencies across the front and back office, continuing to innovate is crucial to stay ahead of the game, and business leaders are turning to outsourcing partners for selecting and implementing the technology that can help differentiate them in increasingly competitive markets.”

Overall, the findings revealed outsourcing contracts worth £2.73 billion were signed across the UK public and private sectors between January and March, representing a 13% year-on-year rise.

The research found that services outsourced in the UK are being increasingly delivered onshore. No deals agreed in Q1 are to be delivered fully overseas, compared with six% in Q1 2016 and eight% in the period October to December last year.

According to the research partners, a decrease in government spend was partly responsible for the drop in contract volume from 49 agreed in Q1 2016 to 22 in the same period this year, as public sector organisations adopt a ‘wait and see’ approach in the wake of Brexit and the upcoming General Election. Government departments spent £304 million on outsourcing in Q1, compared to £1.6 billion in January to March 2016.

Telecoms investment rise driven by customer services

The telecoms sector accounted for 18% of all UK outsourcing deals agreed between January and March, according to the findings.

The value of contracts signed by businesses across the industry more than doubled year-on-year, with agreements worth £514 million procured in Q1 compared to £217 million in the same period in 2016.

The research reveals significant investment in improving customer experience is behind the rise. Companies in the sector agreed deals for customer service worth £274 million in the first three months of the year, up from the £126 million spent in Q1 2016.

Debra Maxwell added: “The telecoms sector is an intensely competitive marketplace and exceptional customer service is now a key differentiator. Providing a seamless customer journey across digital and traditional channels is key, and a growing number of operators are partnering with third party experts to deliver outstanding experiences.”

The Arvato UK Outsourcing Index is compiled by leading BPO and IT outsourcing research and analysis firm Nelson Hall, in partnership with Arvato UK. The research is based on an analysis of all outsourcing contracts procured in the UK market during Q1 2017.

Other headlines from the Q1 2017 Index include:

(Source: Arvato UK & Ireland)

Finance executives are less optimistic about the economy entering the second quarter of 2017 than they were entering 2017, according to the AFP April 2017 Corporate Cash Indicators.

In the latest CCI, a quarterly survey of corporate treasury and finance executives conducted by the Association for Financial Professionals, US businesses continued to build their cash reserves in the first quarter of 2017. This was not what they anticipated at the beginning of the year. Last quarter, finance executives suggested that they were, for the first time in many months, willing to deploy cash in Q1. However, new numbers reveal they did otherwise. The quarter-over-quarter index of +15, which measures actual changes in cash balances during the quarter, contrasts with the anticipated change for Q1 of -7 that was reported last quarter. The +15 reading was just one point lower than a year ago. The year-over-year indicator increased by 6 points to +16, showing that companies have continued to accumulate cash over the last 12 months.

The forward-looking indicator, measuring the expected change of cash holdings during the second quarter of 2017, increased 10 points to a reading of +3, signalling a continued softening in finance professionals' business confidence through the spring and an anticipated increase in cash holdings in the coming quarter. This was four points below its reading from a year ago.

Meanwhile, the indicator for short-term investment aggressiveness gained one point in the last quarter moving from -2 to -1, continuing to signal a more conservative posture with cash and short-term investments. These results are based on 212 responses.

In early 2017, for the first time in many months, finance professionals displayed a new sense of optimism about the economy, which AFP attributed to a new president promising a pro-business agenda. However, continued gridlock in Washington, plus heightened geopolitical risk in Syria and North Korea likely dampened the mood of finance executives.

"The rapid change in finance executives' outlook comes as little surprise given the sudden rise in economic and political uncertainty," said Jim Kaitz, president and chief executive of AFP. "Corporate treasury and finance executives are responding quickly, and prudently, to the new environment."

(Source: Association for Financial Professionals)

Canada’s Budget 2017 has given voice to a number of matters, but among the chaos of themes and numbers, it can be hard to keep track of the big picture. Here Joy Thomas, MBA, FCPA, FCMA, C. Dir. President and CEO of the Chartered Professional Accountants of Canada, talks to Finance Monthly about the uncertainty surrounding this year’s budget aims and tailors an overview for our readers.

Budget 2017 aims Canada toward economic renewal but does not offer a firm timetable for bringing an end to annual deficits.

The current budget plan would see the deficit peak at $28.5 billion in fiscal 2017-2018 and drop to $18.8 billion in fiscal 2021-2022.

But the deficit reduction plan stops there. Setting a target date for a return to balanced budgets would have helped guide the government in its financial planning going forward. Knowing the ultimate destination would help promote business confidence, ensure funding for essential programs, and ease the impact on future generations.

Sustaining Prosperity

Of course, sustaining a prosperous economy needs more than strong fiscal management. The budget outlines several measures to help Canadians, their families and their businesses flourish. There are investments in training, innovation and infrastructure and a recognition of the importance of lifelong learning and youth employment.

Additional support is offered to help Canada’s workforce remain competitive amid automation and technological change. CPA Canada supports the government’s focus to address how Canadians deal with the effects of these broad economic forces. Canada’s future prosperity will be directly linked to the competitiveness of its workforce.

Fighting Tax Evasion

On the tax compliance side, the budget builds on earlier announced efforts to combat tax evasion and to improve compliance. An additional $523.9 million is being invested over five years to support the Canada Revenue Agency’s crackdown on tax cheats. The CRA will use the funds to increase its verification work, improve investigations targeting criminal tax evaders, and beef up its business intelligence infrastructure and risk assessment systems.

The CRA also will hire more auditors and specialists to focus on the underground economy, a widespread problem that cost the Canadian economy some $45.6 billion in 2013, according to Statistics Canada. CPA Canada works to help the government address under-the-table dealings through our representation on the Minister of National Revenue’s Underground Economy Advisory Committee.

Altogether these measures are expected to raise an extra $2.5 billion in tax revenues over five years, for an estimated return on investment of five to one.

The government reiterated its commitment to work with international partners to ensure a coherent and consistent response to fight tax evasion. CPA Canada is dedicated to supporting the government in this effort. The government’s commitment to strengthening compliance reinforces Canada’s determination to protect the public interest.

The budget also notes that the federal government will work with the provinces to implement strong standards for corporate and beneficial ownership transparency to provide safeguards against money laundering, terrorist financing, tax evasion and tax avoidance.

Tax System Review is Long Overdue

Several budget measures resulted from a review announced in 2016 of federal tax expenditures, which the new fiscal blueprint suggests will continue. For efficiency and simplicity, this budget streamlines some personal tax credits and cuts a handful of others. Tax incentives for scientific research and experimental development will be reviewed as part of a broader review of government support for innovation.

Tax preferences for private corporations will be studied further, with a white paper promised in the coming months. The government is concerned that strategies involving private corporations are being used to inappropriately reduce the personal taxes of high-income earners. These strategies include using private companies to split income among family members and to convert investment income to lower-taxed capital gains.

At the same time, the government plans to examine whether aspects of the current taxation of private corporations adversely affect genuine business transactions involving family members. Presumably this includes tax measures that impede transfers of family businesses from one generation to the next. This will be especially important in the coming years given the high number of businesses changing hands as the Baby Boomers retire.

These limited assessments are a positive step forward but a more comprehensive review is what Canada truly needs. An extensive review can identify areas that would help in redesigning the tax system so it not only enhances efficiencies for Canadians and the business community but also plays a role in cultivating long-term, sustainable economic and social growth. This represents the Canadian ideal of good business – an equitable system that focuses on both business and social development in creating a stronger Canada.

Adapting to Climate Change

Budget 2017 includes a range of measures addressing climate change adaptation, from managing health risks to increasing resources for First Nations and Inuit communities to assessing risks to federal transportation infrastructure. Among these measures, the budget devotes $2 billion for a Disaster Mitigation and Adaptation Fund that will support the infrastructure Canada needs to deal with the changing climate’s impacts.

What’s missing, however, is a National Adaptation Plan that would coordinate these and other public and private sector initiatives. CPA Canada has urged the government to develop such a plan in consultation with Canadian businesses.

It’s Time for Action

With the current economic uncertainty south of the border, some suggest the government should take a “wait-and-see” approach. I disagree. We cannot afford to have the federal government become paralyzed in its decision making. Successful Canadian businesses must always navigate change. So too must the Canadian government, with a continued focus on strategies and measures that ensure Canada remains competitive and is able to attract and retain top talent.

This week Finance Monthly interviewed Tom Carroll, head of EMEA corporate research at JLL, which released its 2017 report on global CRE trends just a few weeks ago. Here Tom delves into the future of automation in the CRE sector and discusses the current impact its having on businesses.

Could you introduce the need for more automation to benefit the business processes and real estate needs for corporates?

Robotics and automation are already being adopted widely across the corporate world. Going forward, they are more likely to lead to job transformation as opposed to wholesale replacement of human labor. This shift will free up time for innovative, creative and strategic work.

Automating repetitive, simple tasks in business processes will help increase speed, precision and cost efficiency. From a real estate perspective, this means that the organisation will be reorganised. The work that companies do and the way they do it is changing. As the more process-driven elements of work fall into artificial intelligence, the use of freelancers, consultants and contingent workers sourced via virtual marketplaces is becoming increasingly common too. This means that the companies of the future will be leaner and more dispersed allowing their employees to focus more narrowly on value creation.

How are overall roles set to change within large companies on the back of automation, and what about SMEs?

The companies of the future will be leaner, with remaining employees more narrowly focused on value creation and other activities delegated to specialist providers or intelligent machines. Competing for talent, however, will continue to be a major challenge due to slowing growth in the global labour pool across the next 15 years.

Therefore, developing talent strategies to attract and retain the right kinds of employee is essential. There are two generations of talent that firms particularly need to get to grips with to successfully navigate the changes taking place: digital natives and digital dependents. These groups have the digital skills and understanding of technology that companies need to transform their businesses.

What has so far been the impact of introducing automation in business operations?

McKinsey analyzed 2,000 work activities across 800 occupations and found that just 5% of occupations are likely to be become fully automated based on currently demonstrated technologies. However, individual activities in almost every job can be partially automated. Adapting current technologies could allow half of all activities that people are paid for to be automated, equal to almost $16 trillion in wages.

Overall, the report estimates that 49 percent of the activities that people are paid to do in the global economy have the potential to be automated by adapting currently demonstrated technology. While less than 5 percent of occupations can be fully automated, about 60 percent have at least 30 percent of activities that can technically be automated.

The good news is that automation could raise productivity growth, which would be a boon at a time when productivity rates have been falling. McKinsey estimates it could boost productivity growth globally by 0.8% to 1.4% annually in 2015-2065. That compares with the 0.3% productivity boost afforded by the creation of the steam engine in the period from 1850 to 1910.

What would you say is the biggest benefit, and are there any downsides?

Enhanced productivity and lower costs could be significant benefits for companies. Another of the biggest benefits of integrating automated processes is the fact that employees and companies can specialise and focus on value creation, innovation and growth.

As the shape of the workforce changes. Real estate portfolios will be consolidated, with a greater share of space located in urban hubs which appeal to top talent. The design of office environments will be guided by user experience as the competition for talent grows more intense.

What are the best examples of automation in large businesses? What might these look like in future?

Intelligent software is already automating many back-office roles in fields like accountancy, finance and law. E-discovery software, for instance, can analyse millions of electronic documents and tease out ones that might be relevant for a legal case, even when specific words or phrases are not present.

At JLL, for instance, we have signed a global agreement with Leverton to automate lease administration. Leverton’s machine and deep learning technology enables the identification, extraction and management of key terms and data from corporate documents, such as leases and contracts, in more than 20 languages. JLL will integrate these systems into its own global technology platforms to transform the way lease documents are reviewed, analysed and managed for its clients. This way, our clients will benefit from optimised data management, more efficient processing of documentation, reduced operational risk and a more robust audit trail.

Chicago-based Narrative Science has developed software capable of taking raw statistics and data and converting it into prose. Originally used to convert sports statistics into news stories, it’s now being used by a leading international bank to summarise stock activity for the firm’s brokers – a task which was formerly undertaken by a team of 20 people.

Cognitive artificial intelligence (AI) programmes that can respond to natural language will see human to machine collaboration become part of everyday working life. Watson, IBM’s natural language processing artificial intelligence system which famously defeated two human contestants on US prime time quiz show ‘Jeopardy!’ is now being used in fields like medicine, banking and customer services. Watson can even act as a ‘c-suite advisor’, scanning documents, listening in on meetings and advising on which companies to invest in. Ross Intelligence – an application powered by IBM Watson – can answer legal questions asked in natural language by shifting through huge databases of legal documents.

In a similar capacity, Kenshoo – a natural language processing system that another major international bank has invested in – provides detailed answers to financial questions that are asked in plain English. Applications like these – that can interact with humans through speech – will be called on to support or enhance the work of people.

How do you expect workplace attitudes to change in respect to automated roles?

Workplace attitudes are already shifting, just as people are becoming more comfortable with smart technology and robotics in the home. Automation has already transformed manufacturing processes and what we are seeing is an extension into new industries and job functions.

User experience will take primacy in the design of office environments as the war for talent grows more intense. To meet the expectations of the next generation and boost the productivity of those using the office, a greater variety of spaces will be available to work in. Activity based working – an approach to creating workplaces that provide users with shared access to spaces for individual and collaborative work – will become commonplace in workplace design. High-quality services, from food and beverages to recreation spaces, gyms and space to support wellbeing, will become standard features in core locations.

What does the real estate or financial services company of the future look like in respect to automation?

By 2030, companies will look very different than they do today. They will have diverse real estate portfolios that balance core space requirements with greater amounts of flexible space. Core locations will be concentrated in fewer, yet more dynamic, strategic, locations. More of them will be in developing markets with strong talent pools. Automation and outsourcing will streamline the workforces of large companies and reduce the number of full-time staff they employ. Employees will also benefit from greater automation of basic process driven activities within their day to day roles and technology may even improve the work life balance of employees.

Following last week’s announcement of the Canadian Budget 2017, Trevor Parry, M.A., LL.B, LL.M (Tax), President of the TRP Strategy Group, provides Finance Monthly with specialist insight into the impact of the announcement and potential outlooks for the next budget.

Despite active rumours that dramatic changes were coming in the 2017 Canadian federal budget, the document as tabled in the House of Commons on March 22nd contained virtually none of the controversial elements budget-watchers had feared—such as an increase to the capital gains inclusion rate or changes to the taxation of employee stock options.

Instead, Finance Minister Bill Morneau brought forward a status quo document that reads more like a budget update than a true or full budget; while nevertheless clearly and directly signaling the Trudeau government’s appetite to eat away at particular tax benefits “as soon as the time is right.” In the wake of the budget announcement, rumours are now circulating that like his (Conservative) predecessor Jim Flaherty in 2011—which saw federal budgets in March and then again in June, although separated by an election—a second federal budget may be tabled in a single calendar year, with pundits suggesting fall (October?) for a possible additional 2017 budget.

Status quo with adjustments at the margins

The 2017 budget tabled on March 22nd and entitled “Building a Strong Middle Class” is organized around five main themes*:

  1. Skills, Innovation and Middle Class Jobs

The Government is proposing to invest an additional $4 billion over the next five years in such areas as developing “superclusters” (dense areas of business activity) to spur innovation; the creation of a strategic innovation fund; funding and promotion of clean technologies; and growing Canada’s advantage in artificial intelligence.

  1. Investing to Create Jobs and Strong Communities

The government has announced plans to accelerate implementation of the Canada Infrastructure Bank; modernize Canada’s transportation system; work with the Provinces and Territories to invest in green infrastructure; support families through early learning and child care; improve indigenous communities; and build a new National Housing Strategy. While these programs account for almost $21 billion in expenditures over five years, they will be funded by reallocating current budget dollars.

  1. A Strong Canada at Home and in the World

Included under this “theme” is new investment in home care and mental health; creating healthier First Nations and Inuit communities; providing greater support for veterans and their families; and enhancing the security and safety of Canadians. It is of interest that some of the additional funding for these initiatives will come from the reallocation of almost $1 billion that had previously been set aside for defence funding of large scale capital projects.

  1. Tax Fairness for the Middle Class

This theme focuses on ensuring that the tax system is fair in both design and implementation. This is to be accomplished by closing tax loopholes; cracking down on tax evasion and combatting tax avoidance with an additional investment of $500 million over the next 5 years; eliminating ineffective and inefficient tax measures; and providing greater consistency in the tax treatment of similar types of income. Specific initiatives are outlined in greater detail below, with the government estimating these programs will increase tax revenues by almost $5 billion over five years.

  1. Equal Opportunity

In the 2016 Fall Economic Statement the Government committed to completing and publishing a gender-based analysis of budgetary measures starting with Budget 2017. Included in Budget 2017 is a discussion on how specific proposals will have a positive impact by addressing gender inequality.

“Tax fairness for the middle class” means coming tax punishment for high income-earners

So why such a milquetoast effort from Morneau’s sophomore effort? Speculators conclude that Trudeau et al. are waiting and watching on actions south of the border before making any bold strokes here at home. What this means for the Canadian high income-earner, business owner or entrepreneur is a continuing requirement to remain vigilant and engage in defensive tax planning for the upcoming months.

What could be on the chopping block for the next budget round (whenever it comes)? Everything from income sprinkling from a testamentary trust to holding passive investments within a corporation to tightening the rules that allow family members to share income (a common strategy used by family-owned businesses). Thus when the Liberals decide to move back above the treetops to mount their full assault as they have telegraphed in their actions to date—and as reinforced by the threats contained in the March 2017 budget announcing “further study” of various issues—Canadians would do well be prepared with effective countermeasures.

(*with files from “CALU”, the Conference for Advanced Life Underwriting.)

About Finance Monthly

Universal Media logo
Finance Monthly is a comprehensive website tailored for individuals seeking insights into the world of consumer finance and money management. It offers news, commentary, and in-depth analysis on topics crucial to personal financial management and decision-making. Whether you're interested in budgeting, investing, or understanding market trends, Finance Monthly provides valuable information to help you navigate the financial aspects of everyday life.
© 2024 Finance Monthly - All Rights Reserved.
News Illustration

Get our free monthly FM email

Subscribe to Finance Monthly and Get the Latest Finance News, Opinion and Insight Direct to you every month.
chevron-right-circle linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram