Like every financial pontificator and prognosticator, I am going to present predictions for 2023. I could go tearing through the entrail or birds or try reading tarot cards, but experience teaches the best we can do is guess, and then carefully dress it up and hedge these guesses to present them as informed advice. But that’s not what readers are looking for. Readers generally want insights and ideas so here is my best advice for dealing with 2023.
First, forget everything you ever thought you knew about economics and your perceptions of current markets! That might just be the best piece of advice I ever give. Chuck everything you think is sacrosanct in the bin and start again. Do so, and the current contradictory markets and theoretical economic morass might make a little more sense. Break it down and reconstruct the bits and pieces to make sense of your perceptions! Remembering, of course, to spice it with plenty of self-doubt.
Remember the most significant danger to markets is people. The market, after all, is just an enormous voting machine weighing up the votes of every participant. Things get complicated when everyone is pessimistically careful causing the prices to become overly depressed. Hence smart money says to be fearless when others are fearful. Things get dangerous when market participants are optimistically careless causing prices to soar to euphoric levels. Know the mood and trade accordingly.
We still seem trapped in a phase of over-optimism with investors jumping on any positive news to validate their hopes the market will go higher. After all, that’s what they have been doing since 2009, so surely, they can only ever go up. Nope. A lower-than-expected US Consumer Price Index pushes up prices for a while. Any hints of a Fed “pivot” to lower rate rises will push stock markets higher.
If you want an example of over-optimism in the face of reality, it’s the high likelihood that the market believes that Central Banks can navigate a genuine soft landing. Why? They have never previously succeeded. Every known instance of economies overheating, and rampant inflation has been followed by a crash of some description as Central Banks either let inflation run on too long or engineer an economic crisis by hiking rates too hard. There is no such thing as a soft landing, but a good landing is one you can walk away from.
First, forget everything you ever thought you knew about economics and your perceptions of current markets!
The expectation that we can still avoid a damaging recession in 2023 is strong across markets. I don’t want to sound grumpy, but I still think a recession will happen because of rising rates, property sentiment dipping, and inflation which leaves consumers unhappy, nervous and not buying. For consumer societies to thrive, we need more, not less consumption. People spend even less when faced with tax rises, austerity spending, declining services, rabid inflation, industrial strife, and ongoing political sleaze. It’s a recipe for economic misery, and next year's stagflation, in the UK, looks nailed on.
To see where we are going, look back to where we have come from. 2022 was a watershed year. The third exogenous shock of the decade, the Ukraine War and Energy Price Shock, followed by COVID-19 in 2020 and Supply Chain Disruptions in 2021. We also have a critical endogenous shock underway. Quantitative Tightening as global Central Banks try to unroll the effects of monetary experimentation in the 2010s.
You also must understand the key economic factors that drove markets and inflation through the 2010s. The first was monetary experimentation keeping interest rates low to drive economic recovery following the global financial crash of 2008. But we didn’t get an economic boom. What we got was galloping financial asset inflation as bond prices and stock prices went stratospheric. That distortion enflamed market exuberance and euphoria, triggering the stock market bubbles in Big Tech, disruptive tech and the stupidities of meme stocks, crypto and NFTs.
At the same time, we had the second factor, a de-facto cap on global inflation: China. The Middle Kingdom became the “cheapest to deliver” manufacturer exporting deflation around the globe, and all supply chains led back to it. COVID and the building of a geopolitical stag fight between China and the USA profoundly changed that reality. It unleashed supply chain price instability as geopolitics changed and shut off the deflation spigot.
The era of cheap money fuelling markets and downward pressure on prices is over. Make sure you understand that there is a new reality of real inflation and expensive money before figuring out what 2023 looks like. Although the indications are for inflation to moderate, I reckon it will prove stubbornly high and challenging to de-fumigate from Western economies.
Let’s scribble down some possible scenarios and predictions for 2023. My starting point would be to worry about further shocks. What about another exogenous shock? Could COVID in China overwhelming the medical system create a judder moment triggering another China shutdown, making the Government look weak, causing the possibility of a deeper global recession, and the possibility of President Xi deciding to deflect by going outward bound on Taiwan?
Could the Bird Flu that’s ravaged Christmas Turkey’s jump species lead to a second major pandemic? What are the chances Central Banks decide to go soft again and turn market accommodating? Slashing rates to avoid a market meltdown and a deep recession?
These are all known unknowns, and none are binary. There are numerous others we could discuss, including political instability across the west, the dollar, and the great retirement causing a demographic crisis in the jobs market, and thus the economics of every firm that hires staff!
Equally, there are a host of entirely unpredictable events that could occur. Dreaming up storyboards for disaster movies is fun but scary: the big West Coast earthquake, a super-volcano triggering a mini-ice-age, a meteor strike, a solar flare, an unwater landslide caused by ocean warming causing a tsunami to hit Europe’s Atlantic and North Sea Coasts, a storm surge in the North Sea flooding London and the Netherlands. There is any number of unimaginable events.
Or it may be something financial. A big bank discovers its bust on the back of a housing crisis, a major hedge fund evaporating in a slew of downright stupid trades, or a pension fund exploding in a leverage/liquidity event. Don’t discount anything upsetting our cosy little apple cart of expectations. I think it is 100% likely the remaining cryptocurrency exchanges will collapse in a welter of liquidity events but if you were invested, there is no one to blame but yourself.
What about bond markets? The consensus is bonds are likely to rally on the back of the pace of interest rate rises declining. That doesn’t factor in residual inflation remaining higher than expected, the effects of the sheer over-indebtedness of nations like Italy, France, and even the USA, or the fact that Central Banks are trying to sell down their QE inventory creating a supply glut. The much-heralded bond rally may yet be premature.
Or earnings? Stock markets are still rolling on hopes rather than the fundamentals of good versus bad companies and their earnings. The quality of earnings and their sustainability to competitive threats and a changing economy matter. There is still a shakeout on valuations and stock market multiples to come.
In currencies, sterling has recovered all its losses since the Liz Truss mini-budget disaster but mainly on the back of adults being back in the Downing Street room, and dollar weakness. What does the coming year hold for US growth on the back of a weaker dollar and with all the effects that would have on the global economy?
I predict the big themes for 2023 will be renewables, carbon mitigation, agri-business, soil enhancement, commodity weakness, healthcare in terms of AI, obesity and Cancer drugs, consumers and retail. I plan to continue exploring these topics in 2023.
Do you have an equal passion for both justice and crunching numbers? You undoubtedly know what economics is and you’ve likely heard of forensics, but do you have any idea what forensic economics is? Who knows, maybe this is the career path you were meant to take. Let’s find out.
What You Need to Know About Forensic Economics
According to the National Association of Forensic Economics (NAFE), forensic economics is classified as the application of economic theories and methods to legal matters. It’s a scientific discipline and those who work in the field are almost always master’s degree or PhD holders.
Someone who works in forensic economics is called a forensic economist. Economics and accounting are completely different as are forensic economists and forensic accountants. Though the roles are similar in nature, there are a number of factors that differentiate one from the other. Two of the biggest differences are the scope of work and the salaries associated with each.
What do Forensic Economists Do?
While of course it can differ from industry to industry, a forensic economist is generally tasked with conducting research, preparing reports and formulating plans that are aimed at specifically addressing economic problems relating to monetary or fiscal policies.
Forensic economists are well versed in services such as economic damage calculation and litigation consultation. They are often called upon to act as expert witnesses in a court of law. Their common areas of practice include:
- Toxic tort
- Accident claims
- Employment
- Medical claims
- Business
- Real estate
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How Much do Forensic Economists Earn?
Now, onto the good stuff. How much do forensic economists earn? Considering the scope of their work and the academic credentials behind their names, it should come as no surprise that forensic economists earn a pretty penny. The average salary of a forensic economist in the US is around $124,430, which is approximately $60 per hour, with an average bonus of $4,405 per year.
The entry-level salary for those with one to three years of experience is $86,457 while those with eight years of experience or more behind their name can earn up to $154, 814. Again, much like the scope of work, the salary of a forensic economist largely depends on the industry in which they work and the company or organisation that employs them.
A forensic economist can work anywhere from smaller organisations or cottage businesses to one of the Big Four firms. This is also one job that accommodates remote working—unless your presence is required in court of course—so it’s a career path that caters to working mothers and those that prefer working solo.
Final Thoughts
Forensic economists are remarkable people who can take numbers on a piece of paper and paint a picture of a hard-done-by single parent who struggles to make ends meet. They’re people who can review pre-incident records and come up with accurate figures that represent a business’s loss of earnings. They fight for the little guy and big guys alike, so whoever hires them benefits from their expertise and they leave a positive legacy.
Amidst the recent shock resignations of Brexit Secretary David Davis and Foreign Secretary Boris Johnson, investment uncertainty, slower economic growth and a weaker pound, the United Kingdom is on its way to a slow but steady Brexit, with negotiations about the future relations between the UK and the EU still taking place.
And whilst the full consequences of Britain’s vote to leave the EU are still not perceptible, Finance Monthly examines the effects of the vote on economic activity in the country thus far.
Do you remember the Leave campaign’s red bus with the promise of £350 million per week more for the NHS? Two years after the referendum that confirmed the UK’s decision to leave the European Union, the cost of Brexit to the UK economy is already £40bn and counting. Giving evidence to the Treasury Committee two months ago, the Governor of the Bank of England Mark Carney said the 2016 leave vote had already knocked 2% off the economy. This means that households are currently £900 worse off than they would have been if the UK decided to remain in the EU. Mr. Carney also added that the economy has underperformed Bank of England’s pre-referendum forecasts “and that the Leave vote, which prompted a record one-day fall in sterling, was the primary culprit”.
Moreover, recent analysis by the Centre for European Reform (CER) estimates that the UK economy is 2.1% smaller as a result of the Brexit decision. With a knock-on hit to the public finances of £23 billion per year, or £440 million per week, the UK has been losing nearly £100 million more, per week, than the £350 million that could have been ‘going to the NHS’.
Whether you’re pro or anti-Brexit, the facts speak for themselves – the UK’s economic growth is worsening. Even though it outperformed expectations after the referendum, the economy only grew by 0.1% in Q1, making the UK the slowest growing economy in the G7. According to the CER’s analysis, British economy was 2.1 % smaller in Q1 2018 than it would have been if the referendum had resulted in favour of Remain.
To illustrate the impact of Brexit, Chart 1 explores UK real growth, as opposed to that of the euro area between Q1 2011 and Q1 2018.
As Francesco Papadia of Bruegel, the European think tank that specialises in economics, notes, the EU has grown at a slower rate than the UK for most of the ‘European phase of the Great Recession’. However, since the beginning of 2017, only six months after the UK’s decision to leave the EU, the euro area began growing more than the UK.
Reflecting on the effect of Brexit for the rest of 2018, Sam Hill at RBC Capital Markets says that although real income growth should return, it is still expected to result in sub-par consumption growth. Headwinds to business investment could persist, whilst the offset from net trade remains underwhelming.”
All of these individual calculations and predictions are controversial, but producing estimates is a challenging task. However, what they show at this stage is that the Brexit vote has thus far left the country poorer and worse off, with the government’s negotiations with the EU threatening to make the situation even worse. Will Brexit look foolish in a decade’s time and is all of this a massive waste of time and money? Or is the price going to be worth it – will we see the ‘Brexit dream’ that campaigners and supporters believe in? Too many questions and not enough answers – and the clock is ticking faster than ever.
Trading is often seen as a career path only for those with a deep understanding of the market. But the truth is we all trade. The concept of value and purchasing power is something we learn at a young age and most people haven’t yet learned that the forex market is everywhere. Here Finance Monthly hears from Benjamin Sparham, Trader at Learn to Trade, who has expert insight into the world of trading.
The richest people in the world are constantly in the know about the markets. They must ensure they’re making the most out of their money and investments.
Most of us don’t worry about things that don’t affect us directly but the economy does. It’s a complex ecosystem that’s constantly growing, therefore it’s important we know what’s going on. For example, have you ever wondered how Brexit is affecting you? Understanding the Forex markets will give you the full picture.
Here are the 3 things you didn’t know about trading.
- Trading happens at all times
Trading is literally, as defined, “The act of buying, selling, and exchanging commodities”. Any time you buy food, you’re trading; you’re giving money to someone in exchange for food. The forex market represents an exchange in purchasing power between currencies and the exchange rate is pretty much the value of one currency reflected in another currency
For example, if the exchange rate between USD/EUR is 2:1 a H&M jumper that costs $100 in the US will cost €50 in the EU, So, when you exchange $100 and get €50, you are not losing money, you’re acquiring the same purchasing power you had, but in a different currency.
- The forex market affects you…even if you don’t buy foreign currencies
We live in a globalised economy where no country has the power to produce everything.
In Venezuela there’s a strict currency control that limits the purchase of the USD which has caused USD prices to skyrocket. The exchange rate of USD/VEF is around 1:40,000.
If Venezuela let the currency float freely, the price rate would be approximately 1:10. The massive devaluation of the VEF leaves prices growing rapidly which has badly affected the wallets of their citizens.
Since individual countries cannot produce everything, most companies import some of their materials to make their products available. Think iPhones, cars and food brands. As a result, the increase and decrease of prices in the forex market means that these imports can also become more or less expensive.
Going back to Venezuela, with the USD prices growing, any company importing their items will need to sell them at a higher rate than before, which causes inflation and badly affects their citizens.
If you have ever bought anything from the internet, then you’ve probably used the forex market. Online sellers get paid in their particular currency, so the value of that currency will affect the price you pay.
- How the world develops, politically or economically, will affect you
Most people worry only about news and political events that affect them. However, every election, every separation, every merger, and any referendum does affect you. Economic and political stability shapes the health of any currency.
Look at the GBP performance after the Brexit referendum; shortly after the surprise results that led to David Cameron quitting his job as Prime Minister, the market started getting more and more volatile (higher volatility, higher price swings). That is because the British market was filled with unknowns about the future of the nation. 64 million people will, potentially, lose access to a 500 million people market in 2 years if nothing is agreed.
A lot of British citizens didn’t mind that fact, but the market did care. The interest rates that your bank account pays, the goods you buy, the petrol you put in the car, even the cost of your services all depends on the strength of the British pound. Let’s break it down in simple terms, so you see it.
The value of the pound fell to a low not seen in over three decades after the referendum. The pound fell 20% against the US dollar and since then it has regained most of the losses with prices now at almost pre-Brexit levels. This shows the size of swings the market can make and of course, this creates trading opportunities. ”That means that anything the nation imports (like warm weather vegetables) will be roughly 13% more expensive. So, that increases inflation and lowers your disposable income.
And your bank account? A large part of the interest rate banks pay on savings accounts come from said banks trading in the forex market. Consequently, just the fact of having a bank account means you are a forex holder since you benefit from the profits the bank made from trading currency.
So next time you read the news, keep an eye on the economic indicators, they influence your life more than what you think they do.
Aware of the coverage of transfer pricing in the media in recent years, Finance Monthly interviews Ruth Steedman, Managing Director at FTI Consulting, who has specialised in transfer pricing for over 20 years. Ruth works with multinationals to determine and implement transfer pricing solutions. At FTI Consulting, Ruth leads a team of over 10 dedicated transfer pricing advisors, working alongside tax, economics, strategic communications and corporate finance professionals.
We have heard a lot about BEPS in a transfer pricing (“TP”) context. What do finance managers need to be aware of in relation to BEPS and TP guidance?
As part of the BEPS project, the OECD has introduced extensive new guidance for TP and international tax – much of this is already reflected in UK law. In particular, there is a focus on understanding where risks are controlled and borne within groups and remunerating group companies accordingly. Another key theme is the requirement to have sufficient economic substance, for which there is a parallel with the UK’s Diverted Profits Tax that was introduced in 2015.
Economic substance is not a clearly defined term - it perhaps suffices to say that it is no longer sufficient for risk to be borne on paper. Rather, the reality of decision making and control needs to align with intercompany contractual arrangements.
In addition, there are specific recommendations resulting from the BEPS project (under Action 4) that will impact multinational companies with intercompany borrowing. Also, companies having activity overseas should be aware of the changes to the definition of permanent establishment (“PE”) under Action 7. And, of course, there is the introduction of country-by-country (“CbC “) reporting, which is a huge development.
What is the significance of CbC reporting?
CbC reporting requires multinational groups with consolidated revenue of Euros 750 million or more to report various financial information (including revenue, profit, headcount, tax paid) on a country-by-country basis to tax authorities. In the UK this requirement is already effective for financial years starting on or after 1 January 2016.
An electronic exchange will be set up to allow tax authorities in different countries to easily exchange CbC reports, thereby potentially making the CbC data for a multinational available to the tax authority in every country where it operates. Qualifying companies are grappling with assembling the necessary information and considering how that information may be interpreted by tax authorities. Significantly, there is wide expectation that the introduction of CbC reporting will lead to an increase in TP audits around the world, which typically take a lot of time and resources to manage.
Multinationals with revenue below Euros 750 million should not be complacent as the threshold for CbC reporting is expected to come down. Smaller groups that are required to prepare transfer pricing documentation for UK purposes should consider whether to prepare TP documentation in the Master File/Local File format prescribed by the OECD.
Could you tell us more about BEPs Action 4 and what is happening in the UK?
The UK will adopt the OECD’s recommendations under Action 4 with effect from 1 April 2017 to cap the amount of relief for net interest expense. Specifically, a fixed ratio rule will be introduced limiting the tax deductions available for net interest expense to 30% of UK earnings (EBITDA). A consultation is in progress which will determine the detail of the new rules and there remains huge uncertainty for business in relation to the impact of these changes. Undoubtedly, the ETR of a lot of companies will be affected and we are already seeing moves by a number of groups to undertake a wholesale transfer pricing/supply chain restructuring.
As a thought leader in this segment, how are you keeping abreast of technical developments and interpreting new requirements?
The team at FTI Consulting has contributed to the OECD’s public consultation on new TP guidance and recently spoke at the OECD on the attribution of profit to PEs and proposed guidance for the application of the Profit Split method. As well as drawing on former HMRC experience and supply chain specialists within the team, we also have a team of experienced economists and valuation experts with whom we develop economic analyses to satisfy the increasingly complex requirements of the OECD.
Given all the recent changes in TP, what practical recommendations do you have for companies?
Our advice is in two parts: now is the time to undertake a substance and risk review and assess alignment of TP policies with the new OECD guidance for TP. Secondly, we recommend companies prepare their CbC report and Master File/Local Files as soon as possible and ensure that there is consistency between the various reports.
Is there anything else you would like to add?
We are clearly moving to an environment of greater transparency in relation to tax and TP. There are moves in the European Parliament to make the publication of CbC reports compulsory and in the UK large companies are now required to publish a tax strategy online. As of mid-September, the UK Treasury has the power to pass new regulations to require the inclusion of a company’s CbC report in their published tax strategy. It remains to be seen whether the UK Treasury enforces these powers, but in the interim companies are advised to prepare their CbC report and tax strategy.
