How to Think Like a Futurist
Why Power is Everyone’s Business
Creativity in the Virtual Age
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PAGE 26
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The Magazine of the Rotman School of Management UNIVERSITY OF TORONTO
FALL 2021
THE SOCIALLY-CONSCIOUS BUSINESS PAGES 6, 32, 108
MANAGEMENT
Now What?
QUESTIONS FOR
Frances Donald, Global Chief Economist, Manulife Investment Management
Q &A
One of Canada’s leading economists describes some of the societal and economic changes wrought by the scourge of COVID-19. Interview by Karen Christensen
You believe we are in the midst of a paradigm shift in terms of the way we measure the economy. Please explain.
The COVID-19 shock put the spotlight on many serious existing problems within our economy. It also provided a platform for traditionally unconventional ways of addressing those issues. For example, we saw the government send cheques to households disrupted by pandemic-related unemployment, and Modern Monetary Theory saw governments spending much more than they ever have historically. It also became clear that childcare — which was traditionally considered a social issue — is a critical part of a functioning economy. The pandemic also made it clear that while our economic data on the stock markets can tell us one part of the story, there is much more to a healthy economy. When we look outside our windows and see lineups for food or have friends and relatives suddenly unemployed, we realize that the way we measure our economy probably has to change, as well. It is no coincidence that so many governments have talked about ‘building back better,’ and in part that’s because we’re now more attuned to the problems that existed even before COVID-19. Perhaps more importantly, there is more of an appetite, not just among everyday people, but also from governments and central banks, to try to solve these issues for the first time in a very long time. Of the seven macro disrupters you have identified (see sidebar on page 106), which will have the greatest impact on the new economic paradigm?
Number one — the shifting roles of monetary and fiscal policy — is perhaps the element that most needs to be rewritten rotmanmagazine.ca / 105
We’re now more attuned to the problems that existed even before COVID-19.
Looking Ahead: The 7 Macro Disruptors 1. Monetary and fiscal policy coordination and the blurring of policy roles. 2. A growing thirst for alternative investments, including cryptocurrencies. 3. A shift away from traditional data, including GDP and CPI, pivoting towards private and alternative data. 4. Central bank digital currencies will receive more attention. 5. An accelerated focus on ESG investing that expands into the macro universe. 6. Labour market scarring. 7. Populism and the demand for redistributive policies. Source: Frances Donald. For more, visit manulifeprivate wealth.com/en/viewpoints/frances-donald
pretty aggressively in the next decade, becoming very ESGfocused. And that will change everything from the shape of the yield curve, to the type of government spending, to the entire investment outlook. ESG isn’t just about picking climate-friendly stocks — it is an entire cross-asset system. Talk a bit about how fiscal policy and monetary policy will be intertwined going forward.
How a government spends, in addition to how much it spends, can radically alter a country’s economic outlook. Government actions are having sizeable impacts on the Canadian economy right now because they are spending extraordinary amounts of money to support growth — and they have to issue bonds in order to fund that spending. As we begin to exit the pandemic, that is creating a substantial steepening of the yield curve. In an environment where governments have both the ability (because of low interest rates) and the will (because there is political demand to spend more) to do this, we have to think about government spending even more than we have historically in our forecasts and projections. This will impact everything from GDP forecasts to the 30-year bond yield. You have argued for embracing a holistic view of the economy. What does that entail?
in the Economics textbooks. Traditionally, we have thought of the role of central banks as targeting inflation, but it is increasingly clear that their mandate extends from financial stability to income and racial inequality to climate change. On the flip side, our concept of government support has changed radically during COVID-19, and the appetite for greater government spending is sizeable right now. Everything we learned in our Economics 101 textbooks about the role of governments and central banks is shifting rapidly, and this is an area we need to be more cautious about when we think about the post-COVID world. Savvy investors should be watching the ESG [environmental, social, governance] space very closely. Not just because it makes good sense to make green investments, but because the way our policymakers behave is heavily influenced by their concerns about everything from racial and income inequality to climate change. The ways we support our economy are going to change 106 / Rotman Management Fall 2021
The economics profession has been based on trying to measure an economy, which is extraordinarily difficult to do. One of the proxies we use to do this is GDP. I use the term ‘proxy’ because even economists understand that this approach is flawed. We also know that the Consumer Price Index (CPI) doesn’t necessarily explain the cost of living; it’s just one way to think about measuring the beast of a problem that is the economy. COVID-19 created so much variety in household financial environments — who had jobs, who didn’t, who was benefitting, who was forced off work — that the averages across our country stopped being meaningful. This is not a new problem. For years we could talk about GDP in Canada, but it wouldn’t tell you the difference between provincial economies that were struggling from the collapse in oil prices versus the housing-centric economies of Vancouver and Toronto. As we look ahead, we must realize that GDP never helped us explain who was really suffering in our economy
Canada needs to address structural problems that are holding it back, such as the lack of childcare.
and who needed the most help. As a result, economists are now widening their perceptions around how to measure an economy. And while we don’t have answers just yet, we know that the traditional metrics are not up to the task. Going forward, we should start seeing economists trying to measure things like food insecurity, income inequality, labour force participation rates among women and happiness. If we widen the metrics used to measure how well we’re all doing, we will be able to support more people. What is your view on the rise of cryptocurrencies?
Cryptocurrencies are not going away. In my view, there is a significant message behind their rise, along with all alternative currencies, which is this: Investors are looking for a trending investment that central banks can’t print, and that governments have less ability to tax or regulate, particularly in an environment where deficits are rising and people are worried about taxes rising. It’s not about whether crypto is a good or bad investment; that’s a deeply personal decision, based on your own financial situation. But I do advise people to listen to the core message behind crypto’s popularity, which is, in this time of very low interest rates, people are looking for a different place to put their cash. And for that reason, we have to become ‘crypto fluent.’ What key lessons about investing has the global pandemic taught you?
Most importantly, we have decades of models and textbooks that tell us how the world should operate, but sometimes things are going to come out of left field that change the way we think about our traditional models. During COVID-19, the people who got it right were those who chose to question the traditional ways we think about the world and those who chose to step outside of the box and challenge the traditions within economics and finance. The biggest lesson for me personally has been that models can change. Correlations can change, and you can find yourself on the precipice of an entirely new paradigm. As a result, constantly challenging the current system of thought can only reap rewards. It’s not that the current system is always wrong, but those who have the courage of conviction to stand up and say, ‘Maybe this time is different’ can really change things for the better.
No one has a crystal ball, but broadly speaking, what can we look for in 2022?
Canada needs to address structural problems that are holding it back, such as the lack of affordable housing and the lack of childcare. It’s also important for the government to examine how it thinks about debt. With historically-low interest rates, it’s important to invest in infrastructure and other services that can propel the economy in the years ahead. Next year is going to include an extension of the vast uncertainty we see today, and it’s also going to be challenging as we begin to see the short- and longer-term effects of COVID-19 on our society. I’ll be watching out for a few things. Will labour force participation rates come back online? How many of us will actually return to the office? Will we still want to buy cottages, or will we return en masse to urban environments? How much did COVID-19 really change us for the long term? My sense is that we will all be more cautious with our savings and investments. We may continue to make changes to our home environments in recognition of the fact that we can do so much now in a work-from-home environment. And 2022 will be a year of learning about whether we were truly changed by COVID-19, or whether it was just a blip on the screen. But my suspicion is that we will have been truly changed — and therefore, everything from our textbooks to our policies and mindsets have to change, too. We are at the very beginning of a conversation that I suspect will last for decades — but at least we’re starting to have the conversation.
Frances Donald is Global Chief Economist and Global Head of Macro-
economic Strategy at Manulife Financial. In 2019 she was named one of Canada’s Most Powerful Women. rotmanmagazine.ca / 107
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