Who’s driving the bus today?
As the Chief Economist for KPMG in the U.S., Constance Hunter set the stage for the morning’s conversation with an economic overview of the energy sector. “Twenty years ago,” she said, “the developed economies were really driving the bus in terms of demand, but we have gradually had a shift towards Asia, in particular China, and to some extent, India.” She noted that in terms of consumption demand projected over ten years, China is currently growing at a rate of about 4–5 percent versus only 2.5 percent for developed economies in the Organisation for Economic Co-operation and Development (OECD).
Hunter argued that the energy intensity of GDP—a measure of the energy efficiency that calculates how many units of energy it takes to produce a given level of GDP—is going to be the key determinant of how and where energy is used in the future. She cited transportation as an area where greater efficiencies have come into play. “That efficiency is only going to continue in terms of advancements in developing economies, for example, it’s going to continue in terms of distribution of more efficient vehicles throughout emerging markets.”
Manufacturing was another key sector Hunter identified as undergoing significant changes in energy usage. She cited a recent instance where a Global 100 corporation used artificial intelligence to reduce the electricity used for cooling its server facilities by 40 percent. “Imagine if all of manufacturing were to reduce its energy intensity of GDP by 40 percent,” she said. “Now also imagine China, which has made a huge investment in artificial intelligence, and how artificial intelligence will affect their energy demand over the next several decades.
“If we get greater energy efficiency and lower energy intensity of GDP, it’s very possible we’ll see the start of a decoupling of geopolitics and energy over the next several decades.”
The rise of China
Richard Ellings, President, The National Bureau of Asian Research, has spent decades studying Asia and China in particular. He focused on the growing role of China and its potential impact on geopolitical risk around the world.
“The balance of power is totally different than it was two decades ago,” he noted. “The U.S. has less capacity relative to the rest of the world to exert leadership. Our military is not as gargantuan in comparison to others as it was. We’ve kept military expenditures fairly flat, especially in terms of investments. Aside from enormous expenditures in the Middle East, we’re not making the investments, for example, to counter Chinese investments.”
In the meantime, he said, “China now talks about replacing the U.S. not just regionally, but globally as the world leader. Russia is simply aggrieved and it would love to have Eastern Europe again.”
He added, “I don’t give a date, but I do think the world is approaching a tipping point simply because of the ambitions and power of those whose interests, as they define it, are not in preserving the World War II order. The challenge is economic, and it’s a challenge that is way more than the Soviet Union ever was.”
“Despite these misgivings, Ellings said that he remained optimistic. “The U.S. has been more involved in the world, frankly, than we were the prior eight years. We’re stronger in the Ukraine. We’re confronting allies and friends, maybe not always in the right ways, but nonetheless, we’re out there. So, there is an activism and a recognition of problems that seem to me to be a good thing.”
Tax reform and tariffs: who benefits?
John Gimigliano, Principal in Charge, Federal Legislative and Regulatory Services, KPMG in the U.S., wasted no time in addressing the question on everyone’s mind: What about that tax bill passed in December by Congress?
Gimigliano started by pointing out the sheer magnitude of the bill. “For everyone in this room, this is the largest tax bill that we will all see in our working careers. There will be changes, there will be tweaks along the way, but this is the big kahuna for most of us in terms of changes in tax policy.”
He also explained that the bill is not “a $1.5 trillion bill.” Rather, it’s a $1.5 trillion net tax cut. “When you total the tax cuts and tax increases, it’s really closer to a $10 trillion bill. Five-and-a-half trillion dollars of tax cuts and $4 trillion in tax increases. So even by Washington standards this is an enormous bill, and easily the largest tax bill in U.S. history.”
Given its size, Gimigliano said, this bill will change the way companies do business around the world. The former statutory corporate rate of 35 percent had created “all sorts of undesirable behavior—inversions, IP migrations out of the U.S., and foreign acquisitions of U.S. assets.” Parts of the new bill will enable companies to repatriate over $3 trillion of foreign earnings that had accumulated over decades. “And not only the opportunity to do that, but the mandate that they do that.”
So who will benefit the most from the tax bill? “There are those that think that this is all about stock buybacks that maximize the income of upper management,” Gimigliano argued. “I don’t ascribe to that. There’s a finite amount of demand for stock buybacks. Taken to its logical extreme, I really don’t think these companies are going to go private. I believe that corporations have lots of stakeholders that they must answer to, some of which are shareholders, but also employees, the community, and other things.”
Gimigliano also pointed to a recent uptick in wages, and added that the lower taxes will result in greater investment over time.
Top risks for today—and tomorrow
By way of closing, Mayor asked the panelists what they considered to be the top risks that the world faces today.
From Ellings point of view, the greatest possible risk would be the potential for a Sino-Russian alliance. “Not that they share that many interests, but they have complementary interests—China mainly in Asia, Russia in Europe.” Short-term risks, he said, would include Taiwan, Japan, and regional disputes in the South China Sea that could disrupt trade.
Gimigliano cited political stability in the U.S., by which he means policy stability. Having spent the last two years on the tax reform trail talking to hundreds and hundreds of companies, he said that companies often tell him, “Yes, we want legislation that makes us more competitive, but we also want stability. I just kind of want to know what the rules are.”
For the economy, Hunter identified an escalation of trade disputes as the greatest risk. “If we pull out of NAFTA, if there was an escalation there, that would certainly hurt the economy.” She said that if inflation were to pick up from an increase in wages, that might lead to higher inflation and higher rates from the Federal Reserve, all of which would bring forward a recession.