The day after: what will the economy look like when we finally have COVID-19 under control.
To state that we are living unprecedented times is probably the euphemism of the century. The world, as we knew it only a few weeks ago, is frozen. Entire countries are under lockdown. Others will soon follow. Some industries are completely or almost completely stopped (air travel, hospitality industry, leisure travel [Note: they collectively combine 1 out of 10 jobs in the world!]). Most developed economies are in a state of shock. Demand for goods and services, across the board, B2B or B2C has crashed.
Governments, around the globe, have to address multiples existential threats: 1 — get the propagation of the virus under control, 2 — treat very sick patient through a health care system that was never dimensioned for this kind of pandemic, 3 — help companies and entire industries facing rapid fall into bankruptcy and 3 — help consumers who lost their job and income. All of this, with government balance sheets that were already very loaded with debts accumulated for several decades.
[Note: I have followed COVID-19 and its consequences since January 23rd, the day Wuhan, a city of 11 million people, was shut down from the rest of the world. As it turns out, a young lady who was working with me, has her parents living in Wuhan. She was looking forward to going back for the Chinese New Year until the news came: nobody goes in or comes out of the city. It was soon followed by a lockdown of the entire Hubei province (57M people). It was clear to me that if the Chinese were taking that kind of measures, the situation was extremely serious. It was also clear to me that, unless some kind of miracle occurred, the virus would travel to other continents (as had SARS).]
I thought about what the world would be like once we have the situation under control. I am not a specialist of infectious diseases (though I worked in the medical field for years). I am not an economist (though I have been the CEO of three companies in the past). These are just observations (written from my observation post, ie my comfortable apartment, overlooking the St Laurent’s river, where I am confined). These are only my views. Feel free to disagree or correct me where I am wrong. Comments and thoughts welcome! I tried to be a bit provocative to stimulate a debate 😊
What happened?
A new coronavirus (now baptised COVID-19) started to infect some people in the city of Wuhan (Hubei province of China). The Chinese authorities were somewhat slow to react and may have been less than transparent until it became urgent to take some draconian measures such a locking down entire cities and provinces. The number of cases rose quickly along with the number of deaths.
The virus is characterized by some very nasty properties (it is from the SARS family). It is new (so no data available), there is no cure or mitigation medication, there is no vaccine. Then it was discovered that people could be contagious BEFORE they showed any symptoms. All of this combined made for a lethal “cocktail”.
By the end of January, the outbreak was limited to China and surrounding countries (HK, South Korea, Taiwan). That being said, it was obvious that the virus would cross over to other continents, given the intense travel traffic between China and the rest of the world. It did. And initially, the rest of the world did very little. Cases of infection started to materialize in Europe, the United States and other areas. At first, only a few cases that could be traced to travellers that had been infected in China. Then community transmission started in several countries.
Again, governments around the world were very slow to react and did not adopt the draconian measures China was using to contain the virus. This lack of taking the problem as seriously as it should have been taken yielded explosive growth in the number of cases outside of China.
As of the date of this writing (April 7th, 2020), the number of cases worldwide has exceeded 1.36 million, the number of deaths is above 75,964. Half of humanity is under a “stay-at-home” order. The number of cases and deaths in European countries have forced complete lockdown of Italy, Spain, France, and Germany. However, it seems that China has been able to stop the spread of the virus (at least the first wave). The situation in the US is catastrophic.
What does it that mean so far for the economy?
Basically, the world economy is frozen. Nearly all of it. It started with China, and, as the virus spread, other countries came to a halt. As of today:
- The travel industry has been decimated. Airlines have cut down up to 95% of their flights.
- The hospitality and leisure industry is 100% stopped and is facing an extinction event (restaurants, hotels, resorts, cruises, etc)
- Most manufacturing plants are closed.
- Most retailers are closed (those who do not sell essential goods like food or medications). Some of the retail market has shifted to on-line purchases. That being said, demand for a lot of products has simply gone to zero or near zero.
- The energy market (especially gasoline) has collapsed. People don’t drive their cars to commute for instance since they stay at home. Manufacturing plants are idle.
- The world global supply chain is beyond disrupted. It is facing a deconstruction which may takes years to overcome or it may be completely transformed.
- Nobody knows how long the global lockdown will last. It may last several more months.
As the results:
- We have started to see massive layoffs everywhere (for the past two weeks, first time unemployment claims have jumped to 10M in the US alone!!!)
- Credit (as provided with banks) is tightening (which will exacerbate the issues faced by SMEs (Small and Medium Enterprises)
- A number of companies are getting close to the point where they will go out of business.
- Governments, all over the world, have been working on gigantic bailout packages (currently totaling $7T for the entire world). It is clear that is not going to be enough (as the lockdown of the economy goes into 2 or 3 or more months).
- Whatever budget for durable goods or equipment were on the books for 2020 are now completely obsolete. That is true for businesses, consumers and governments.
This not a recession or a slow down. This is a near complete halt of the entire world economy (at least for nonessential goods and services). The combination of collapsed demand, massive layoffs, and tightening credit for a duration that is unknown are the elements that can create a depression of the same magnitude or bigger than 1929. On a worldwide basis. And until the virus is dealt with everywhere, you simply cannot discuss a “restart”, unless we are willing to isolate one or more countries, or, as some government have discussed, simply accept that a — the health care system is going to be even more overwhelmed than it is today and b — a very large number of people are going to die in the name of the economy. May be Trump thinks this is a good idea. He may be alone in that regard. [Go to your parents, grand parents and tell them that, “Well, we need to open the country back up. I hate to break you the bad news, but you may have to be sacrificed in the process. Love you though!]
Bottom line:
- Absolute need to contain the spread of the virus until a cure or vaccine is found. Timeline: unknown.
- Results in more than ½ of humanity to stay at home (some working, some not and most not consuming)
- Governments around the world printing vast amounts of new money.
- Complete uncertainty relative to the timeline back to “normal” (whatever that means) while the world’s economy is frozen.
Warning: we have yet to see the pandemic take hold in Africa or India (very large population with weak health care systems). The impact of the virus in those areas could be catastrophic.
What happens next?
- The US is now the hot spot. Over ¼ million of cases and rising fast. Until and unless the situation in the US (the world largest economy) is stabilized, a global solution is simply not in the card. The federal government has a forecast of 100,000 (or more) deaths in the US. At 2% to 3% death rate, we are talking about 2M to 3M people infected. As of today, we stand at 367,659 registered cases. So, there is still a long way to go before we come out on the other side.
- It took three months for China to get some amount of control of their situation. Europe and North America have outbreaks that are now far more severe. So, it’s anybody’s guess as to how long it will take, especially since the west does not have the appetite for the drastic measures that have been successful in Asian countries.
- Stimulus packages will kick in but very quickly reveal themselves to be insufficient. In the past, part of stimulus packages was dedicated to large infrastructure projects. That is simply not the case today because it is not possible (you need to keep people at home so they do not spread the virus). Therefore, governments around the world will subsidize hundreds of millions of people to stay at home and produce very little economic activity (beyond basic consumption). More stimulus will require more money that can only come from printing it with the risk of hyper inflation.
- In the US, 70% of the GDP comes from consumers. Whereas a number of items such a food are still being purchased, a great many number of other items are simply not leaving the retailers’ shelves and will not until shops are re-opened.
- Tens of millions of people are or will soon be unemployed. Tens of thousands of business will go bankrupt (or already have).
- On the other end, China has attempted a restart of their economy. They have a very large internal market. But 25% of their GDP is tied to export. Export, that, today, cannot go anywhere.
- In the US, car loans, credit card charges, mortgages and student loans total a staggering $14T. Most of that is at risk of default.
- Banks will very soon tighten credit for a very large swat of businesses (in spite of government incentives to not do that…remember 2009!). Tight credit will be the kiss of death for a lot of businesses.
When do we “come out of this”? September? October? Just in time for the second wave of COVID 19. There is going to be intense pressure and efforts to find a cure and/or a vaccine. That is simply not something that can be forecast.
The day after. For the sake of argument, say October 1st, 2020 (six moths from now).
What could the world look like? And who would be “winners” or “losers”, given that, in the current circumstances, we all lose (at least those who did not have millions or billions in their bank account to begin with…and made it alive). I will use the “Winners” and “Losers” analogy to go down the list of my modest “predictions”.
- Losers. The western governments around the world for their casual approach to dealing with the pandemic at its onset. And in the case of some governments, the fact they systematically downplayed the threat (ie Brazil). In the case of the US, the inept management of the crisis at the federal level. Time will tell if said governments will be punished at the ballot box.
- Loser. Current health care systems around the world which prove to be grossly unprepared to deal with the kind of problem we are faced with. The notion that some day, a nasty virus would spread havoc in the world is not new (even some movies were made about it). Some plans were made following SARS (2002–2004), or the 2009 H1N1 crisis, but nothing even remotely close to addressing millions of people getting sick all over the world.
- Winners. Future health care systems around the world. It would seem rather logical that massive investments in health care infrastructure are made after the crisis is over. It will be interesting to see how that plays out in the US where the structure of the system is one of its main weaknesses (profit driven health care, no coordination between the states, no coordination between the federal government and the states, massive amount of people without health insurance).
- Winner. Research on infectious diseases and their cure. Given the global scare that COVID-19 is giving everybody, you can bet that a lot of $$ are going to flow to preventive and curative research. Same will probably true for anything with “bio” as a prefix.
- Loser. Globalisation. A whole bunch of multi-national companies just found out that “cheap labor” can turn into “no labor” when something like COVID-19 freezes entire regions of the world. One of the first consequences of the pandemic in China was a shortage of parts for US car manufacturers. Ooooppss! How far will the return to more local supply chains be? Unknown. After all, cheap labor is very attractive. Some sectors (like agriculture) may see a huge “produce local, buy local” movement. It was already there. COVID-19 may give this movement a huge boost. Also, expect medical supplies to be on top of the “produce local” bandwagon. Of course, there is another way to call the “produce local, buy local” movement. It is called protectionism with all of its consequences.
- Winner. Automation and robotics. Robots do not get sick. They can work 24/7. And they do not unionize. There was already a very steep trend to replace human labor with automaton or robots. I would not be surprise that the sentence “anything that can be automated, will be automated!” become a major driving force behind investments plans of major companies (in a variety of industries).
- Losers. Global logistics companies (See remarks about Globalization)
- Winners. Local logistics companies (See remarks about Globalization)
- Loser. The restaurant industry. Some statistics show that between 30% to 50% of all restaurants in the US will disappear forever. [True, most restaurants sent their employees home. Still, they have to pay fixed costs like rent, etc]. It is unclear to me what will be the attitude of people when they are told that “it is safe to go out again”. After weeks or months of confinement, it could be expected that folks would want to enjoy themselves and go out. That being said, the lingering effect of the scare induced by the crisis may last for a while.
- Winner. May be those who want to be in the restaurant business! With so many restaurants going out of business, it will open a lot of opportunities for those who want to get into that market. Small margins of course. But if you look at any busy street on any busy city in the world, and you take out ½ of the restaurants, it creates a world of new opportunities. We may see a new breed of restaurants that have half of their revenue derived from dining room services and half from delivery. If that is the case, put the delivery guys in the winner column.
- Loser. The travel and leisure industry. In the very short term, their revenue will remain zero while they have to pay their fixed costs (mortgage on properties, cost of upkeep, etc). How many hotels will survive? How many resorts will make it? How many travel agents will go bankrupt? [Note: the likes of Expedia, etc may be big winners when it is all said and done because a large number of travel agents will disappear].
- Loser. The airline industry. Over the past 10 to 20 years, airline traffic has been boosted by two specific drivers: 1 — global commerce and 2 — vacation / leisure travel. In the very short term to mid term, both drivers are gone. One of the consequences of a depression is that a lot of consumers do not have any disposable income for stuff like vacation and a lot of business have to cut their budgets and re-cast their international deployments. This will affect airlines in a negative way.
- Winners and losers. Startups. Those startups with a business model based on “our market is in infinite expansion like the universe” may be headed for a very tough landing, if not crashing. However, there will be many opportunities for new products and services but those will be based on the new reality. Also, like all other businesses, B2C startups will find that there is a lot less disposable income out there. Lastly, VCs and other financiers are going to have to make tough decisions very soon because they cannot provide funding to their entire slate of startup such that they all survive the crisis.
- Winners and losers. Banks and financial institutions. As previously noted, in the US, the $14T consumer debt is at risk. And of course, there are many $Ts of corporate debts of all grades out there. There will be default. This could have massive consequences “a la” 2008, with one consequence being a rapidly tightening credit market which would make everything worse. Of course, as is always the case, the banks will do OK…
- Winner. Tele work. The world is engaged in a massive, real-time experiment in tele-work. We had toyed with it until now. There is no toying any longer, there is no choice. So, I expect any kind of technology or services that will make distance working easier to be very successful.
- Winner. Distance learning. Why go to a university and pay a lot of money just for rent in a distant city when you can follow the same curriculum from your home (and increasingly your parents’ home)! I would expect distance learning to be very significantly boosted on the other side of COVID-19. Again, technologies enabling distance learning should do very well.
- Loser. Commercial real estate. That may seem counter intuitive. But let us assume that the “let’s make as many employees work at home as possible” become a tremendous success, then the question for any CEO could be: “Why would I rent or buy a lot of office space, pay utilities and contribute to the employees commute costs when they can work from home?”. And, in the next few months (or years), you may be talking about work forces greatly reduced in size. If I was WeWork, I would try to “re-invent” [probably the word that will be most used for the next little while 😊] my business plan.
- Losers. Constructions companies. Less buildings, less houses, less renovations, less, less, less. Recent years were really good for the construction companies. May be not so in the future. Except if governments around the world decide to stimulate the economy (post COVID) with massive infrastructure projects.
- Losers. Small businesses. (particularly the businesses owned by people who want to retire). There is going to be a very high casualty rate amongst small businesses, in spite of whatever programs governments are trying to put in place. It will be particularly tough for business owners who want or wanted to retire. The value of these assets (sometimes the only assets that the entrepreneur held on to) will either be greatly diminished or will simply vanished. In the US, there are roughly 30M small businesses employing roughly 60M people. A lot of layoffs (mostly permanent) will take place in that segment.
- Winner. Consolidation. With a lot of businesses fighting for their life, companies with a relatively healthy balance sheet (all things being equal) will be on the prowl for acquisitions (small, medium and large). Again, this is somewhat counter intuitive. Given the fallen stock prices, shares may not be the transaction currency that they were pre-COVID. That being said, some businesses will be desperate to salvage whatever value they can and opened to offer “they cannot refuse”.
- Loser. Oil & Gas. With precipitously falling demand comes steeply falling price. The nature of this business is such that below a certain price, specific methods of extraction are simply not worth pursuing (think oil sand or even fracking). Given the very sizeable investments that are required to be or stay in this business, we may see a lot of newcomers simply disappear.
- Winner. Renewable energy. It is more a personal hope but the post-COVID world may be fertile ground for growth in the renewable energy sector.
- Loser. Electric car and autonomous vehicles. Car OEMs were investing tens of $B into both electric cars and autonomous vehicles before all hell broke loose. The market for automobile around the world may contract by 15% to 20% (or more?) in 2020. Who knows what it will be in 2021? That does not leave much room for a lot of R&D investments. On top of that, with gasoline price where they are (and will be for a while) and shrinking disposable income, consumers may not be too inclined to buy electric vehicles (which tend to be more expensive) any time soon.
- Winner. Infrastructure for electric cars and autonomous vehicles. Both require a lot of road infrastructure to be viable alternatives or solutions. May be building these infrastructures could be part of the massive projects governments around the world will finance to restart their economies?
- Losers and winners. Real estate market. Real estate market does not do too well in a recession or depression. On the other hand, there are going to be a lot of great deals to make for people with liquidity.
- Losers. Traditional retailers. No disposable income means no purchasing. Retailers are now closed. That’s one punch. When they re-opened, they may find that consumers either do not have money to spend or have gotten accustomed to buy everything online. Will we see the end of the shopping mall??
- Winners. Online shopping. Clearly, people who want to buy have very limited options these days. Buying online is the name of the game. It was already gaining favor amongst consumers. It may cross the “sound barrier” because of COVID-19.
- Winners. Delivery for online shopping. As the volume of online shopping increases (for all kinds of goods), any technology or service that will make delivery more efficient and cost effective will be a winner.
- Winner. China. It appears (according to their released data) that China has COVID-19 close to being under control and they are slowly restarting their economy. If that is truly the case, they may be “on the other side” 3 to 6 months ahead of the western economies. China is even now lending its assistance to some European countries in terms of medical supplies and staff. It may position them to be the strategic partner of choice for countries that are going to be hit very hard very soon (Africa, India). In other words, China is positioned to recover much sooner and play the strategic role that the USA has now vacated.
- Loser. The USA. The way this crisis has been handled is a total disaster. There was not plan when there should have been one. The virus was let loose when it should have been energetically contained. There is no coordination between the states and the federal government. And the health crisis, already a catastrophe, is only going to get worse. There are currently debate about “re-opening the country”, something that flies in the face of the reality on the ground and the humanitarian aspects of such a callous statement. The richest country on earth is hit the hardest from a health crisis perspective. Since the current solution is to send everybody home and close most of the plants, the offices and the shops, it is going to be hit the hardest from an economic perspective. Yet, it is hard to discount the resources of the world’s first economy. It may not be the world’s first economy when this is all said and done or if it still is, it may not be by much.
So here are a few thoughts. Again, I am not an economist or a forecaster. I welcome all comments.
A few reference sources:
https://en.wikipedia.org/wiki/Corporate_debt_bubble
