As We Approach the End of the Beginning: What Is the Economic Outlook?
The COVID-19 pandemic, the resulting lockdown, and the stress it puts on all daily activities are combining into the biggest economic challenge of our lifetime. In the U.S., 1 in 7 people have lost their jobs in the past 6 weeks. The International Monetary Fund (IMF) last week expected the global economy to shrink by 3% in 2020 (see video), down from an original outlook of 6% GDP growth earlier this year, more so in Europe and the U.S. This forecast seems increasingly unrealistic as the IMF assumed that the pandemic can be contained early and that we see a gradual economic recovery after the summer. In many countries the size of the contraction already exceeds the impact of the financial crisis of 2008/09, and in some could reach U.S. depression era levels.
For the first time in modern history, in this crisis we don’t have to wait for government statistics painstakingly collected with delays and adjusted for seasonal pattern. As our lives have increasingly digitized, we have an immediate sense of the magnitude of its economic impact. OpenTable shows a 90% decline in restaurant bookings in the U.S. Online banks know that household travel expenses are down to zero, and grocery spending is up 25+%. Job marketplaces observe how gig economy opportunities have shrunk by 50%.
The encouraging news from last week’s Virtual IMF Meetings is that the initial economic policy response globally has been equally unprecedented in both speed and scope. Governments around the world have assembled fiscal support packages within weeks, sometimes days, with emergency support for the frontline medical system, as well as direct transfers to households and concessional loans or even grants to small businesses to help them cope with the abrupt halt to the economy. In some of advanced economies, the size of these initial fiscal efforts has already reached 10% of GDP — twice the levels of 2008/09 interventions — with more to come. One of the big concerns is the limited fiscal room that many emerging markets have as they face the crisis with weaker health systems and less economic cushion to begin with. They have been hit by significant capital outflows and financial distress even before the pandemic arrived.
The global financial system and central banks have forcefully stepped up to preserve liquidity and the functioning of financial markets. The US Federal Reserve, for example, has activated nine different backstop facilities, including swap lines that allow other central banks to borrow US dollars while posting Treasury bills as collateral. Domestically, the Fed stands ready to purchase financial assets including corporate and municipal debt to the tune of $4 trillion. The IMF has pledged its $1 trillion firepower as emergency funding for stronger members and announced debt relief for the 25 poorest countries.
An Economic Outlook Is Emerging
Informed by the expertise of epidemiologists, a consensus view of the most likely global economic outlook is emerging. And the virus and its likely behavior are dominating that outlook. The public health experts agree that it will take 18–24 months before the world will have an effective vaccine, be in a position to mass-produce it, and, equally important, be able to actually inoculate the billions of people required to get to epidemiologically relevant 80 percent immunity levels. In the meantime, second or third rounds of the virus flaring up are highly likely, as has already happened in Singapore and Japan despite early containment success.
Against this pandemic backdrop, the probability of a quick, V-shaped or even U-shaped economic recovery is extremely low. Of course, we can’t be in total lockdown for 18–24 months. Governments, the private sector, and civil society will have to find the fine balance of reopening the economy to some degree to ensure the adequate provision of medical supplies, food, and other necessities without letting subsequent pandemic outbreaks get out of control. We are likely going to see economic activity pick up in fits and starts with a longer, sluggish recovery lasting into 2022.
As we hopefully get the current acute COVID-19 virus spikes in places like Italy, Spain, or New York City under control soon, for the economic outlook, this is only the end of the beginning. We are embarking on a long, uncertain journey. And the “new normal” starts now. Critically, 18–24 months is long enough a timeframe to irreversibly change consumer behaviors, business practices, and market structures. [click to tweet]
A Few Likely Changes
Economic predictions are fickle in the best of times. Under the current, high degree of uncertainty, even greater humility is in order. However, it seems plausible for a number of structural shifts to occur as a result of the unprecedented crisis and the economic policy responses already playing out.
- Bigger government. Given the central role of national and local authorities in fighting the pandemic and the massive fiscal expansion under way, we will have a bigger government for the foreseeable future. For example, societies will, and should, look at which national health systems better protected their people and decide on a new, responsive social contract to organize, deliver, and finance health care in the future, a sector which already today accounts for 15–20 percent of GDP in advanced economies.
- Changed consumer behaviors. Even if there were no major second waves of the pandemic, the fear that there could be outbreaks will change consumer behaviors irreversibly. Who will want to sit in packed restaurants or bars elbow-to-elbow with strangers? Who will want to fly unnecessarily? Who would still prefer going to the bank branch and touching the cash ATM screen over using instant, contactless, digital payments? Crowded events planned for stadiums, arenas, and fairgrounds will all be impacted by these dynamics as well.
- Shifts in viable business structures. If restaurants do open with appropriate physical distancing or if airlines fly with each passenger getting their own row in economy class, are these still viable business models? How much would a restaurant meal or flight ticket have to cost at, say, 33 percent pre-COVID capacity utilization? What types of companies will have the greatest resilience? It’s more likely for Starbucks to achieve the economies of scale and scope to be able to reopen its corner locations after a prolonged lockdown versus the independent coffee shop. Walmart and Costco are similarly likely to emerge stronger than smaller grocery chains. On the other hand, at least in the early days of the crisis, Ebay and its more diversified producer network seemed to have fewer bottlenecks than the more centralized Amazon structure. Similarly, in India, the tried-and-tested, local Kirana stores and their distributed supply chains are providing vital supplies rather than big box retailers or e-commerce players.
- Altered business practices. For those of us in privileged white-collar jobs, the shift to Work-from-Home has gone relatively smoothly. With discipline, some creativity and flexibility, and the use of complementary tools such as virtual breakouts rooms or consensor polling, online business development and decision making can be quite effective. Many firms (and their employees) will find that reducing the expensive downtown office footprint, working more from home, and traveling less is a truly superior way of conducting 21st century business.
Our firm, Flourish, was founded with an explicit belief and aspiration to invest behind ideas and innovation that improve the functioning and outcome of retail financial services. A fair financial system should ensure that it helps families and small businesses improve lives. It should leverage a modern, open-architecture, digital infrastructure that delivers more adequate services to all people at far lower costs.
The current crisis shows that in countries that have made strides towards such a system, government support can flow much faster and be more targeted. A portfolio company of ours operating in Africa and based in Switzerland applied for the Swiss equivalent of the US small business loans. They had money in the bank half an hour after submitting their application. In India, the government was able to accelerate critical social cash transfer programs and reached tens of millions with the click of a button. In light of the pandemic crisis and the uncertainty we face, the moral guidance our Fair Finance Principles provide is more important — and urgent — than ever.