As I write this, app. 49,000 individuals have died of COVID-19 across 180 countries. A total of app. 960,000 known cases has been reported. 202,728 have reportedly recovered from the symptoms of the disease. No vaccines or cures are known, though some prototypical vaccine testing is taking place. This situation is not yet at peak, which (in North America at least) will come over the next 14 days.
After COVID-19 What Next?
The most sanguine health advisors suggest we will be under lock-down and constraints until at least June, possibly to mid-July and that we should be prepared for a second wave of the disease once we begin to ease current constraints. It is now early April. That would suggest another four months (around 122 days) of a highly constrained economy with tensions mounting about the prospect of recovery. We have not yet seen the significant impact of the disease on those nations with poor healthcare infrastructure, especially those led by corrupt governments. The situation will get worse before it gets better.
Current economic models indicate that China, which is beginning to return to economic activity, will have experienced a devastating blow to its economy, which drives much of global trade activity. The China International Capital Corporation (CICC) has cut China’s growth forecast from its January number of 6.1% to a new low of 2.6% – a major Chinese recession would follow, with Chinese exports falling by 18% or more.
Merrill Lynch is more pessimistic, suggesting that GDP growth in China may be as low as 1.5% for the balance of this year.
The US economy will also take a hit, according to Goldman Sachs, with GDP shrinking 34% in the second quarter and unemployment reaching an all time modern high of 15%, with many of those who lost their jobs being unable to find new ones. A recession, or possibly an economic depression, is on the cards.
As China and the US move to recession, so will Canada. The National Bank of Canada has cut growth expectations for Canada to 1.5% or less, with Alberta being in serious trouble due to the ongoing oil price collapse – Alberta’s heavy oil is now selling below the price of a designer coffee at Starbucks. The Royal Bank of Canada is suggesting that Alberta will experience a -5.6% growth and unemployment at near 12% or higher. Despite significant developments in terms of seeking to secure pipeline capacity – the Federal governments purchase of the Trans Mountain Pipeline (now under construction) and the Alberta governments investment in Keystone XL Pipeline (Alberta has an 81% interest) – market prices will determine when (if at all) production will return.
Inflation is not occurring. Indeed, observers see this as one of the few aspects of the current situation which is positive. It is “chronically” below central bank targets in North America and Europe.
Not all parts of the economy will be impacted equally and not all regions of the world will experience the same impacts in the same way. Many small and medium enterprises, which in Canada account for 91% of all businesses, may not be able to return to normal operations. In the City of Edmonton, for example, it is estimated that app. 40-50% of retail stores will close permanently. Large corporations, especially those who suffered the most in the pandemic (e.g. airlines, car manufacturing, hospitality and restaurant groups) as well as arts and non-profit organizations may have to merge, reform or reshape their sector as they begin to imagine a return.
The education industry, currently a $6.5 trillion business which will rise to $10 trillion by 2030, is experiencing a sea change as more learners and instructors experience digital learning and online delivery – more than 1 billion students K-PhD are now online. Some educational institutions, deeply impacted by the collapse of the international student market, may not survive. Simon Marginson of Oxford University, writing in Times Higher Education, suggest that “it is unlikely that normal face-to-face higher education will resume at the beginning of the northern hemisphere’s academic year in September/October 2020, except perhaps in East Asia. It might resume in Australia and New Zealand in March 2021, with northern hemisphere students returning then or later”.
Political landscapes may change too. The US has a Presidential election in November and, though President Trump’s approval ratings have never been higher, the politics of the situation are so volatile that there could be a sea-change in government in the fall. The German Chancellor, Angela Merkel, is also set to step down this year. Equally, vulnerable governments, such as the Canadian government, may find their fortunes better or worse as a result of the way they have handled the crisis.
But the bigger questions relate to the way in which responses to COVID-19 have changed the global financial picture.
Before COVID-19, global debts (corporate, government and personal) were very high. In September 2019, debt from all sources stood at app. $253 trillion, according to the Institute of International Finance. Such a debt level is 353 times larger than global GDP. In addition, there are a significant number of unfunded pension liabilities which governments had before the COVID-19 pandemic. According to the Swiss Re Institute, these real liabilities will reach $400 trillion by 2050 (up from $70 trillion in 2015) unless action is taken.
With bail-outs, guaranteed income supports and other measures, government debt will have risen dramatically. Given that central banks have lowered interest rates, returned to quantitative easing and are actively buying bonds on the bond market, debt servicing should not pose a significant problem for governments. Yet the bond market is and will soon be even more replete with bonds. Some major new bonds, such as the European so-called “Coronobonds”, may be issued so as to secure some respite from mounting debt but who will buy them and what their expectations for returns will be is questionable.
For corporations and individuals, it is a different story. Each situation will be judged by lenders on its merits. For example, major retailers – already hurt by the growth of online buying – are now faced with the prolonged closure of stores. Retail is capital and labour intensive and generally works on tight margins. Their immediate response to the COVID-19 situation has been to lay off workers, suspend dividend payments, accelerating online sales activities, halting share-buy-backs and, in some cases, reducing executive pay. While food retail is strong at this time, sales of other goods is slow to non-existent. Not all retailers will survive. Some retailers, especially small retailers, will find it difficult to secure financing.
Hotel companies are also suffering. While mergers and acquisitions have dominated the sector for some time, the sector depends on cash flow for its operations and debt servicing. In the US alone the industry association is predicting a loss of $910 billion between January and April 2020 together with a loss of 5.9 million jobs – seven times the impact of 9/11. A particular challenging sector within the hospitality industry are cruise lines, many of which (e.g. Carnival Corp, Royal Caribbean, Norwegian Cruise Lines) will not receive US or Canadian bail-out money since they do not pay tax in these jurisdictions as they are incorporated in other nations. They will have to re-organize their financing and secure new customers, many of whom (especially the elderly) will now be concerned about the health risks of cruise travel.
Car manufacturers are also suffering. Ford Motor Co., before COVID-19, was seeking to secure new financing through the bond market for its $38.5 billion of debt. In January Ford’s bonds are now rated triple-B (essentially junk bonds). Others are or soon will be in similar situation.
Patterns for a Different Future
We can see some patterns emerging already that will shape how the world may respond to the post-pandemic world. These patterns include:
- An emphasis in corporations and other organizations on resiliency and adaptability rather than efficiency and profit taking. An acid test for leadership and investors will be the quality of the response made by a company to COVID-19 and the position it finds itself in once its permitted to restart operations. Some will be in much better shape than others. Some will not re-open at all.
- An emphasis on creative strategies to manage the level of corporate debt and a focus on securing new sources of reliable cash-flow while at the same time lowering of labour and capital costs.
- Aligned with lowering labour costs, especially in the service sector (which accounts for 80% of all employment in Canada), will be the accelerated introduction of AI enabled and related technologies. For example, check-out-free retail using “pay in the isle” apps or similar technologies will be more widely deployed. Online retail will grow exponentially as will buy-online, pick up in store. More robotic cleaning systems will be in use in hospitals, hotels and complex buildings.
- A reimagining of the use of physical spaces. In particular, office spaces will now be seen as cost-sinks rather than a necessity. Office vacancy rates will be high.
- A re-evaluation of the real value of intangible assets. What is the value of a brand which cannot be bought or used during a major crisis?
- There will likely be much larger differentiation within industry sectors between winners and losers, between the adaptable and non-adaptable organization and less tolerance for “bullshit” marketing and inflated claims about the veracity of an organization. Shareholders will be especially focused and sensitive to performance claims. As Warren Buffet said “when the tide goes out, you will soon see who is wearing swimming trunks”.
- Much closer entanglement of government and regulation in the private sector, for example restricting share-buy backs or requiring higher employment standards as well as new regulations related to health and safety.
- A substantial and prolonged period of investment by governments in infrastructure – roads, mass transit, bridges and other needed improvements.
- A political struggle over taxation (especially taxes on the wealthy), profit takers (especially banks) and employment rights.
- There will be a significant growth of “local” and the decline of “global”. For example, in the higher education market the volume of international students traveling to secure their education will fall dramatically and may not recover to pre-COVID-19 levels for five or more years. This has profound implications for universities and colleges across North America and Europe.
- The “local” vs “global” tensions will have major implications for multi-lateral organizations such as the European Union. Tensions are already high, especially in the Eurozone, but they will increase as the implications of the post-COVID and post-Brexit world sink in. The EU already struggled to agree a budget – that struggle may lead to fractures.
- The disruption of world economic order caused by COVID-19 will change the way in which international relations and trade are conducted. The failure of the US to lead a global response (“Trump’s America First”) will lead to a struggle between China and Russia for leadership roles in global affairs.
- Disrupted supply chains will re-emerge with different configurations, with the chain increasingly focused on value and resiliency. The reliance on complex supply chains, such as are seen in automotive manufacturing, will be replaced by a search for simplicity.
- Governments will accelerate policies with respect to job and wage protection and employment, aimed at providing some certainty in a difficult 2-3 year period following the end of the pandemic.
- Patterns of social behaviour will change. One estimate is that 70% of all restaurants in the US will close permanently, impacting the social and economic wellbeing of communities, especially communities where tourism is the major economic driver.
- Governments will take a closer look at technology related policy questions – especially cybersecurity, the cost of internet access to individuals and profit-taking / taxation of service providers like Amazon and Facebook.
- Our understanding of who is an essential worker has changed. The value of health workers, those who work in the food supply chain and security services will now be seen differently.
- The health sector will take a significant time to recover, especially where the pandemic hit hardest.
- Arts and entertainment, always vulnerable, will find recovery from shut-down difficult with some organizations – theatre companies, orchestras, dance companies, film and production studios – disappearing. Attempts to raise support through donations and subscriptions will falter as the number of people unemployed (including former patrons) will have dramatically increased and disposable income will have fallen dramatically.
- Innovation will be seen as a premium skill and competence. Individuals and teams able to imagine a new approach to a challenge, problem, opportunity or threat will have more opportunities to test and implement.
This list is not intended to be either complete or comprehensive, merely indicative of some of the emerging patterns.
Some Future Scenarios
When we look at specific organizations – firms, non-profits and others – we can see two dimensions that will shape the response of leadership. The first is speed of response how fast or slow they are in realizing the opportunities that covidomics provides for change. The second is the size of the change they intend to make – from small or modest to substantial and large.
For organization leaders, the choices are stark. They have to secure the future of the organization by decisive, focused action and secure the alignment of their colleagues in the work needed. Never an easy task, as a century of research on organizational change and development illustrates. It is even more difficult when every organization across the world is seeking to change at the same time.
Leaders will need to decide:
- How much change is needed for both survival and future growth – there are real opportunities in the marketplace.
- How much change is possible, given the financial and operational state of the organization on its return to normalcy at some point in the future. This is about change capacities and capabilities.
- How change will be managed and by whom in the organization – especially given that many who work with and for the organization will be sensitive to change, given the massive disruption to their lives they have just encountered.
- How change will be paced – the slow or fast question. Given the state of the organization, fast may be the only option.
- How the impact of change will be evaluated in terms of key success indicators and risk identifiers. One key indicator will be staff satisfaction and morale which will be a key determinator of whether or not the changes made will “stick” over time.
In making change, leaders will need to “think back from the future” – imagine a different future state of their organization and then work to implement change to make that future possible. They will also need to think glocally – look at what others are doing around the world in their sector and learn from their successes and failures. They will have to build adaptability – something seen in abundance as the COVID-19 crisis unfolded – and resilience into their organization and be creative and flexible in their use of money, people, time and resources.
 This is due to the actions of Saudi Arabia who are flooding the market with oil so as to force down prices as a strategy to ease out of the market small producers and US frackers.