Coronavirus pandemic has now impacted every nook and corner of the world. The crisis has had an unprecedented impact on the global economy. There are a few key questions that are are floating around:
Here are some thoughts:
What will be the trajectory of the economic recovery?
The path to full economic recovery is likely to be complicated and gradual, as wide swaths of the economy are forced to rebuild and adapt. The economic activity around the world and across almost all industries came to a sudden stop. A restart in activity is likely to be gradual as different industries need to adapt to function in a changing market environment.
In some parts of the economy, like say manufacturing sector, recovery can be swift. In sectors like transportation and travel, there will be a bounce back but is likely to take 12–18 months to reach pre-crisis levels. Technology Media & Telecommunications (TMT) sector will definitely benefit from the crisis. This can already be seen with stock price increase in data centers, cloud computing and teleconferencing companies.
The economy may also benefit new entrants and we should expect technology disruption as well. There will probably be more expedited acquisitions in the TMT sector as giant corporations with sizeable cash piles try to gain market share by acquiring smaller and more recent start ups. An example is the recent acquisition of Blue Jeans by Verizon announced just last week. In areas where a company’s share price has collapsed, we may see companies raising capital from private equity firms or debt funding sources in their fight to survive. An example is the recent announcement by Expedia to raise $3bn to support its balance sheet and working capital needs due to the shutdown in travel industry.
From a macroeconomic standpoint, economic theory suggests we should expect a recovery shape that resembles one of the following:
V Shaped: Economy suffers a sharp but brief decline followed by a sharp recovery to the same levels as pre-crisis. This is referred to as a “Bounce Back” shape.
U Shaped: Economy suffers a steep decline, and has a clearly defined trough. Economy may shrink for several quarters in a row before slowly returning to a growth phase. This is referred to as a “Bath Tub” shape.
W Shaped: Economy falls into a recession, recovers for a short period and then fall backs into recession again before finally recovering. This is also commonly known as a Double Dip Recession showing a “down up down up” similar to the letter W.
L Shaped: Economy suffers a severe recession and does not return to growth for many years. This is also commonly known as “Stagnation” and is the most severe of the different types of recessions.
The hope is for the current crisis to represent a V Shaped crisis and not an L Shaped crisis. To achieve a V shaped crisis, the world economy’s bouncebackability will need to be supported by various government initiatives and public funding schemes. People need to be given direct cash benefit to increase consumer spending and in turn to drive economic growth.
After the 2008–09 Financial Crisis, the US entered a prolonged period of stagnation until 2013, after which point the economy rebounded. The current view from the governments across the world is very clear — Economic Health is far less important compared to Public Health. There need not be any debate on this topic as people’s lives are way more important than economic recovery. This leads us to the next question:
What is required for the economy to bounce back?
I think what the economy really needs is a vaccine for coronavirus. Monetary and fiscal responses by governments across the world are very helpful. These will help keep the economy sort-of-afloat. But, for the economy to flourish, thrive and increase productivity, the healthcare system will play a pivotal role.
There are three parallel strands relating to the coronavirus healthcare right now and if we can make progress in these three areas, we will gradually see a bounce back in the economy:
Late Stage Treatments
Anti-viral Treatments
Vaccinations
It is likely that Late Stage Treatments and possibly even Anti-viral treatments are available soon (3–6 months likely to roll out to the masses). These will at least make governments take a chance and risk letting people get out of their homes to go to work and be productive as they will know that there are treatments available in the healthcare system should something go wrong. Vaccinations may take longer to develop and to be made available to the masses. And, when vaccinations are available, we can all dream about going back to the pre-crisis world again. This leads us to the next question:
How will this crisis shape the future economy?
This crisis, like any other, will provide businesses and investors an opportunity to rethink their strategy, practices, objectives and risk appetites. There is a new normal now about remote working, which is accelerating our move towards an e-world. Zoom — the teleconferencing application — has apparently seen 5 years worth of adoption in less than two months. It’s stock price has grown exponentially this year. A relatively new product such as Microsoft Teams has grown rapidly in the past few weeks. As companies have made working from home mandatory in almost every place in the world, it has ushered us into a new era where jobs have no borders. People can choose to work from the remotest location as long as they have acess to the internet. Disruption by new technology firms will shape the economy and the businesses will also focus on achieving growth in a more sustainable manner to remain a going concern under any future crisis or stress scenario.
A crisis today is generally expected to make the economy more resilient in the future. This is not to say that something new won’t go wrong to cause another crisis that badly impacts the world economy in the future. But, we will at least be better prepared if and when today’s crisis repeats itself in the future. A good example is the reaction of the Banks and Financial Services to the current crisis. After the financial crisis in 2008–09, a decade long regulatory measures and restrictions built the much needed capital and liquidity war chest for banks. The current crisis is probably the first time the banks have really been tested since the financial crisis. As of when I am writing this post, the banks have been able to handle the stress on the financial system quite well. Many companies with Revolving Credit Facilities (RCF) with the Banks are fully drawing down on their credit lines to preserve cash during the crisis. Banks are able to participate in financial relief and corporate financing programs and there seems to be limited interconnectedness between the banks in the current crisis to have a contagion effect we previously saw during the collapse in 2008–09 financial crisis. The financial regulators and central banks have also acted swiftly to maintain stability in the financial system. They have relaxed some of the stress buffer requirements on banks to ensure they are able to continue to operate and lend during the crisis. Although the stock markets around the world have crashed relative to pre-crisis and the bank stocks have all declined, I think the financial services industry has reacted quite well to the current crisis. And this is because of a decade long preparation using the lessons learnt from the previous crisis.
To summarize — in the light of the current crisis, the world economy needs to stabilize, adapt and then recover. We are very much still in the stabilization phase but we should continue to explore ways to adapt to the new normal and when the healthcare system provides a green light, we will see the economy recover. Until then, keep well, stay safe and be patient.
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