The post-Covid new world order

Long term trends emerging out of the pandemic, and what they mean for recovery

WHO would have thought that an unknown virus would be the Black Swan of 2020 that will redefine how we work, play and interact once this global health crisis abates?

The novel coronavirus, or Covid-19, has made routine decisions agonising dilemmas. Decisions on whether to visit a parent who lives alone or make a trip to the supermarket are no longer so straightforward. Everyone is now forced to think through the potential implications of such normal, everyday actions in a way we never had to before because of how they could affect others.

The seismic societal shifts since January have made us readjust in ways most of us never imagined. For those who are fortunate to still have a job, home is now office and doubles as a classroom for those with children. Others are forced to go out to work, casting aside fears of the virus with no cure, as they provide what are deemed essential services.

What's clear is that this global pandemic will have long-lasting and profound effects on the world, with structural changes to economies, markets, industries and daily life. A recent Harvard study has found that on-off social distancing may be necessary until 2022. Societies will be forced to finally address those long-standing frailties that have been neglected in good times.

Suzy Taherian, a chief financial officer of Kinetics, a global engineering and construction company specialising in high-purity processing facilities for microelectronics and biopharma companies, expects Covid-19 will push supply chains to go local rather than global.

"The tariff and trade wars had stretched global supply chains to breaking point. The virus pandemic broke those chains. Companies will be loath to trust all the supply from one foreign country or even from outside the US. Companies will look to diversify their suppliers and to favour local suppliers, even at higher costs,'' she said in an article she wrote for Forbes.

Already, France's finance minister has directed French companies to diversify their supply chains to become less dependent on China and other Asian countries.

Digital divide will become a chasm. Everyone shifted to working and learning online. Those with connectivity and technology jobs and skills could continue working remotely, fairly unaffected during the stay home orders or lockdowns.

"Access and ability to work online will become even more important and those who are unable to connect online will fall further behind economically,'' she added.

Taking the experience of China as it emerges from the abyss of the Covid-19 pandemic, Citi Research believes the global stay at home orders or lockdowns in varying degrees have also accelerated the trend for online transactions in nearly every aspect, from healthcare, business to shopping for grocery.

Shift to online

The US research house believes that more governments will be supportive of online healthcare after the Covid-19 outbreak. Despite not being in the same physical location, some online providers use medical equipment that connect to patients' cellphones via apps, giving online doctors the ability to monitor the heart rate and blood pressure of their patients remotely.

"Online consultation and online drug sales will become more important and prevalent going forward, backed by policy tailwinds, as (1) online pharmacy is helpful, with better coverage and accessibility; (2) online consultation helps build a tiered medical system; and (3) Internet healthcare can save medical expenditures for the government in the long run on higher efficiency and transparency,'' Citi said.

In the US, a 2019 digital health survey found that 29 per cent of consumers have used some form of virtual care, up nearly 40 per cent from 2017. Prior to Covid-19, the US telehealth market was expected to double over the next five years. Telehealth market revenues are projected to hit US$35 billion by 2025 from an estimated US$13.5 billion in 2019; that's a compound annual growth rate of 17 per cent.

New consumption patterns

The Covid-19 outbreak has also transformed how and where consumers shop.

"The population of e-commerce users has expanded from younger consumers to the middle-aged, and the shift from offline to online shopping is happening faster than was widely expected,'' Citi said.

Of particular note is the shift to online shopping in fresh food, where physical stores have a dominant share as a sales channel, big-ticket items like autos and real estate, and services such as travel and concert tickets.

"Our sense is that the upper limit on the rate of e-commerce adoption has been raised, opening up new possibilities for the online channel,'' it added.

Another change involves how products are sold online. Since the Chinese New Year holidays, live commerce has expanded rapidly. Live commerce is a new type of online marketing that blends live-streaming and e-commerce, in which celebrities and influencers (also known as key opinion leaders, or KOL) live-stream about certain products, which viewers can ask questions about, comment on, and buy. The live commerce market was worth nearly 450 billion yuan (about S$90 billion) in 2019. iiMedia Research estimates that the market will roughly double in size in 2020, to 960 billion yuan.

With more restaurants using online sales platforms since the start of Covid-19, the trend is expected to climb as more adopt similar moves.

"Our sense is that the possibility of e-commerce expanding into consumption categories that have heretofore had little affinity for online sales has increased," Citi said.

Social distancing amid the Covid-19 outbreak has also changed the way people do their grocery shopping as more turn to food delivery services to get their weekly shopping instead of physically heading to the local supermarket.

"To the extent that grocers can meet the elevated levels of demand, we expect more customers to try online grocery and for some to carry on post the Covid-19 crisis, thereby accelerating what we see as an inexorable growth in online grocery penetration. The crisis may also prove to be a tipping point for potential retail partners presently considering their options,'' Citi said.

At the moment however, online grocers seem severely handicapped both by an inability to fulfil orders as inventories run down far more quickly than before and supply chains remain logjammed, and huge gaps in the last mile of their operations - delivery. Whether they are able to scale up effectively will determine the long-term sustainability of their model.

Ms Taherian, a lecturer in the Graduate School of Management at UC Davies, believed that as the last online laggards adjusted to online commerce, they would likely not go back.

"So in-store shopping and commercial real estate will take a hit long-term,'' she said.

Risk and trust management

Risk management will become a core activity in the new world, she added. Companies will actively develop and test contingency plans and look for insurance services to protect themselves. Hedging will not be viewed as an unpleasant cost but a wise necessity. Of course, insurance companies will also look to protect themselves and tighten their exposure.

Loss of trust will take time to recover. How long will it take before people are comfortable going on a plane or a cruise again? Or when will homeowners feel comfortable letting a stranger into their house to rent it for a weekend? How long before countries with high infection rates will be deemed clear so their citizens can come visiting as tourists again?

"It will take some time. My guess is two years or more,'' said Ms Taherian.

Fat, thin U, V, W or wok-shaped recovery?

The trillion dollar question remains - with more than four billion told to stay home globally and major economies coming to an abrupt halt, vaporising millions of jobs, what will these mean for the new post-Covid 19 economy?

Most economists are finding it challenging to assess how far the downward leg of the 'U' goes as Covid-19 has greatly diminished the forecasting and interpretative value of macro indicators. But right now, a V-shaped recovery in consumer spending looks increasingly unrealistic.

"The question of how much economic activity will be permanently lost is closely related to the question of how many businesses will fail because of this shock,'' said Simona Mocuta, senior economist at State Street Global Advisors.

Citi analyst Adam Cochran feels that China may not be a relevant benchmark for recovery as the social distancing measures in Europe and potential economic impact may be bigger.

"Also as highlighted by Nike, the Chinese consumer is more digitally savvy and younger, which may promote a quicker bounce back,'' Mr Cochran said.

As of now, there is no clear end point to this new way of life, nor any sort of roadmap for navigating a global health crisis that has a negative multiplier on nearly every other aspect of the economy.

"It is very difficult to determine the precise timing of a recovery - sometimes the market bounces and recovers very quickly. That said, while I am hoping for a V-shaped recovery, I don't expect it. I expect a U-shaped recovery that will take some time and be highly dependent on the tapering off of new virus cases," said Capital Group's Joyce Gordon, a veteran of numerous bear markets.

In its baseline scenario, the International Monetary Fund (IMF) projected in April that global growth in 2020 will fall to -3 per cent. This is a downgrade of 6.3 percentage points from January 2020, a major revision over a very short period. This makes the Great Lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis.

Assuming the pandemic fades in the second half of 2020 and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, IMF projected global growth in 2021 to rebound to 5.8 per cent. The cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars, greater than the economies of Japan and Germany, combined.

For this year, growth in advanced economies is projected at -6.1 percent. Emerging market and developing economies with normal growth levels well above advanced economies are also projected to have negative growth rates of -1.0 percent in 2020, and -2.2 per cent if you exclude China. Income per capita is projected to shrink for over 170 countries. Both advanced economies and emerging markets and developing economies are expected to partially recover in 2021.

But in the event the pandemic does not recede in the second half of this year, leading to longer durations of containment, worsening financial conditions, and further breakdowns of global supply chains will be a given.

"In such cases, global GDP would fall even further: an additional 3 per cent in 2020 if the pandemic is more protracted this year while, if the pandemic continues into 2021, it may fall next year by an additional 8 per cent compared to our baseline scenario,'' the IMF warned.

With recent data revealing more clearly the extent of the Covid-19 damage, Pictet Wealth Management has revised down its central scenario for world GDP growth to -4.1 per cent in 2020, from -0.4 per cent previously.

Given the developing global recession, Sung Eun Jung at Oxford Economics expects Singapore's exports and imports to contract further this year before rebounding in the second half.

"Domestically, the large fiscal stimulus and monetary easing should help sustain consumption and investment. Nevertheless, we estimate the economic cost of the 'circuit breaker' to be sizeable and expect Singapore to enter a sharp recession in H1,'' the economist said.

Life may not be exactly the same post Covid-19 when restrictions are progressively lifted. Consumers may be even more prudent upon exiting lockdown. Despite the strong policy measures undertaken to protect workers' jobs and income, the shock could prompt some consumers to build precautionary savings, leading to weaker consumption. Household spending will also be dented by the rise in unemployment.

"But the main concern is corporate investment, the GDP component most sensitive to uncertainty,'' Pictet Wealth said.

Already, the lack of visibility has led many euro area firms to postpone investment projects. Moreover, the steep decline in capacity utilisation and household consumption will have a negative impact on corporate investment. The rise in corporate debt to meet fixed costs could also impair capital expenditure in the future. Nor will external demand save the day, since normal patterns of global trade will not resume until all regions have emerged from the pandemic.

But a positive surprise should not be completely excluded either. Economists believe a treatment or vaccine could emerge that helps shorten lockdowns and social distancing measures. This could help soften the impact of the virus significantly.

"In this alternative, more positive scenario, world GDP growth would contract by -1.2 per cent in 2020. But this would still be the worst figure since the 1930s,'' Pictet Wealth said.

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