Current COVID-19 Economic Scenario Summary
All current (made in March) economic overviews and financial projections indicate that we’re in for an economic downturn. How big a downturn and for how long varies from one forecast to another.
Strategic marketing and business consultant, OKsuzi Strategy CEO, researched the question “When will things get better?” The data is available on our previous post here “When Will Things Get Better?”
The following is a summary forecast of the storm ahead based on that research.
Storm below Mount Fuji (Sanka no haku u), from the series Thirty-six Views of Mount Fuji (Fugaku sanjūrokkei)
Current Major Challenges
For the most part, the US market was doing at least OK before COVID-19 hit. That said, there were indications that something was impacting our financial markets, although it hasn’t gotten a lot of press. There have been liquidity challenges in the repo markets and the Federal Reserve (FED) has been stepping in to improve liquidity. They have pumped about $5T into the repo markets as part of a few different strategies. Please note that this has nothing to do with the $2T bill that just passed. (1)
The low cost of oil seems to be a separate challenge. There is a huge drop in price per barrel worldwide. This can have major repercussions in manufacturing as there is a significant cut in investment from energy companies (e.g., these companies are no longer willing to purchase the metal that goes into pipelines). There is also a drop in usage of oil products as the movement of goods and people has dropped. (2)
The impact of COVID-19 is far-reaching. The global pandemic has a direct impact on the economy for 3 reasons mentioned by a Deloitte analysis:
1. There are interruptions to supply chains as workers can’t go to work because of lockdown requirements across the globe.
2. People are spending less money as they are under lockdown conditions. It’s hard to spend money when you can’t leave your home.
3. People are losing jobs. If others aren’t spending money, demand for goods and services shrinks. And people are losing their jobs. And at least a portion of these people live paycheck to paycheck, so they have limited ability to continue to spend money if they lose their jobs. (2)
Economic Scenarios
Depending on the different resources, there are several different ways that the economic scenarios could play out for the US. Most financial forecasts have a recession starting at the end of Q2 2020 (remember that the technical term of a recession is two consecutive quarters of negative growth). At least one analysis by McKinsey describes the financial impact as “the largest quarterly decline in economic activity since 1933.” (3)
Some forecasts, such as the one from Goldman Sachs, show that the economy will bounce back in Q3 and Q4. The growth for 2020 would still be small, though, with only .4% growth for the entire year. This was cut from the original forecast of 1.2% growth for 2020. There would be a strong bounce back in early 2021. (4)
Other forecasts, such as the one from Deloitte, has the US economy most likely recovering in 2021. The long-term forecast has 1.3% growth over several years. Deloitte has two other forecast scenarios that have recovery starting in 2021 although 2022 is when there is a “strong recovery” or even until 2023 when there is a strong recovery. This last scenario has a much longer lingering effect of COVID-19 worldwide, where small outbreaks continue to impact the globe. (2)
Industries and Areas that will be Affected
COVID-19 Economic Vulnerability Index by County (top) and MSA (below) (5)
Chmura created an Economic Vulnerability Index for all counties and Metropolitan Statistical Areas (MSAs) in the US so they could see which areas and industries would be most impacted by COVID-19 specifically and would lead to higher rates of unemployment. They used employment data from the 4th quarter in 2019 as per information from JobsEQ. The idea above is that the average rate of unemployment is 100 percent (please see key to understand levels of impact). (5)
The graphs above do not take into account the number of cases of COVID-19 in any area (e.g., NYC is currently the epicenter of the virus in the US) nor the impact of government policy in any given area. The information is based on the mix of industry employment in the MSA or county. The expectation is that these are temporary for the length of the crisis. “Any consequential economic shocks are not incorporated into this model.” (5)
The team has taken into account the following information for the analysis: primary research on expert testimony; news reports for key industries such as hotels, restaurants, retail, and transportation; preliminary release of unemployment claims; and the latest job postings data from Chmura's database.
Sectors with the largest expected job losses are likely to include: (5)
Arts, entertainment, and recreation
Accommodation and food services
Wholesale trade
Transportation and warehousing
Those with smallest projected losses are:
Construction
Professional, scientific, and technical services
Utilities
Management of companies and enterprises
Public administration
Real estate, rental, and leasing
How can Companies Cope?
A McKinsey report shared an interesting perspective on managing through the crisis. They talk about a 5-step approach: Resolve, Resilience, Return, Reimagination, and Reform. This report shows that, although this can be a challenging time for companies, it can also be an opportunity to understand weaknesses and create opportunities. Companies that innovate and experiment to create new ways of doing business (that help deal with weaknesses) will end up stronger and more able to cope with other global challenges in the future. (6)
There is no question that everything is changing, sometimes daily. There is all sorts of uncertainty in the marketplace right now. People are losing jobs and companies are struggling. And this moment could create a before COVID-19 and post COVID-19 approach to business. Companies must understand their own situation, weaknesses, and opportunities to survive now and eventually thrive as they move forward.
1 https://www.bankrate.com/banking/federal-reserve/why-the-fed-pumps-billions-into-repo-market/
5 http://www.chmuraecon.com/blog/2020/march/how-vulnerable-is-my-regions-economy-to-covid-19/
6 https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business