Learning from China, as it recovers first from Covid-19 … the post-pandemic economy might be a lot worse than we think, warns The Economist

May 27, 2020

3 months after China’s lockdown was lifted, the nation is recovering from the worst effects of Covid-19, and the rest of the world is looking for clues as to how the post-pandemic world might look.

In many ways, China has returned to around 90% of its pre-Covid performance.

A 90% economic recovery might not sound too bad, but analysis by the Economist shows how it could be catastrophic

Factories are busy and the streets are no longer empty.  However the missing 10% include large chunks of everyday life. Travel on public transport and domestic flights are down by a third. Discretionary consumer spending, on such things as restaurants, has fallen by 40% and hotel stays are a third of normal.

People are weighed down by financial hardship and the fear of a second wave of covid-19. Bankruptcies are rising and unemployment, one broker has said, is three times the official level, at around 20%

And this in a country which had one of the shortest lockdowns, and has huge state support.

The latest IMF economic outlook report shows that the pandemic is inflicting high and rising human costs worldwide, and the necessary protection measures are severely impacting economic activity.

As a result of the pandemic, the global economy is projected to contract sharply by –3 percent in 2020, much worse than during the 2008–09 financial crisis.

In a baseline scenario, which assumes that the pandemic fades in the second half of 2020 and containment efforts can be gradually unwound, the global economy is projected to grow by 5.8 percent in 2021 as economic activity normalises, helped by policy support.

The WEF says the crisis will catalyse some huge changes. Few industries will avoid being either reformed, restructured or removed. Agility, scalability and automation will be the watchwords for this new era of business, and those that have these capabilities now will be the winners.

Thanks to government stimulus packages, liquidity is coming back to the market, hoping to keep enough of the economy afloat, and accelerate a recovery. But the way much of it is structured means that it will likely benefit already better capitalized larger businesses, over the smaller operators who may struggle.

It would be an over-simplification, however, to paint this new era as one of “big” versus “small”, or “incumbents” versus “upstarts”. The past decade’s tropes that pitted fintechs and digital natives against big banks and consumer brands will seem dated by the middle of this year.

Indeed, one could see the current times as the first real test of the digital-first business mantras that have been extolled over the first part of this century. COVID-19 will force a rebirth of many industries as we all sit at home in lockdown, re-assessing and re-imagining modes of consumption, supply, interaction and productivity.

For instance, the shift from cash to digital payments is clearly accelerating. In the UK, ATM usage was already falling between 6% and 14% a year, but has now plummeted by more than half. As discussed in the “Future of Finance” report, this has major implications for: the resilience of payment forms – young and old; for banks’ business models; and society, as we work to ensure no-one is left behind in an increasingly digital economy.

In the workplace we’re already seeing a super-charging of the nascent bring your own device (BYOD) trend in business technology. As people scramble to work and socialize remotely, previously niche tools such as Zoom, Slack, Microsoft’s Teams, and even the Houseparty app, are suddenly supporting millions of personal and corporate interactions every minute.

Those businesses that have designed their solutions to use the full potential of cloud computing, will not buckle under the pressure. For instance, the cloud gives businesses easy access to digital payment methods. It has enabled companies to continue working, by rapidly and securely providing access to business applications to their employees working at home. Yet it also provides financial flexibility, allowing those seeing a slow-down to wind down the technology costs of business lines that are facing challenges.

The combination of scalable and agile capabilities is what will define the short and medium-term success of businesses, whether large or small. But in the longer term, change will have to be more fundamental. Resilience, combined with agility, must be the new focus of business leaders as we all emerge from this crisis.

To create long-term resilience we will likely see further robotic automation and artificial intelligence (AI) within our supply chains. These technologies reduce manual intervention and hand-offs, cutting transmission risks, and reducing the reliance on humans to work face-to-face. They can also enable production to scale and shrink in response to sudden demand.

Indeed, government interventions may have unintentionally accelerated this trend. Many countries’ fiscal stimuli amount to the largest scale experiment in Universal Basic Income (UBI) to date. UBI is considered by many to be a prerequisite for a successful AI-driven economy – by enabling businesses to potentially replace humans without impacting their welfare.

It’s clear that this crisis will end a lot of outdated practices, yet many more than we might think will continue. We will always want to travel, to eat out, to be entertained, and to have experiences in person. Just don’t expect any of these activities to be unchanged. Or to be delivered by the same brands, and by the same means to which we’ve become accustomed.

We will emerge from this period stronger, wiser and more connected as a global society. Resilience will be at the forefront of every strategy, yet it is agility that will ensure competitiveness, and an ability to respond to the unexpected. To achieve this, businesses will have to re-evaluate where they must be strong and where they must be flexible.

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