Pandemic observations — what will tomorrow look like?
Yes, this is another post about the hottest topic of the moment: how is Covid-19 shaping the world of tomorrow and what will it look like?
I’ve never attempted to write a blog post before, let alone one about the world of tomorrow so please bear with me. My aim is not to predict what the coming months will look like, but rather to share my observations from a set of data points that I came across over the past few weeks.
Not your typical crisis
Never have the letters of the alphabet received so much press. Everyone has been discussing the shape of the GDP recovery curve and we will see who turns out to be right as history writes itself over the coming months.
The first obvious reference point is to look at previous financial crises. In the past, the economy has recovered in a V shape, except for the 2008 financial crisis which was more of a U (Source 1).
While interesting, it’s hard to feel confident that history can provide good indicators as to what tomorrow might look like due to the scale, context and characteristics of this particular crisis.
1.The economic impact is much larger. The below charts do a pretty good job at showing the unprecedented scale of this crisis (Source 2, 3).
2.The context of the crisis is different. In 2008, the crisis began with disruptions in the US real estate and financial markets before it spread to the rest of the world and the real economy. Covid-19’s impact has been more radical and abrupt. When the real economy was put on pause in China, it immediately affected the rest of the world through dry supply chains. Demand was affected soon after when consumption dropped due to increased unemployment and shop closures.
Furthermore, unlike the previous crisis, Covid-19 is impacting all geographies, including emerging markets and developing countries (Source 4). Even though countries relying on tourism, travel, hospitality and entertainment are more vulnerable, no one has been spared. Emerging markets face additional challenges such as weaker health systems and limited space to provide fiscal support. It is truly a global crisis.
3.This crisis has different characteristics. Having the majority of the global population in lockdown has led to much bigger non-economic changes than previous crises, particularly regarding human behaviour. Indeed, it’s changing our entire way of living — including how we work, consume and manage our health.
So instead of looking at history, a lot of people are turning to China. As the country is a few months ahead, data on post-lockdown can be considered as a better indication of what our tomorrow might look like.
Is China really paving the way?
As you can see below (Source 5), China’s economic activity is bouncing back, even though it is still lower than 2019 levels. It looks like a U-shaped recovery overall, but can we really expect to see the same in Europe?
- The speed of recovery in China is driven by the governments’ ability to contain the virus and encourage people to get back to work quickly through its top-down approach. Europe is in a different position regarding these two points. The virus has been more widespread, and governments’ responses more fragmented.
- Additionally, economic activity is not recovering evenly across sectors: the secondary industry has been recovering faster (Source 6, 7). This is good news for China whose economy is weighted towards these industries, less so for Europe that is more heavily weighted towards the tertiary industry.
- When comparing Chinese and European economic recovery, we should also split online consumer demand from offline.
As you can see in Source 8, in 2019, online penetration in China was more than 10 percentage points above the other G7 countries. Since China was more heavily weighted towards online sales pre-Covid vs Europe, it is likely to recover faster from this crisis.
Indeed, Source 9 shows that offline activity in China has not fully picked up yet. In Europe, data suggests it’s unlikely that consumers will go straight back to their pre-Covid lifestyle as soon as the lockdown is lifted.
For instance, Source 10 shows that restaurant bookings in many economies including the UK and Germany plunged before governments announced a lockdown, indicating that people didn’t consider pubs and restaurants worth the health risk. Source 11 shows that although people are going back to work in Germany, they are still avoiding public transport and even though mobility has picked up, it is still slow.
So although the post-lockdown China gives us an indication of what tomorrow might look like here, it does not paint the full picture. This is as far as the data gets us. To try to complete that picture, one can look at how the European pieces of the puzzle fit together and interact with one another.
Ok so what does post-lockdown look like in Europe?
Although recent data from Germany is hopeful and I would love to conclude positively, the possible V shape recovery in Europe is dependent on so many risk factors going right that it is unlikely. The two key drivers shaping the recovery worth looking into are: the effectiveness of the public health response and the effectiveness of the economic policy response (Source 12).
1.Regarding the effectiveness of economic policy, the impact of some elements are not yet fully understood or taken into account.
For instance, one element commonly ignored is the likelihood of SMEs and startups to let go of employees currently on job retention schemes due to persisting poor financial health once the schemes end.
Another element hard to grasp is how inflation is going to change over the coming weeks / months (Source 13). This is due to the fact that several events affecting inflation in opposite ways are happening at the same time. Indeed, decreases in prices are expected for certain seasonal products such as clothing which will likely be subject to large price reductions as companies’ clear stocks, whilst some other consumer goods like home workout and work setup have seen price increases driven by lockdown demand.
2. Regarding the public health response, the effectiveness of it will heavily depend on how responsible people feel and therefore how willing they are to follow the rules (masks, disinfection, temperature measurements, distancing, limiting large gatherings). Although hard to measure, it is clear that this varies across Europe, with the Nordics leading as their citizens are renowned for being particularly responsible.
Overall, European countries don’t just vary in citizen behaviour, they also famously vary in terms of government response. For that reason, it is hard to form a conclusion on the likely shape of European recovery. Indeed, even though most European countries are less optimistic than the rest of the world about their economic recovery, there is a wide variation in the expected consumer spending post-Covid (Source 14). So recovery might be V shaped in some European countries, it might also be W or L shaped in others. And although it seems unlikely that the virus would spread to levels that cause authorities to reverse course in most places, second waves and retightening of restrictions are possible.
Some final thoughts
From what I’ve been reading, my impression is that Q2 will be worse and probably the lowest point in this crisis (except if we enter a second wave scenario). A slow recovery will likely start in Europe in Q3 and Q4, but it will be bumpy, especially if you factor in the potential impact of our good old friend, Brexit, in December 2020. Goldman Sachs Research has shown that the markets are currently discounting for at least the next two years of poor macroeconomic performance, which means that a full GDP recovery is not expected by the end of 2021 (even though this might change depending on the events of the coming months).
I want to leave you with one last message. As we are seeing Europe emerging from lockdown right now, I believe that the next few weeks are going to be crucial in determining the shape of the recovery. And for that reason, I urge you to be responsible. Although countries are following different strategies (Source 15), ultimately it is your responsibility as a citizen to think about your family and friends’ safety, but also about your neighbour’s and his family.
Stay vigilant, stay safe — this is not over just yet.
