By Rohit Talwar, Steve Wells, and Alexandra Whittington

What reasonable assumptions can we make about how governments, individuals, businesses, and markets will behave over the next 6-18 months in response to the COVID-19 Coronavirus outbreak?

As the COVID-19 pandemic spreads around the world, there is a growing understanding that the economic and social ramifications could last far longer than the disease itself. In previous articles we discussed the need to plan for a range of scenarios and factors to consider in any such scenario exploration: Responding to Coronavirus Disruption and Navigating Covid-19 Impacts and The Coronavirus Tech Handbook .

In this three-part article, we focus on a baseline scenario of how things could play out economically and socially if the virus develops in the way that many virologists, epidemiologists, and public health experts are suggesting. This first part explores the macro economic consequences.

A Total System Reboot?

We appreciate that there are now many voices suggesting that this could trigger a reboot of the global economy and the entire model of capitalism. Indeed, there are a range of fascinating predictions and possibilities for how things might play out. However, we believe that right now, our readers want to focus on the nearer term issues and then move on to thinking about that bigger and more fundamental question in relatively short order. So we will be exploring some of those ideas in the coming weeks.

Facts Matter

The virus has spread from China to become a global pandemic. At the time of writing, the most up to date source we can find is https://www.worldometers.info/coronavirus/ which provides current figures of 133,009 reported Coronavirus cases, 68,891 recoveries, and 4,946 deaths across 125 countries and one international conveyance – the Diamond Princess cruise ship. The infection rates per one million of population range from 0.1 in several countries with only one or two reported cases such as Jordan, Sri Lanka, and Togo, up to 250 for Italy, 153.5 in South Korea, 134.1 in Norway, 120 for Iran, and 56.1 in China – which still has by far the biggest number of cases and fatalities.

In most cases, it appears that around 80% of those infected suffer only mild or unnoticeable symptoms, with up to 20% needing hospitalization, and a mortality rate of 1-4% amongst all those infected – with the World Health Organization estimating 3.4%. This compares to 9.6% for SARS, 34% for MERS, and 0.02% for Swine Flu.

The rate of infection is spreading at something close to an exponential rate in many countries – with the number of new cases doubling every two to three days in many locations. Estimates vary quite widely, but virologists, epidemiologists, and public health experts suggest that between 40-80% of the population could be affected – with most not even being aware of it. In the UK, government estimates suggest that the number of deaths could fall between 100,000 and 500,000.

Government Responses

We are seeing dramatic variation in government responses – particularly in relation to issues such as social isolation – to try and flatten and delay the peak of infection. Hence, at one end of the spectrum, many, such as the UK, are taking a relatively relaxed “wait and see how this develops” stance – waiting on evidence of spread before taking any serious action – with an emphasis on delay rather than containment. Many are loathe to act too quickly for fear of acting too soon, exacerbating the economic impact, and causing widespread panic.

At the other end of the response range are those who are taking strong responsive or pre-emptive moves focused on delay, deterrence and containment. For example, Italy, the country with the second highest incidence rate, has acknowledged that it acted too slowly at first. Hence, it has now effectively put the country on lockdown with a very strict quarantine regime. India with 74 reported cases and an infection rate of 0.1 per one million of population has canceled all foreign entry visas, and the US has banned visitors who have been in the 26 European Schengen area countries.

Many have clamped down hard once the evidence of widespread infection is clear – such as China. In Europe, countries like Italy and Ireland are closing schools and universities, postponing or discouraging sporting events, banning large public gatherings, concerts, and conferences, and shutting museums, theaters, and betting shops, while suspending prison visits, civil ceremonies, weddings, and funerals across the country. Now that the World Health Organization has declared the situation a pandemic and criticized the speed of national responses, we can expect a very rapid flow of announcements of more severe measures from many countries.

Alongside these direct responses to the pandemic, there are also a wide range of different approaches being adopted to fiscal and monetary policy, business support measures, and worker support. We believe that we’ll see a lot of announcements in the coming week and so will reserve comment on these until a future article.

The Global Economy

The prospect of national recessions in multiple large economies has now been baked in by many financial analysts and stock markets. This is also driving the prospect of a global downturn. As industries reshape their supply chains and geographic footprints, the impact on major economies such as China and the US are the subject of much conjecture. for example, there is a real prospect of firms reducing their reliance on China as a production hub and moving to establish more local facilities in many key markets. This might help drive investment and increase business resilience.

Financial Markets

Many stock markets have been in freefall and fluctuating quite dramatically as bargain hunters periodically step back in because they think prices have fallen below critical levels and believe that this is a good time to buy. Clearly markets are spooked, with the Financial Times FT100 index recording its second highest percentage fall in history today and the US Dow Jones Industrial Average falling to a 20% drop on its peak at one point. This is driven by a combination of factors. Firstly, there are genuine concerns about particular businesses like airlines being directly impacted by the virus and associated national and customer responses. Secondly, there is the concern about human behavior and the potential for market collapse – triggering a pre-emptive wave of panic selling.

In some cases, shareholders are forced to sell in order to meet their ongoing commitments such as pension payments and life insurance policy maturities. The final factor is a desire for safe havens, leading many large institutional investors such as pension funds to sell shareholding and buy into hopefully more secure government debt – effectively at negative interest rates. The hope is that this will at least preserve the bulk of their investment. Those willing to stay in for the long term may not see losses realized if the markets recover relatively quickly. Alternatively they could see a massive writedown in their portfolio valuations – exacerbated by the failure of companies tipped over the edge by the crisis.

Those sitting on large pools of uninvested funds could be the biggest beneficiaries – coming back into markets when they finally turn a corner. Stock market fluctuations, the disruption of economies, and the level of confidence in national governments will also drive behavior in foreign exchange markets. Some are arguing that this could be the start of far larger contagion that could dwarf the impacts of the 2008 Global Financial Crises – that will be the subject of a future article.

General Business Responses

Businesses are increasingly erring on the side of caution and likely to become even more risk averse as the virus spreads. In Italy, where most businesses have been closed and the population has been told to stay at home, the estimates of the scale of the devastation continue to rise. The impact on redundancies, business failures, and debt defaults are only likely to become clear once the length of the shutdown is known. Some are already suggesting that Italy’s recovery from this could take five years or more. Elsewhere, we can expect an escalation of the precautionary measures that are already becoming widespread. These include encouraging staff to work from home or smaller remote sites to help localize the possible impact of any confirmed cases. Non-essential travel, meetings, internal events, and attendance at external events will increasingly be banned or strongly discouraged – irrespective of what government policy is.

Cost control will become an increasingly prime directive in the face of declining demand. However, some may also see the need to think about the longer term, deepen and retain customer relationships, and take the opportunity to manage their organization in a slightly more foresighted, and less frantic and breathless manner. Hence, measures we can expect to see emerging would include investing more in customer service training to differentiate themselves and retain customer loyalty and in digital literacy to increase efficiency and flexibility.

Strategically, this may be seen as an opportunity to train leaders and managers in how to use foresight, horizon scanning, and scenario planning to develop anticipatory and forward-thinking capabilities. With people being discouraged from travel or banned from creating large meetings, we can expect a continued increase in the adoption of video conferencing and online training solutions that has already been evidenced.

Many may see this as an opportunity to pause for reflection, leading to the prioritization and cancellation or suspension of current business initiatives to focus on the vital few. Many will be accelerating the testing of the capacity of systems to support large numbers of staff working from home and remote locations. A number of financial services firms are already splitting key staff, such as traders, across multiple sites to minimize the risk of infection – this is likely to spread to every key resource group inside an organization.

Widespread cost cutting measures on non-essential spending will be increasingly commonplace – alongside reducing revenue forecasts and budgets for the next financial year. The virus could also see a growing number of firms investing in automation to reduce their dependency on a human workforce and lower their cost base. Hence, Robotic Process Automation and Hyperautomation could become major priorities. Alongside this we can anticipate increasing use of on demand outsourcing to reduce fixed staffing costs.

Among the health protection and cost reduction measures, we can expect an acceleration in the banning of all travel and external event attendance. Some may go as far as cutting the salaries and suspending bonuses of top leadership to lead by example. Those worse affected may also be asking staff to take voluntary pay cuts and encouraging them to take unpaid leave. Others may look to renegotiate the terms of contracts, leases, loans, and mortgages – with a particular emphasis on cancellation charges. This has already become a key battleground with owners of canceled and delayed conferences and exhibitions now locked in cancellation charge negotiations with venues and hotels. A number could end up in legal proceedings and lead to damaged business relationships and owners switching venues and even city locations when their events are rescheduled. Whilst many firms will be delaying major investment projects, others may see the willingness of vendors to cut prices to secure sales as an opportunity to accelerate major investment projects.

Supply Chains and Business Footprint

There was clearly some sourcing disruption as a result of large-scale factory closures in China in January and February. Many of these supply chains are starting to recover now. However, it is as yet unclear what the long-term impact might be on the ability of firms to source critical raw materials resulting from widespread infection and forced quarantine in countries like Italy. In the short term, we can already see the prices of fresh food and raw materials rising for many sectors – offset slightly by declining industrial production. Inevitably this will lead to firms looking to source more locally. It could also drive a number of firms to re-evaluate the operational risk and the economics of their geographic manufacturing and distribution footprint.

Many may consider that, with the extent to which production is now automated, they can bring production either back to their home markets or distribute it even more widely. We could see a growth in much smaller footprint facilities across a number of markets, with a view to hopefully minimizing global disruption and maximizing the capacity to service all of the current markets businesses are in and those that could be important for the future. The crisis could also drive innovation in newer approaches such as vertical farming, containerized farming, and 3D printing.

Global Aviation Disruption

At the center of the global economy – and the post-Brexit “Global Britain” strategy – is Air Transport. This is also currently looking like the sector that could experience the most immediate and severe impacts. Prior to the announcement of flight cancellations to Italy, and the impending US ban on travel from 26 Schengen countries in mainland Europe, there were reports of flight bookings being down up to 30% or more for certain destinations. With up to 400 daily flights per day from Europe to the US, these latest announcements are driving an even steeper collapse in bookings and widespread concerns over the sector’s future. As nations close borders to locations with higher infection rates, the volume of flight cancellations is likely to increase still further – with the very real prospect of a near or total shut down of global flights.

In response, many airline share prices have collapsed, Qantas has announced the grounding of 23% of all its international flights and the cancellation of new aircraft orders. The CEO of Virgin Atlantic has taken a 20% pay cut, with fellow executives accepting a 15% reduction. As bookings decline and route closures escalate, we are likely to see airline staff being asked to take unpaid leave, pay cuts, and ultimately redundancy. Prior to these latest announcements, IATA estimated the crisis could cost airlines $113Bn in 2020. That figure could now be significantly higher and a number of airlines could struggle to meet their debt burdens. Pressure will rise for governments to step in with tax relief, loans, and rescue packages.

Lower passenger numbers and fewer flights will reduce demand for all of the consumables that service a flight – from food and drink to aviation fuel. Cost cutting measures could see projects and new aircraft orders being delayed or canceled outright. The passenger number assumptions in airport expansion plans will be coming under scrutiny. A similar picture could be seen across rail, coach, and ferry services. The cruise industry could be worst affected with a triple whammy of cancellations, declining demand, and nervous nations increasingly refusing to allow port access to ships with confirmed cases of COVID-19. The UK government has already discouraged citizens from taking cruise trips.

Pressure has already been effective in persuading national and international governments and regulators to relax the current rules that are leading to the nonsensical situation where airlines have been forced to fly empty fights just to retain their landing slots in different airports – adding to their environmental footprint unnecessarily.

This is a rapidly unfolding situation, with many thrown into chaos by a lack of foresight and preparedness. We hope that the analysis and ideas presented here will help businesses to develop and test their plans and prepare for what seems like an increasingly likely base case scenario.

In future articles in the coming days, we will look at the impact on employment, investment, specific industries, societal infrastructure such as healthcare, education, and social protection, and the wider impacts on wellbeing and mental health.

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