The COVID-19 pandemic has changed the world and some of its effects will last. There are various research projects taking place around the globe that shed light on the factors that business leaders should keep in mind as they prepare for the next normal.
As I interact daily with various businesses, I could see first hand that many business have spent much of 2020 scrambling to adapt to extraordinary circumstances. While the fight against the COVID-19 pandemic is not yet won, with a vaccine in sight, there is at least a faint light at the end of the tunnel—along with the hope that another train isn’t heading our way.
Barring any unexpected catastrophes, 2021 will likely be a year of transition, where society can start to look forward to shaping their futures rather than just grinding through the present. We all know that the next normal is going to be different and anyone thinking (or hoping) that things will be going back to the conditions that prevailed in 2019, is in for a few nasty surprises. Indeed, just as the terms “prewar” and “postwar” are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras.
However in today’s Blog I wanted to highlight some of the trends that current research is indicating as highly likely to shape the next normal, to then assess how business will adjust and how society could be changed forever as a result of the COVID-19 crisis.
The return of confidence unleashes a consumer rebound
Research is indicating that as consumer confidence returns, so will spending, with “revenge shopping” sweeping through sectors as pent-up demand is unleashed. That has been the experience of all previous economic downturns. One difference, however, is that services have been particularly hard hit this time. The bounce back will therefore likely emphasize those businesses, particularly the ones that have a communal element, such as restaurants and entertainment venues. That isn’t to say that consumers will act uniformly.
However research emerging from China serves as a good reference point. China is the first country to be hit by the COVID-19 pandemic and it was also the first to emerge from it. China’s consumers are relieved—and spending accordingly. On Singles Day, November 11, the country’s two largest online retailers racked up record sales. That wasn’t just a holiday phenomenon. While manufacturing in China came back first, by September, so had consumer spending. Except for international air travel, Chinese consumers have begun to act and spend largely as they did in pre-crisis times. Australia also offers hope. With the pandemic largely contained in that country, household spending fueled a faster-than-expected 3. %growth rate in the third quarter of 2020, and spending on goods and services rose 7.9%
How fast and deep confidence will recover is an open question. New lockdowns and, critically, the rollout of COVID-19 vaccines have and will affect those numbers. The point is that spending will only recover as fast as the rate at which people feel confident about becoming mobile again.
Leisure travel bounces back but business travel lags
People who travel for pleasure will want to get back to doing so. That has been the pattern in China. In China as a whole, hotel occupancy and the number of travelers on domestic flights were more than 90% of their 2019 levels at the end of August, and over the October Golden Week holiday, more than 600 million Chinese hit the road, around 80% of last year’s figure. Because of confidence in the country’s health and safety measures, domestic travel in China is almost back to the level seen prior to the pandemic, and high-end domestic travel is actually ahead of it.
By definition, leisure travel is discretionary. Business travel is less so. During and after the pandemic, though, there is a question about business travel: Exactly when is it necessary? The answer is almost certain to be not as much as before. Video calls and collaboration tools that enable remote working, for example, could replace some onsite meetings and conferences. History shows that, after a recession, business travel takes longer than leisure travel to bounce back. After the 2008–09 financial crisis, for example, international business travel took five years to recover, compared with two years for international leisure travel.
On the other hand, leisure travel is driven by the very human desire to explore and to enjoy, and that has not changed. Indeed, one of the first things people do as they grow more prosperous is to travel—first close to home and then further afield. There is no reason to believe that the rise in global prosperity will reverse itself or that human curiosity will diminish.
The crisis sparks a wave of innovation and launches a generation of entrepreneurs
Plato was right: necessity is indeed the mother of invention. During the COVID-19 crisis, one area that has seen tremendous growth is digitisation, meaning everything from online customer service to remote working to supply-chain reinvention to the use of artificial intelligence (AI) and machine learning to improve operations. Disruption creates space for entrepreneurs—and that’s what is happening in all major economies. This is leading to the rise of start-ups as there is a veritable flood of new small businesses. In the third quarter of 2020 alone, there were more than 1.5 million new-business applications in the United States—almost double the figure for the same period in 2019.
Many of those businesses are single-person establishments that could well stay that way—think of the restaurant chef turned caterer or the recent university graduate with a cool new app. Even in Europe, though as a much smaller scale than in the US, we are seeing such a trend. France saw 84,000 new business formations in October, the highest ever recorded and Germany has also seen an increase in new businesses compared with 2019.
While on the whole the COVID-19 crisis has been devastating to small businesses globally, the positive trend in entrepreneurship and start-ups, especially technology related start-ups, could bode well for job growth and economic activity once recovery takes hold.
Permanent changes prompted by the COVID-19 crisis
All research done in all major economies indicates that at least two-thirds of consumers say they have tried new kinds of shopping and about 65 percent or more of these say they intend to continue to do so. The implication is that brands or businesses that haven’t figured out how to reach consumers in new ways had better catch up, or they will be left behind. However, research indicates over and over again that consumers in continental Europe have bought more online but aren’t as enthusiastic as those in Britain and the United States to continue doing so. However, the shift to online retail is real, and much of it will stick. In the United States, the penetration of e-commerce was forecast in 2019 to reach 24% by 2024 but by July 2020, it had hit 33% of total retail sales.To put it another way, the first half of 2020 saw an increase in e-commerce equivalent to that of the previous ten years. In Europe, overall digital adoption is almost universal (95%), compared with 81% at the start of the pandemic. In normal times, getting to that level would have taken two to three years. Strikingly, the biggest increases came in countries that had previously been relatively cautious about shopping online. Germany, Romania and Switzerland, for example, had the three lowest online-penetration rates prior to the COVID-19 crisis; since then, usage increased 28, 25, and 18 percentage points, respectively—more than in any other markets.
The future of work is here
Before the COVID-19 crisis, the idea of remote working was in the air but not proceeding very far or fast. But the pandemic changed that, with tens of millions of people transitioning to working from home, essentially overnight, in a wide range of economic sectors. Global research indicates that more than 20% of the global workforce (most of them in high-skilled jobs in sectors such as finance, insurance and IT) could work the majority of its time away from the office—and be just as effective. This change is happening not just because of the COVID-19 crisis but also because advances in automation and digitisation made it possible; the use of those technologies has accelerated during the pandemic. As Microsoft’s CEO Satya Nadella said in April 2020 – “We’ve seen two years’ worth of digital transformation in two months.”
There are two important challenges related to the transition to working away from the office. One is to decide the role of the office itself, which is the traditional centre for creating culture and a sense of belonging. Companies will have to make decisions on everything from actual physical office i.e do we still need this building, office, or floor? to training and professional development (Is there such a thing as remote mentorship?). Returning to the office shouldn’t be a matter of simply opening the door. Instead, it needs to be part of a systematic reconsideration of what exactly the office brings to the organisation. A fresh re-think is needed.
The biopharma revolution that gave us the Covid-19 vaccine
The announcement of several promising COVID-19 vaccines has been a much-needed shot of good news. There will be challenges to rolling out these vaccines on the scale needed, but that does not lessen the accomplishment.Unlike previous vaccines, many of which use an inactivated or attenuated form of a virus to create resistance to it, the vaccines created by Moderna and the BioNTech–Pfizer partnership use mRNA. This platform has been under development for years, but these are the first vaccines that have secured regulatory approval. The “m” is for “messenger” because the molecules carry genetic instructions to the cells to create a protein that prompts an immune response. The body breaks down mRNA and its lipid carrier within a matter of hours. Just as businesses have sped up their operations in response to the COVID-19 crisis, the pandemic could be the launching point for a massive acceleration in the pace of medical innovation, with biology meeting technology in new ways. Not only was the COVID-19 genome sequenced in a matter of weeks, rather than months, but the vaccine rolled out in less than a year—an astonishing accomplishment given that normal vaccine development has often taken a decade. Urgency has created momentum, but the larger story is how a wide and diverse range of capabilities—among them, bioengineering, genetic sequencing, computing, data analytics, automation, machine learning, and AI—have come together.
The development of COVID-19 vaccines is just the most compelling example of the potential of the so called “Bio Revolution”—biomolecules, biosystems, biomachines, and biocomputing. The potential of the Bio Revolution goes well beyond health; as much as 60% of the physical inputs to the global economy, could theoretically be produced biologically. Examples include agriculture (genetic modification to create heat- or drought-resistant crops or to address conditions such as vitamin-A deficiency), energy (genetically engineered microbes to create biofuels), and materials (artificial spider silk and self-repairing fabrics). Those and other applications feasible through current technology could create trillions of dollars in economic impact over the next decade.
All over the world, the costs of pollution—and the benefits of environmental sustainability—are increasingly recognised. To cope with the 2008–09 financial crisis, there were substantial government stimulus programs, but few of them incorporated climate or environmental action. This time is different. Many (though by no means all) countries are using their recovery plans to push through existing environmental policy priorities. For example, the European Union plans to dedicate around 30% of its $880 billion plan for COVID-19-crisis plan to climate-change-related measures, including the issuance of at least $240 billion in “green bonds.”In September 2020, China pledged to reduce its net carbon emissions to zero by 2060. Japan has pledged to be carbon neutral by 2050.
My personal hope is that the COVID-19 crisis foreshadows what a climate crisis could look like: systemic, fast moving wide ranging, and global.
Global Public Debt
The scale of the Global fiscal response to the COVID-19 crisis was unprecedented—and three times bigger than seen for the 2008–09 financial crisis. In the G-20 alone, fiscal packages are estimated at more than $10 trillion. Few question the humanitarian and economic cases for strong action. In the US alone, as the US federal government has allocated trillions in COVID-19-crisis relief, it has put the country into new fiscal territory, with the US public debt projected to be bigger than the whole US economy in fiscal year 2021—the first time that has been the case since shortly after World War II. Same thing for the UK. In the United Kingdom, debt rose to more than £2 trillion, a record and more than 100% of GDP. In the Eurozone, the combined budget deficits in October were 11.6% of GDP, where total public debt hit a record 95% of GDP. That looks comparatively trivial compared with Japan, which has the world’s highest debt-to-GDP ratio, at more than 200%.
As the pandemic recedes, governments will have to figure out how to address their fiscal difficulties. Although interest rates are generally low, that could mean raising taxes or cutting spending—or both. Doing so could risk slowing the recovery and stimulating political backlash. But high levels of public debt carry their own costs, limiting the resources available to governments as they service their debt. The long-term answer is growth and productivity. Promoting growth will require well-trained workforces, the continued diffusion of technologies and most of all, it will require individuals, businesses, and governments to be willing to embrace change. Paying down debt isn’t exciting to do. But for economic stability—and in fairness to future generations—it needs to be taken seriously, not kicked down the road.
The COVID-19 crisis will likely be the catalyst for a dramatic restructuring of the economic and social order. The COVID-19 pandemic has been an economic and human catastrophe, and it’s far from over. But with vaccines beginning to roll out, it’s possible to be cautiously optimistic that the next normal will emerge this year or next. With good leadership, from both business and governments, the adapting to some of the outlined changes to increase effeciencies through technological adaptation, achieving a better level of environmental sustainabilityand economic growth through environmental projects, medical innovation and overall better level of business resiliency—could provide an enduring foundation for businesses in the long term.
P.S. May I please remind you on the upcoming webinar entitled “Do you Lead or Micromanage?” which will be delivered on the 21st January. For further details please click HERE.