COVID-19 Pandemic, Shifts in Consumer Behavior, and The Economic Recession
The Brief
Heir to many disguises, possessor of a multitude of voices, and proprietor of countless outcomes; a crisis is the dark and mysterious fiend that lurks amongst the nightmares of business owners. Although varied in anatomy, the distilled and purified essence of crises is an abundance of uncertainty, lack of control and depletion of confidence.
Humanity has experienced a plethora of crises in the form of humanitarian, political, environmental and economic crises. Far from being new, on too many occasions, communities, business and governments frequently fall victim to foreseeable events. Some of the more astute businesses, institutions and governments diligently study crises and develop responsive scenarios: a plan of action. But unfortunately, it does not appear to be the norm; managers and directors tend to lean in towards the exculpatory optimistic or favorable scenarios of risk.
Interspecies interactions continually occur and rarely have dire consequences over the global economic scope; outbreaks of diseases tend to be limited by geographic boundaries and be climate region specific. In late 2019 an interspecies jump was once again accomplished by a virus, a seasonal event that usually originates in the eastern hemisphere but that in this occasion was accomplished not by a virus of the orthomyxoviridae family but of a virus from the coronaviridae family. COVID-19, as labeled by the World Health Organization (WHO), reportedly has ten times the mortality rate than the seasonal flu; although a consensus is yet to be reached, most experts coincide around a 1% mortality rate, and has proved to be highly contagious as opposed to similarly frightening pandemics such as the ebola, SARS or MERS of previous years (2014, 2002, and 2012 respectively).
Summed to the reach of contemporary mass media and the distortive power of social media, the developments in the Wuhan province or China, where the outbreak had originated, and lack of precautionary and control measures by the local health authorities began a cascading effect of uncertainty and fear that spread as its own viral rate. The reports seemingly equally based on statistics or opinions fanned the flames of fear and began to alter the behavior of consumers, and ultimately the beginnings of the unbalancing of the supply and demand of commodities and other goods. Fuel generously added to the fire in the form of an ill-timed Saudi-Russian oil price war and last ditch containment efforts on behalf of governments in the form of more or less strict lockdowns. Supply chains began to collapse as the world’s producer of consumer goods (China) shut its doors and the world’s consumers (European Countries and the United States) shut theirs. What seemed to be a hit that would only bloody the noses of the travel and leisure industry turned out to be an all encompassing halting of the world economy. The previously mentioned alteration of the supply and demand of commodities dropped their prices and ultimately dragged exchange rates down with them; mainly hurting developing economies.
As of today, the beginning of April, the uncertainty is as high as ever as business have been forced to close doors (as a fundamental pillar of containment efforts), furlough heaps of workers and consumers hunker down and demand only the most essential goods and horde some of the fundamentals for the health industry. With a delay in the times of contagion between the different regions of the world, there is no clear or definitive forecast. As China was reopening factories and attempting to reactivate its economy, the infections were mounting in European countries. With the subsequent lockdowns put in place, the European economy went into hibernation and the demand for Chinese goods dropped, holding up China’s economic recovery.
As European countries and the United States seem to be entering the downside of the curve (the number of ICU patients have begun to level off in major cities), developing countries appear to be entering the curve. This translates to a negative first quarter due to the reduction in trade, foreign direct investment, remittances and tourism and a projected negative second quarter associated with an auto-induced remedy of a hibernating economy in efforts to decrease the pressure on a severely limited healthcare system.
The quick recovery that was previously expected is no longer a viable outcome, many experts have expressed their distress over the possibility of witnessing not a recession but a global depression; from which drastic intervention on behalf of the governments in the form of war-time economic policies is a real scenario. The first stage of the war-time economic policy measures have already been put in place to alleviate the economic burdens by some countries; but, most, if not all of the developing countries do not possess the fiscal elbow room to ramp up their public health services and stimulate vulnerable or important sectors.
The post-war policies could range in form from heavily subsidizing wages, supporting firms with loans and guarantees up to the establishment or expansion of large state holding companies. All of this to varying degrees related to the strength of the national economies and financial vulnerabilities.
Being that most of the developing countries in the western hemisphere are barely beginning to see a rise in the number of infections, but had already begun to feel the economic effects of reduced trade, travel and foreign investment, they will be taking one of the hardest hits because as the developed countries are in the recovery phase; they (developing countries) will still be in the midst of managing the brunt of the ordeal. Call it a one-two combo: a pre-contagion recession followed by a post crisis recession. A rough second quarter and a 2020 with negative growth will be the most likely scenario for developing countries.
Bringing it back down to a micro-economic scope, with this degree of uncertainty, no one knows what the next move should be; business owners are questioning whether to shut their doors permanently because of high overhead costs, which tend to make up between 20% - 50% of the cost of operating in most services industries. When a business is asked to hold out for one month, the decision is clear: temporary downsizing and lean measures; but ask a business to hold out for months (yes, plural) the real question is “How long do I have to hold out?” And unfortunately, with no definitive answers, the domino effect of an indefinitely halted economy has already begun.
The Outlook
What follows?
On a small business scale, this year will at best be a fight for survival as the bleeding liquidity and solvency issues that businesses normally deal with are now exasperated by the little to no cash flow. If you are a large business, firstly thanks for honoring us with your time, cash flow is not an issue as most large businesses have enough cash to ride out the roughest of storms; for most, this is not the case. Pivoting and readjusting financial models is a must for a prolonged period of limited income.
Most importantly as business owners, entrepreneurs, advisors and consultants; the key to navigating towards calmer waters is through quality information and an old sea-dog’s sixth sense.
References
IMF - COVID-19 Pandemic and Latin America and the Caribbean
IMF - Economic Policies for the COVID-19 War
IMF - An Early View of the Economic Impact of the Pandemic in 5 Charts
Financial Times - Coronavirus Latest
Financial Times - Dividend Debate Divides Banking
Economipedia- Por Qué Es Importante la Economía en Esta Crisis
Business Casual - Special Episode Downtown Josh BRown on How Coronavirus Moves Markets
