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Proman Consulting | On The Wave of Change II: COVID-19: Global Impact on Economy and Business

On The Wave of Change II: COVID-19: Global Impact on Economy and Business

Our society  met the COVID-19 virus in December 2019. It all began in China, then spread out across Europe, and shortly afterward the US and almost all other countries in the world, more than 175. The World Health Organization declared a pandemic. Until today, over 2,000,000 people infected with coronavirus and over 130,000 have died.

At the beginning of the pandemic, most countries have taken tough measures, while a smaller number of countries are looking at the measures more liberally and, with health recommendations, are trying to pay attention to the economy as well. Measures taken by states such as border closures, a complete ban on movement, social distancing and staying at home have caused a significant slowdown in the economy, newly unemployed people and many other changes in the markets.

The implications of the pandemic will be lasting and many will remain and become a new constant. The impact will be felt in many areas of our lives - health, social, economic, political etc.

Let’s overview the impact on the economy by the end of this text, mid-April 2020.

 

More and more unemployed

“We are trying to factor in the temporary massive shock into our estimate modeling. The magnitude of fluctuation is much bigger than expected,” said Sangheon Lee, director of the International Labour Organization employment policy department, and added “We need to make downward adjustment, the projection will be much bigger, far higher than the 25 million we estimated.”

In the US until now, just under 7 million people have lost their jobs so far due to the pandemic, and the predictions of economist Miguel Faria-e-Castro have reached 47 million new unemployed. In comparison, some 22 million jobs were lost during the 2008/9 crisis.

According to Hong Kong SCMP, out of 460,000 closed SMEs in China earlier this year, half of them have been in business less than three years, making the SMEs the most vulnerable to this type of economic crisis.

 

Affected industries

The airline industry has completely stopped. International airports are closed, and “birds” are grounded. The stock market is forecast to decline by 44%, which will affect the workforce in the industry, as well as the quality of some future service. Also, what is still uncertain is the future of the virus on our planet. This will have a huge impact on this industry. One theory says that people will travel much more after this crisis because they have been unable for months, while another theory says that the decline in the total use of these services will be up to 40%, which is somewhere around 3.5 billion passengers and that losses could up to $ 90 billion by the end of this year.

 

Loss of revenue in air traffic

International Air Transport Association 

 

Tourism and hospitality are also under the brunt of it. Hotels, private accommodations, travel agencies, carriers, travel destinations, and everyone involved and in contact with this industry are currently the hardest affected and their business has completely stopped. For this reason, the local communities and the states, for which tourism is the main source of income, will suffer the greatest impact. Their fate will depend on the future behavior of the virus as well as the global response. The toughest predictions are that 75 million jobs will be lost in this industry alone.

 

2020 forecast - international tourist arrivals, worldwide (in millions)

The World Tourism Organization

 

2020 forecast - international tourist arrivals, world (% change)

The World Tourism Organization

 

Many analysts claim that the impact of coronaviruses and previous wars in oil and gas pricing policies will pretty much change that industry. In a joint statement, the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) say developing countries could also lose 85% of their oil and gas revenues.

Micro businesses and entrepreneurs are also extremely affected: caterers, hairdressers, beauticians, therapists, tailors, shoemakers, mall stores, fruit and vegetable vendors, and more. All listed are also the most vulnerable group. Many businesses have completely stopped, it is impossible to transform their services, and they also depend on the purchasing power of their environment. They have a drastically lower recovery capacity than large corporations. The advantage is that they do not need to pump up massive money and they can also rely on their creativity when it comes to customization.

 

There are also projected losses in the automotive, insurance, and real estate sectors.

Growth in certain industries has been noted: medicine and pharmacy, e-commerce services and home delivery services.

 

The answer to the question What to do during the war with the COVID-19 virus? The answer is provided by the McKinsey consulting firm. Their answer lies in the call to act in five stages, starting from today's crisis to the next normal phenomenon that will emerge after a victory in the fight against coronaviruses: resolve, resilience, return, re-imagination and reform.

Resolve: Address the immediate challenges that COVID represents to the workforce, customers, technology, and business partners. Make difficult and immediate decisions. Integrate people into new systems of functioning, structures, and technologies, while paying attention to productivity, and motivation. Rebuild trust with clients and partners, think about their new, and real needs. Adjust priorities and new values. Achieve business goals with sustainable design technology.

Resilience: Address near-term cash-management challenges and broader resiliency issues during virus-related shutdowns and economic knock-on effects. Speed and discipline characterize all those companies that have not been hit by the last recession.

Return: Create detailed plan to return business to scale quickly as COVID-19 situation evolves and knock-on effects become clearer. So, once this immediate stroke is over and when we find out what the immunization procedure will be, then think about protecting your employees, how to reassure customers, re-supplying, and whether to go back to your old functionality or to revise it and what to change.

Re-imagination: reimagine the next normal: what a discontinuous shift looks like and implications for how institutions should reinvent. Certainly, resetting to a new normal will be difficult, and those who will be fast and disciplined will have the most chances.

Reform: Be clear about how regulatory and competitive environments in industry may shift. 

 

Covid-19 virus impact scenarios on the economy

We still stick with McKinsey's research. According to them, nine situations are grouped into two main scenarios: one more optimistic and the other more extreme.

 

The first group includes the A1-A4 curves that everyone is hoping for. In this scenario, the virus is under control, and catastrophic consequences for the economy are avoided. The situation will vary from country to country, but globally, the recovery will not take too long.

In the second group of scenarios, the worst case, are the B1-B5 curves. The possibility of a "black swan of black swans" cannot be excluded: structural damage to the economy caused by years of the spread of the virus until the vaccine is widely available, combined with the lack of policy responses to prevent widespread bankruptcy, unemployment, and the financial crisis. Complete long-term damage to the economy.

This scenario, as we have seen in this text, is predicted by many. The IMF predicts a recession worse than during the 2008 financial crisis, as well as global growth downward into negative territory.

 

Factors that will affect the overall future, both general and economic:

  • Whether and how successfully the vaccination will be administered;
  • New virus transmission and whether this virus will be seasonal;
  • Will we have to adhere to measures of physical distance from each other;
  • How health systems will function in the future;
  • Will we develop collective immunity;
  • How will states respond and what policies and decisions will be implemented by politicians;
  • What will be the market response?

 

Conclusion of the author

There is a big challenge ahead of us without knowing exactly what. We hope for short-term anguish, while on the other hand, it is very realistic that a major global crisis will follow.

It is very difficult to predict exactly what will happen and what the consequences will be. While researching to write this article, I came across quite different predictions, such as 22 to 75 million jobs lost. Some studies say that 70 million jobs will be lost only in the tourism sector, including all those from the smallest to the largest in the chain, and that figure includes those seasonal positions and jobs that are not currently active.

We have to design the changes that we will use. Some things will not depend on ourselves, but some will be solely and exclusively in our hands. First of all the decisions to be made. The decisions it will make over the next few months will have a long-term impact on both the macro and micro-economies and life in the world in general. Therefore, the decisions we need to make must be based on deep analysis, must be discussed, and must be projected. During the process of making the biggest decisions, we also have to make the smaller one. It is necessary to respond quickly, and at the same time to be disciplined.

During my communications with many consultants across Europe, I noted both concern and hope. I noticed that they are already deliberate, analyzing, designing. They are creating scenarios. They are looking for opportunities. They are preparing the reaction.

Reform

Leaders will have to revise costs. Reduction of expenses such as business trips, representation, use of non-priority services, cancellation of various subscriptions, postponement of certain payments if possible, temporary reduction of staffing arrangements: unpaid absence, suspension of benefits and bonuses, temporary suspension of the use of outsourced services. Also, outsourced services delegate to internal associates.

Use of economic measures and assistance of their countries, first of all, favorable loans for liquidity, but also all other possible solutions.

Also, generally speaking, this situation where we have to physically distance ourselves from our colleagues can definitely be used to reduce costs like office supplies, commuting, meals at work, cleaning services, etc.

As for the operational activities themselves, I believe that a large number of companies, SMEs will have to adapt in the coming period. Some industries will find it difficult to make major changes, but try to tailor your services to the needs of the market.

Shortly after the outbreak of the epidemic, many companies were already able to adapt their business to the situation, so, for example, those companies that used to produce certain products are now able to produce medical equipment such as masks, disinfectants, respirators, and other aids.

Try to look at what your capacity is and what industries might use your service or product.

Also, the Italian, French, Spanish and some other markets will be in longer recovery, and if you do business with them, consider special prices for those markets.

Many industries will reduce cash flow, but much of that money will still be in circulation, so try to "smell" new global financial flows.

American economist and Nobel laureate Milton Friedman said: 

"Only a crisis - actual or perceived - produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around."

I think that change management skills will be one of the key ones for us and that even stronger ones will survive on the market, the ones who will adapt to the future the fastest, depending on how long it will take.

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