After the World Health Organization declared COVID-19 a pandemic on March 11, 2020, its impact on the world and business continues to grow. The coronavirus outbreak has already caused a serious disruption to the world’s health systems, business and economic growth, employment, and supply chains.
With 48 countries on the lockdown as of April 23, 2020, some businesses have managed to adapt to the digital environment and use contingency plans. Others, like small businesses, are suffering losses and some have, unfortunately, closed down completely.
The coronavirus effects on the economy are hard to estimate as the virus continues to progress. Many experts are comparing the COVID-19 outbreak with SARS, an epidemic virus that affects the human respiratory system, and infected more than 8000 people in 2003.
A look at the consequences of SARS:
The symptoms of coronavirus may seem similar to SARS, as they are from the same family of viruses. However, the diseases they cause are different, with SARS being much less infectious than COVID-19.
Nonetheless, economists and analysts are often comparing the two viruses to estimate the potential financial stress and economic impact of the latest coronavirus outbreak. In China during 2003, the SARS outbreak reduced the real GDP but 1.05%, while in other countries the impact varied from 0.5% (Singapore) to 0.07% (US and Japan).
Along with the decline in real GDP, SARS brought China a slowdown in retail growth (-3.7%), and industrial output (-6.3%), while the export rates of goods remained steady, according to CNBC.com.
Unlike the coronavirus outbreak, SARS was brought under control within a few months, which helped significantly reduce global financial stress. Considering the measures taken and relatively low losses of each country’s GDP when viewed individually, the global economic loss in an absolute dollar amount was close to $US 40 billion.
The economic impact of COVID-19 will highly depend on the spread of the virus worldwide.
The International Monetary Fund confirmed that the world has entered a recession “as bad or worse than in 2009”. The emphasis now is on containment of the virus and prevention of liquidity problems, to make the 2020 recession as short and shallow as possible.
Along with the current recession and the global health system crisis, the long-lasting economic impact can be worsened by a wave of bankruptcies and layoffs. IMF is working on mobilizing a one trillion dollars lending capacity for lower-income countries to fight the crisis.
Although the severity of the recession is not yet clear, the current economic forecast is that on the low-end, the financial needs of emerging markets will be 2.5 trillion dollars, with part of it covered by domestic resources.
The Organization for Economic Cooperation and Development (OECD) predicts a 2% decrease in annual GDP growth for each month of the lockdown. According to OECD, the 2020 recession is inevitable, although a coordinated response by the governments to maintain the private sector and citizens’ welfare will help to absorb the economic shock.
The measures proposed by the OECD include keeping businesses afloat through special support packages, supporting employed and unemployed individuals, and mobilizing all macro-economic levers.
The level of severity of the financial crisis will vary per country by the mix of leading industries. Countries, where tourism is an important part of the economy, will be affected more because of the travel limitations. On the other side, countries with prevailing agricultural and mining sectors may experience small initial economic impact.
Disruption to supply chain
In 2020, China contributes 18.69% of world GDP, with a significant part of the growth coming from foreign investment. Due to the US-China trade war, companies have started to diversify their supply chains out of China, and the trend is about to accelerate.
While China is gradually lifting the lockdown and opening factories, experts predict it will take the country months or even quarters to catch up on its lost output. Businesses are now left with the difficult choices of broadening their supply chains and doing more local sourcing.
The effect of coronavirus on supply chains is qualified as a major disruption. The shortages of supplies may bring the prices up for consumers, lowering their buying power in the long term. At the same time, constrained supplies could cause declines in demand and weaken prices.
The situation puts pressure on the concept of globalization, which has already been questioned by tariffs and trade wars, and Brexit. Experts predict a high chance of supply chains to recover quickly, as many companies have invested in business continuity plans to minimize the supply chain shocks.
To protect future supply chains and improve risk management, companies should focus not only on planning a stable supply network protected from trade disruptions. Business growth and profitability will also depend on financial flexibility to varying costs, reliability of logistics and transportation, and the possibility to substitute components in case of unavailability.
Organizations should now incorporate scenario planning for supply chain management to minimize future risks and assess the profitability of operations.
The vast majority of industries are taking a serious hit worldwide due to the pandemic effects, including lockdowns, layoffs, and other business disruptions. Based on our clients’ experiences and updates from different industries, here is how the coronavirus outbreak is impacting industries worldwide.
The lockdown in China has led to the fall of commodity prices and supply disruption. As the sector is highly dependent on commodity prices, it is expected to be one of the hardest-hit sectors.
Multiple countries are seeing a decline in oil prices and negative effects on the mining sector. The demand for fuel has dropped due to the decline in traveling, consequently lowering oil prices and decreasing oil drilling. The lockdown in Asia has also disrupted coal exports from New Zealand and is expected to disrupt the demand in other countries as well.
The global uncertainty has created a higher demand for gold mining (and other precious metals) as a secure asset with fast price recovery.
According to the International Energy Agency, around 70% of the global supply of solar panels are manufactured in China, which in the current situation leads to a solar supply chain disruption.
Reduced demand for thermal coal from China is expected to lower the electricity service price, reducing the demand for electricity generators. Currently, low oil demand from China is expected to cause a decline in wholesale electricity and gas prices.
Although the demand by utilities for production and workspaces is much lower now, private demand for electricity and other utilities balanced the curve, considering the number of employees currently working from home.
Pharmaceuticals are among the industries highly affected by the coronavirus outbreak since a big part of active ingredients are manufactured in China, accounting for 20% of total global API output.
The overwhelming number of patients admitted to hospitals due to the coronavirus outbreak has forced many countries to call their retired medical professionals to assist in the frontlines of hospitals. Operations and other medical treatments have been postponed because of COVID-19. Hospitals are worried about the stagnating revenue stream from medical services while having to expand the capacities for coronavirus patients.
Healthcare manufacturers, on the contrary, are experiencing a higher demand for medical equipment and drugs to fight the virus.
Due to globalization, manufacturing is generally more vulnerable to global slowdowns in production processes. Many manufacturing operators rely on either factories or supplies from China. To secure future business operations, manufacturers are looking at countries such as Vietnam, Bangladesh, and Turkey as potential suppliers.
Medical equipment and supplies manufacturers are experiencing a high demand from medical care providers. Many non-medical equipment and supplies manufacturers are repurposing their facilities to assist in the production of masks, ventilators, sanitizers, and other necessary supplies.
Automotive suppliers started to reduce production as the demand for automotive manufacturing falls. Some automotive suppliers and manufacturers are cutting employee working hours to stay afloat.
Many clothing manufacturing companies are experiencing lowering demand, and thus are switching to producing protective gear for medical workers.
As the industry relied heavily on productions in China, wholesales may need to now source goods from the countries with higher production costs.
Consumer goods wholesale is suffering from the worldwide shutdowns of nonessential activities. Although, grocery wholesaling demand is rising due to the global need for essential food items.
Automotive wholesalers are now experiencing difficulties as well. Jaguar Land Rover suffered an 85% drop in sales in China last month, partly because of most dealerships being shutdown. With employees returning back to work, the brand expects a rather slower increase in profitability.
Food and beverages, as well as health and personal care retail, is expected to see a continuous increase in sales. For some food retailers, restrictions on transportation and logistics would mean export losses, but some manage to shift the focus to local markets.
A big part of electronics products is manufactured in China, which has now become inaccessible because of the supply chain disruption. Although retail prices are likely to remain the same, competitors now have a chance to gain a bigger market share.
482 million jobs have been lost in the retail industry, as all nonessential stores are not working – most smaller businesses have been forced to let their employees go.
Governments are giving spending packages to small retail businesses, to prevent them from exiting the market.
The global slowdown in international trade has the potential to reduce demand for logistics services and freight transport. Although the industry is considered essential and expected to face minimal disruptions and a lower loss in revenue.
Public transportation, like airlines, trains, and buses, are working on reduced schedules, with a big decline in passengers due to the lockdowns and cancellations of events. Many public transportation agencies are seeking government assistance to continue operating and coping with losses and return claims.
According to Lufthansa, it will take years for the airline industry to return to its pre-pandemic passenger numbers. The company has cut 95% of its flights and is predicting the demand for air travel to remain lower than the pre-pandemic in the coming years.
The International Air Transport Association (IATA) analyzed the financial impact of the coronavirus outbreak as a loss in revenue between $63 billion and $113 billion for passenger travel.
As passenger flights are getting canceled, cargo airlines face capacity shortages leading to an increase in prices for air freight.
Financial institutions face the challenge of maintaining their daily operations while providing support to customers and suspending mortgage and loan payments. In the securities sector, safe investment opportunities become the primary focus of investors, decreasing future opportunities for start-ups.
Banks expect fewer transactions in the future due to the recession, and thus less revenue from fees. Although, the need and desire for digital banking services are rising, which will lead the way for fintech companies to create better digital banking solutions.
The stock market crash occurred on February 28, 2020, and was considered the worst one since the 2008 recession. U.S. stocks lost nearly 12%, and $3.5 trillion was erased for U.S.-listed stocks, while European stocks shed $1.5 trillion.
Many Tech giants are affected differently depending on the sector and supply chain dependency on China.
Apple was predicting a revenue stream between $63.0 billion and $67.0 billion for the second fiscal quarter of 2020. Later the company issued an update stating the expected revenue will likely not be met due to Covid-19. China is Apple’s manufacturing partner, and thus the product supply will be constrained until the factories in China are functional again.
Major tech conferences like Google I/O, Facebook F8, and the likes have been canceled due to the virus outbreak. On the other side of the situation are Slack and Zoom, which are seeing increased app downloads. Various videoconferencing apps were downloaded 62 million times in one week in March.
Entertainment products manufacturers like Nintendo and PlayStation are getting hit by the virus outbreak, having the manufacturing facilities in China and are currently experiencing shortages of products.
On the contrary, entertainment service providers like Netflix, HBO, and others are experiencing a higher demand for their services worldwide.
The tourism and hospitality sector took the biggest hit from the coronavirus outbreak, being the first and most affected industries, which cannot yet resume daily operations. Travel restrictions worldwide have caused the passenger airline industry losses of around $252 billion globally.
Due to social distancing and lockdowns cafés, bars, and restaurants cannot operate business as usual, with many switching to delivery services to stay afloat. Even with increased sanitary requirements, businesses are losing customers, as people now tend to cook at home to avoid any contact with others.
Hospitality and foodservice businesses are relying heavily on government help to survive, with experts predicting many smaller businesses to close permanently. For those continuing operations, it is important to build customer trust, applying strict sanitary measures, and protecting both employees and customers.
Currently, many hoteliers compare the crisis to the 9-11 attacks, as the business has not been this severely effected before or since. April tends to be one of the busiest months in the European hospitality industry due to Easter celebrations, and a large amount of projected revenue was not delivered.
Hotels expect an increased demand in the second half of the year, in case the pandemic passes around the summer. Many travelers will have the same purchasing power as before and are expected to spend more on future travels.
Future demand will play a major role in the pandemic economic recovery. As consumption is being turned down right now by the lockdowns, experts predict a bigger than before rise in demand for HoReCa, Transportation, and Retail. This expected demand although will also depend on consumers’ buying power. The longer the pandemic continues the larger the financial stress will be placed on both economies and buyers.
Harvard Business Review discussed the three potential paths to recovery from the recession, summarizing it in 3 scenarios:
Lasting economic consequences
As the economic effects of the pandemic will clearly last beyond the lockdown periods and social distancing practices, the final outcome depends on the number of employed people and businesses on the verge of closure. The OECD predicted global economic growth to drop to 2.4% in 2020 as a whole, from an already weak 2.9% in 2019, with growth possibly even being negative in the first quarter of 2020.
Individual consumption will decrease due to the decrease in buying power and long-term global uncertainty. The decrease will lower the demand for goods and services, which will decrease the speed for economic recovery from the recession. Even with the market recovering, consumers are expected to spend less, trying to secure future wealth.
The supply chain disruption caused by the pandemic has made businesses rethink the location of their manufacturing and production sites. Besides the current inability of businesses to obtain necessary components for business continuity, the changes in the supply chain will likely lead to layoffs and drops in export.
Legacy of the pandemic
The SARS outbreak brought the rise of e-commerce to China. The coronavirus outbreak has increased the popularity of online shopping. Not only that but with schools and universities closed, educational systems are seeing a breakthrough in e-learning.
Webinars and online summits have become the new normal for students, professionals, and business owners. While face-to-face networking may have decreased, many more professionals have gained the opportunity to voice their ideas in a more accessible way.
The virus has put to test many countries’ political systems and their ability to protect citizens. Governments are being forced to cooperate and help businesses and people overcome the mental and financial stress related to the lockdowns.
Many employees, who were lucky enough to save their jobs, have had to adapt to remote working. This situation has led to management teams realizing that employees aren’t required to be in the office to be productive and deliver results.
In a report by Financial Review, about 36% of employees reported increased productivity and more time to work due to the lack of a daily commute. Team members’ time has become more valuable, resulting in more efficient, shorter meetings. 70% of surveyed employees believed their productivity at home was the same or higher than in the office.
Revisit business continuity plans
Whether organizations have had a business continuity plan or not, it is a great time to revisit and improve upon it, and then link it back to the general business strategy. The outcome of this pandemic will certainly be unique but teaches organizations timely lessons regarding remote work for employees, strategic flexibility, and decentralized supply chain organization.
According to PwC, many CEOs have been through crises and expect to experience at least one more in the near future. The biggest issue faced by management teams is ensuring accurate and timely data collection. With a solid data flow, managers can receive accurate forecasts and possible scenarios for the near future and are able to act timely and effectively.
Sustainable data flow throughout the company allows for better control of data insights and process improvement. This case study explains how simple and automatic reporting can help organizations gain clearer and more actionable data insights.
Evaluate supply chains
Assessing the vulnerabilities of the supply chain now will help to build a more sustainable and decentralized approach for the future. Determining essential components for business helps working out a backup plan, especially when a supplier is not available. Analyzing supply chain data will help businesses assess long-term financial stress and improve supply chain visibility.
In a similar exercise, we have helped a global mining technology company identify the relationship between commodity market prices and their sales volumes in the aftermarket and act on market changes proactively. We developed a forecast to predict the likely outcomes of sales using commodity prices as an external factor while taking the internal pattern of the sales into account. The supply chain analysis can predict the supply-side impact of sales by factoring in global macroeconomic indicators and economic forecasts.
Identify potential point of strategy failure
The lockdowns have altered the effectiveness of various business strategies, including marketing and sales efforts. A big part of the population has moved online, adapting to a new way of shopping, education, and business communication. Companies need to act fast to adjust their marketing mix in the aftermath of the crisis.
We have seen results like increased conversion rates, improved marketing ROI, and bigger sales traffic from our clients for whom we built a data-driven marketing framework. Connecting all marketing and sales activities in one network enables close ROI monitoring of campaigns and provides insights on campaign performance.
Communication and trust
The coronavirus outbreak is an uncertain time for everyone, and businesses and individuals tend to seek support from business partners to secure the immediate future. Clear communication both inside and outside the company helps build trust and long-term relationships with external stakeholders. According to Edelman Trust Barometer, trust is important to employees, consumers, and investors, and businesses are trusted more than the government.
Scenario analysis and planning helps determine how well-prepared the business is to cope with possible disruptions. In the Covid-19 situation, scenario planning may be used to determine future supply chain disruptions related to lower demand, lockdowns and social distancing, logistics, and others. Financial capabilities and profitability and risk assessment are also assessed through scenario planning.
We helped a global medical device manufacturer predict the most profitable approach to leasing their technology to partners and competitors. Our client reported a 1.3% increase in revenue of patented products and a general ability to stay ahead of the market.
Looking past the crisis
During the long and complicated crisis recovery process, it is important to look beyond the current situation. Data security is one of the aspects companies should look out for, especially with the enhancement of digital communication during social distancing measures.
Previous crises showed the world that there is recovery after every recession, and this one will likely have a steady and sustainable economic recovery. Being prepared to face complications will ease the recovery process and ensure business growth.