Covid-19 Global Impact: Key Economic Trends

We are currently experiencing the biggest enforced ‘non-movement’ of people in history. A week ago, when India ordered its 1.3 billion people to stay at home, it brought the global tally of people under lockdown to around 2.6. billion: around two thirds of the world’s population. As Business Insider pointed out recently, that’s more than the total amount of people who were alive to witness World War II.

In terms of economic activity, customer behaviour and supply chains, here’s a closer look at how the shockwaves of coronavirus are being felt - and at how businesses are responding.

Global output: headline predictions

Notable recent forecasts include the following:

The Economist Intelligence Unit (26 March 2020). The EIU estimates that the global economy will contract by 2.2% in 2020, compared to a pre-outbreak assessment of 2.3% growth. On a country by country basis, this includes annual predictions of 1% growth for China, -2.8% for US, -5% for UK and France and -6.8% for Germany.

S&P Global (24 March 2020). According to the ratings agency’s most recent assessment, annualised contraction of the US economy for Q2 is expected to be at least 12%. Europe’s decline is expected to be similar, albeit with a larger decline in the first quarter than in the second, because of the timing of when the pandemic hit. For China, S&P estimates that the economy contracted by 13% (annualised) in the first quarter, but is expected to grow again in the second quarter.

Morgan Stanley (25 March 2020). Similar to the EIU’s assessment, Morgan Stanley’s Chief Global Economist, Chetan Ahya, predicts that the euro area and the UK’s economy will contract by 5% and 5.1% respectively in 2020. This is, however, expected to be a relatively short, sharp shock, with the bulk of economic pain being concentrated in the first half of 2020. Assuming a pandemic peak in April/May, euro area and UK growth is expected to rebound 5.5% and 5.6% respectively in 2021.

Buyer behaviour

According to Nielson, in the week ending 14 March 2020, sales of groceries and household essentials increased by appproximately 22% or £467m compared to the same week in 2019. Individual product lines seeing the biggest growth spikes included medicines, UHT milk, pasta, canned goods, household cleaners and toilet tissue.

The predictions are that retail will see a significant hit this year, with consumers focusing intently on the essentials, while severely cutting back on discretionary purchases. A forecast from GlobalData suggests that the UK clothing and footwear market will decline by 20.6% (£11.1bn). By contrast, the UK food and grocery market is expected to grow by 7.1% - up £6.8bn on pre-outbreak forecasts.

Reports from regions that were hit early by the outbreak shows how coronavirus is shaping shopping habits. Ipsos Mori research shows that half of Chinese and 31% of Italian consumers are shopping online ‘more frequently’ to purchase goods they would otherwise buy in-store.

Supply chains

The biggest shock to global supply chains came in late January when Chinese facilities came to a standstill. High profile examples of companies impacted by the blow to production included Apple, which saw iPhone shipments reduced by as much as 10% in Q1.

It is normal practice for global companies to have contingency plans in place, so that if a particular location goes offline, production can be swiftly ramped up elsewhere. However, because this is a global phenomenon, it becomes very hard to identify those regions that are likely to be least affected.

China’s production levels are expected to improve over the coming weeks. That said, the return to normality is expected to be gradual, not least because there is no blueprint for how to take the breaks off production without risking a dangerously high second wave of infection.

The business response: has forecasting changed forever?

Right now, with analysts reassessing their predictions on an almost daily basis, the idea of long or medium-term forecasting seems almost old-fashioned.

Key areas of uncertainty include the following:

HR impact. Responsible employers will have already taken steps to protect and reassure employees, enabling remote working where possible, operating best practice relating to distancing. But with instances of infection continuing to rise, restrictions on organisational capacity may be inevitable. Firms will need the ability to move quickly to redeploy roles, fill talent gaps - and reset customer expectations as required.

Lockdown procedures. Save for the specific categories of leisure and retail businesses that have been ordered to close, the current UK guidelines allow businesses to continue to operate. At this stage, companies cannot discount further restrictions being put into place (e.g. relating to production and distribution of non-essential items).

Exit strategy. At this stage, uncertainty abounds over the timescale for lifting the current lockdown procedures. Removal of restrictions will presumably be a staged process. Furthermore, the emergence of second - and possibly third waves of infection cannot be discounted.

Right now, with analysts reassessing their predictions on an almost daily basis, the idea of a static, long or medium-term economic forecast seems almost old-fashioned.

Forecasting is an ongoing process: one that inevitably has to reflect the reality on the ground. And this is as relevant to individual businesses as it is to economic commentators.

In areas such as salary budgeting, inventory management and cash flow analysis, many businesses already use modelling to aid in the creation of short, medium and long-term forecasts.

But just how agile are those modelling processes? The situation on the ground can change rapidly from day to day. It means that for your budgets and forecasts to remain of value, you need the ability to alter the inputs and see the results in real time - something that’s hard to do if you are grappling with legacy planning technology. To enquire about updating your own forecasting capabilities, speak to Millennium Consulting today.