Pandenomics: Looking to a post-pandemic world
Herman Singh unpacks the ways in which the world will be different after the pandemic.
The pandemic black swan is bringing forth a great transformation permanently in the world. Whether it’s the great recession or the great lockdown, it's clear that the decline in global economic activity will be severe and that recovery will take many years.
For many industries, this has truly been an existential crisis from which recovery is impossible or, at best, a decade. The estimates for GDP decline for 2020 are hovering at around six percent for the developed world while China will only grow at 1.3 percent, their slowest rate of growth since 1975. The term “Pandonomics” captures the trends that we are seeing.
A perfect storm
This virus is very contagious, easily transmitted asymptomatically for two weeks via both surface and airborne vectors, and has attacked the elderly disproportionately. There will be no vaccine for 18 months or longer, and we are still not sure whether one gains immunity post infection meaning that this virus could be with us for decades!
The virus was enabled by the globalisation of the world economy and large numbers of international travelers. To limit spread, world leaders closed borders, cancelled flights, enforced separation of more than two metres and stated that no public gatherings were allowed. With the exception of essential services, all industries and transport services had to shut down to avoid overloading hospitals by killing their staff and occupying all their ICU beds.
My key insights
A few observations were obvious from very early in this crisis.
- Connectivity is now a critical utility. If this had struck 15 years ago you would have had your Nokia/Blackberry with almost no internet functionality, desktop dial-up internet and none of the streaming or social media services of today.
- From globalisation to localisation: The fact that most countries started running short of key manufactured items as soon as China shut down identified a single point of failure. The future will see a move from globalisation to localisation with nations becoming self-sustaining in many key sectors.
- South Africa leads: South Africa has had one of the best responses in the world. We are world class when we listen to our great minds. Who knew?
- Essential staff rock: Sports, movie and fashion stars are worthless in a crisis and our true saviors are medical and essential service workers. There will be a major reset in the pay and care for these essential services in the future.
- Cash is king: The world is now asset rich but cash poor. We own houses but don’t have jobs. We own cars but lost our pensions. Salaries and savings dropped while debt expanded. A buyers’ market has emerged where cash is king.
- Exposing society’s fault lines: Millennials have now had to deal with both the credit crisis and the pandemic in their lives. African Americans have had life expectancies up to 16 years less than predominantly white communities and are three times more likely to die from this infection. Self-isolation is much easier in a suburban home than an informal settlement.
- The handshake is dead. We now truly appreciate the value of human contact and digital will never replace that. Nothing has been more heartbreaking than having a door or a window between my kids and their grandparents.
The obvious downsides
The virus has been like a bullet hitting industries standing in a row. Many corporates are the walking dead and the business graveyard is as busy as that for human victims.
- Corporate zombies: Travel, entertainment and the sharing economy have seen catastrophic collapses. Up to 96 percent of all planes are idle and similar drops are being seen in hotels, taxi’s, Uber, Airbnb and the cruise ship industry is facing an existential crisis
- Intense debt restructuring: The firms that collapse will do so because they have run out of cash yet have assets on their books. This will lead to an explosion of debt refinancing or mergers and acquisitions activity resulting in more consolidation.
- A double whammy: This virus has damaged both supply and demand simultaneously. People with no income cannot buy anything. No use marketing what people cannot afford or mining for materials for factories to produce products that will just sit in warehouses.
- The neutron bomb: Firms are conserving cash and retrenching staff leading to the hollowing out of businesses. The advent of digital makes this worse. It is like a neutron bomb where the humans have left but the assets remain.
- Value is virtuous: Consumers are shifting to better value, forcing firms to take products down market but also create no-frill basic products. This will introduce deflationary forces in many industries that few firms have experience in.
- Empty is plenty: Load factors in public facilities will need to be reduced leaving empty middle seats on planes and cinemas. Restaurants will need to reduce the number of clients served and the associated ambiance. This fundamentally alters unit economics and capital efficiencies.
The invisible upsides
Major wars have driven gigantic leaps in human society. They have forced us to change our lives in powerful ways. Women’s economic emancipation post the second world war was due to factory labour shortages. Hygiene in hospitals was extrapolated after the great plagues, saving millions. There are a number of positives emerging from this pandemic
- WFH is not WTF: Work from home was resisted by firms for decades but has now become compulsory. Fears of loss of control or drops in efficiency evaporated. This is a massive saving for the employer and employees in terms of travel and office space.
- Digital is magical: The users of Zoom went up from 10 million to 200 million in a week. The virus has catalysed the adoption of digital technology in corporates and consumers.
- An investor’s dream: The stratospheric valuations of many technology firms produced trillion-dollar market capitalisations. Company valuations are more realistic now and an ideal time to consider investing.
- Not all digital firms were born equal: Communication firms and media, gaming, video and music streaming firms are thriving but sharing firms and trip apps like Booking.com or Trip Advisor are in freefall.
- Mother Earth approves: The reduction in transport has resulted in an amazing and unprecedented environmental cleanup. From air pollution to garbage disposal we are seeing a cleaner planet and return by wildlife to their environments recently vacated by humans.
- Disappearing with a puff: The end of the cigarette industry looms now that we have seen the tremendous risks and impact on scarce healthcare resources in a pandemic world.
- Peak oil: The reduction in travel has reduced oil demand by 30 percent resulted in similar capacity and price cuts causing the lowest industry revenues in decades, and a negative crude oil price. This is taking out high-cost capacity from shale producers and lowered the sustainable prices for a decade to come. Welcome to the world of renewables.
- Value uber alles: We shift to value as we move to more digital, asset lite, disintermediated and basic offerings with greater cost transparency. Less money paid to stars, reducing the cost of movies and sports, spent on advertising and physical expensive stores will mean more value for consumers. A real boon in an era of fewer jobs and lower salaries.
- Caterpillars become butterflies: We all entered lockdown as caterpillars into a cocoon. We worked on skills or a new side hustle We transformed ourselves into butterflies emerging as new improved versions of ourselves.
The world before pandemic (BP) will be quite different to the world after pandemic (AP). Life will be tougher for almost everyone. It heralds a return to a simpler time where we appreciate the basics more and consume less while valuing more of what we have. Relationships, physical contact, nature and time outside will be more valuable than the latest car or watching overpaid sports stars.