Post-Covid Economic Realities
The economy is like glass.
The economy is like glass.
Once broken, will never be the same again.
The following are three paradigm shifts to the global economy that would outlive even the discovery of a Covid-19 vaccine.
1. Reduced trade
The post Covid economy is likely to see weakening trade
Already before the outbreak of the virus, global trade was facing strong headwinds. The US-China trade war had caused not only immediate delinking of many nodes within the web of US-China trade ties, but also lasting fear across states of being overly connected to other countries and hence vulnerable to trade wars. The World Trade Organisation’s forecast for trade growth in 2019 was at a historic low of 1.2%.
Then came the coronavirus.
An abrupt supply chain shock rippled from China across the world as factory closures and city-wide lockdowns ground large swaths of economic activity to a halt. Corporations that had traditionally relied on Chinese suppliers and markets started devising plans to relocate business activities locally in a bid to mitigate the vulnerabilities and caprice of global trading networks.
The subsequent national export restrictions on personal protection equipment from more than 80 countries worldwide also awoke governments to the reality that economic arrangements are scarcely reliable when national interests are at stake. Many are now seriously considering domestic production of strategic goods -food, medical equipment, and the like- as opposed to relying on imports.
Of course, new trade flows will open up, rushing from burgeoning industries in the post-Covid economies. The biochemical and online commerce industries are two of them.
Yet the overall impact of these developments cannot be fully cushioned by a couple of industries. The changes in business and national strategy precipitated by Covid-19 will likely cause a net fall in trade; and a lasting one.
Looking through an economic lens, this reduction in trade, though possibly allowing for greater individual business resilience, would likely mean a fall in global efficiency and consequently a drag on global growth.
Furthermore, the delinking of national economies is likely to forebode greater international conflict. A reduction of trade and hence mutual dependency reduces the cost of tension with neighbours. This then lowers the threshold for conflict between neighbours. An example of this is the inverse where years of economic integration in Europe, amongst other factors, have contributed to an unprecedented era of peace between European states. Hence a world with less trade is likely to also be a more dangerous world.
2. Greater digitalisation
Not all is doom and gloom. COVID-19 will likely accelerate the inexorable growth of digital services’ position in modern economies.
In response to radical constraints foisted on the world by the novel coronavirus, consumer habits have adjusted and business models have adapted. Digital payments have emerged as the answer to physical cash’ potential to act as a medium for the virus. Virtual meetings are now in vogue as friends are banned from meeting one another. Online streaming services have taken centre stage as theatres shut down.
While the changes in lifestyle during the pandemic are temporary, its impacts will likely be lasting. The period of lockdown is likely to bring about greater consumer familiarity(and consequently, comfort) with digital services on one hand and increased investment in technological infrastructure on the other. Needless to say, these will be changes that no vaccine would take away. This is significant because it would lay the groundwork for sustained digitalisation of the economy for the foreseeable future. Of course, whilst economies that are heavily digitalised are more susceptible to cyberattacks they ultimately allow for greater efficiency and flexibility in the economy, and thus it can be argued that Covid-19 has, in some senses, a silver lining.
3. Corporate consolidation
Assuming a limited increase in anti-trust regulation, global giants will likely see their market shares increase in the short to medium term.
Existing champions have financial cushioning that smaller rivals can only envy. According to FactSet, Microsoft, Apple, and Berkshire Hathaway each had more than $100billion of cash on hand. The balance sheet that large corporations tend to have mean that they are more likely to weather through recessions than smaller companies. When these smaller companies perish in downturns, the larger corporations face fewer rivals and consequently possess a greater market share.
Even if smaller rivals do make it through a recession, their embattled positions open them up to acquisition by larger rivals as we have seen in 2009 where giants like Sanofi started buying out their rivals after the Global Financial Crisis. This again increases their market dominance.
Naturally then, market concentration becomes the default direction of an economy undergoing a recession. Worryingly, the spectre of oligopolistic markets with the ability to impose exploitative prices looms large
In sum
In sum, the post-Covid economy is one structurally inclined towards lesser global trade, more digitalisation, and greater market concentration. An economy broken by Covid-19 can never be restored to its original state again.
