What Will the Economy Look Like After COVID-19?

We’re in the midst of fighting Covid-19 in almost every country around the world.  Governments in all nations and at all levels are responding with shutdowns and restrictions. Small businesses and large international corporations are trying to pivot quickly. White collar jobs are now mainly work-from-home, restaurants are trying to pay the bills with delivery, and so on.  Governments are also addressing financial troubles with policies to help people and businesses get through the worst of the slump. We may not have the numbers yet, but we know what’s happening to the economy now, and it’s not good. The real question, though, is what will the economy look like after Covid-19? We know the economic retraction is deep. The wildcard is how long will be the duration. And how fast will it come back.

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For all my articles on this theme, go to Personal Finance during the Coronavirus Pandemic.

Lessons from China

An accurate economic forecast is hard to nail down, so we should look at what we already know.  China experienced the coronavirus outbreak before the rest of the world.  The Chinese government imposed strict policies of travel restrictions, quarantine and isolation in and around the regional epicentre of the outbreak. The lockdown came two days before the Chinese New Year, typically a high season for travel and festivities. This business and travel shut-down had significant economic effects in China:

• Investment in fixed assets (real estate, factory, equipment) was down about 25%
• Retail sales (goods and services) were down about 20%
• Exports to other countries were down about 16%
• Industrial production (manufacturing, mining, utilities) down about 13%
• Services production (financial services, information technology) down about 13%
• GDP growth forecast for 2020Q1 expected to be negative – the first for China since 1976
• Unemployment rose from 5.2% in December 2019 to 6.2% in February 2020

Source:  National Bureau of Statistics of China, as reported in https://www.visualcapitalist.com/covid-19-economic-impact/

Early Days of China’s Recovery

At this point, early April 2020, China has had very few new cases of Covid-19 in recent weeks.  Severe restrictions on daily life in the epicentre of the outbreak seems to have worked!  Now China is opening up again. Most of Hubei ended lockdowns on March 25th, with Wuhan scheduled to open up on April 8th. Here are some of the changes to their economy after Covid-19.

• Factories are starting to reopen and are operating again, though not at full capacity
• Retail stores are reopening
• Consumers are starting to return to malls and restaurants
• But domestic demand within China is not fully back yet.  Families with lost income over the past 2-3 months are naturally hesitant to spend on more than necessities.
• In addition, demand for Chinese goods from countries around the world has fallen dramatically, since many countries have mandated retail close up shop, and therefore cancelled orders for Chinese products.

Source: NY Times, OAG, Forbes, as reported in  https://www.visualcapitalist.com/covid-19-economic-impact/

However, there is a risk of unwinding restrictions too soon. There is growing concern over a second wave of coronavirus cases, both domestically as asymptomatic carriers start leaving their homes and from travellers arriving in China from abroad. In fact, Bloomberg reports on April 2nd that China has reinstated quarantines in Jia county after a flare-up.

What does China’s Experience tell us about the Rest of the World?

We know at this time that coronavirus is in 199 countries and territories.  The United Nations recognizes 251 countries and territories around the world.  It’s quite possible that some of those areas with no reported cases of the virus are either suppressing the actual number of cases, or not testing adequately.  It’s fairly safe to say that most of the world has been touched by Covid-19 at this point.

I think we can assume that every country with physical distancing measures, such as closed schools and work-at-home policies will have a similar experience as China in terms of economic indicators, although the magnitude will vary from place to place.  We should expect to see:

• Lower GDP
• Lower retail sales
• Lower investment in fixed assets
• Lower industrial production
• Lower services production
• Lower exports
• Higher unemployment

The extent of the economic damage depends on how quickly the virus is contained, and how much financial support governments are willing to make.

How will Shut-downs Affect the Workforce?

Immediate Impacts on Various Sectors

The restrictions governments have set in place in order to “flatten the curve” of coronavirus impacts sectors differently.  If you’re an office worker, you probably have had a fairly straightforward transition to working at home, and conducting meetings over Zoom or Webex or similar platforms.

If you work in tourism and travel, you have been greatly impacted.  No one is planning a vacation right now, and no business people are travelling to meet with clients or go to conferences.

Entertainment has also been severely impacted.  No one is going to movie theatres, and production companies have delayed new releases.  Films and TV shows have paused production.  Live theatre, concerts, comedy, and more have all be cancelled.

Health care will have impacts that vary widely even withing this sector.  Hospital spending for people directly affected by coronavirus will be high, of course.  But family doctors are doing phone consultations or rebooking appointments.  Dentists are only seeing dental emergencies.  Chiropractor offices are mainly closed.

Long-Term Impacts on the Workforce from Covid-19

Office workers have transitioned to working from home fairly quickly, by necessity.  With only a desk and chair, laptop, and internet connection, they can get the majority of their work completed remotely.  As a bonus, they don’t have the long commute downtown or the daily rush hour battle.

Many people will find they quite enjoy this new set up.  Maybe that means full-time working from home, or only going into the office for meetings.  This would impact the demand for office space.  If a company has 100 employees and 80% are working from home on any given day, they only need to keep 20 desks and cubicles instead of 100.

In addition, companies are making good use of online meetings.  Looking forward, we may see less business travel.  It’s much quicker and cheaper to meet with clients online rather than fly across the country.  Remote conferencing, such as Zoom, will likely be a growing industry.

This will require corporations and office managers to create a culture of trust and respect for their employees.  Evaluation will have to be based on completing expectations, rather than putting in 8 hours of time in the office.

Long-term, we could also see improvements to paid sick leave after coronavirus.  Or more demand for jobs in companies with good medical benefits.

The Role of Government

Here is the opportunity for benevolent governments and central banks to really shine.  We’re facing a massive reduction in goods and services sold. Those who can’t work from home face unemployment and substantial reductions in family income.

This is the chance for governments to financially support businesses, to keep employees on the payroll even if they’re not working, so businesses and families can pay their bills.

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Two Scenarios…

The Best Case

Let me give you an example.  Government gives a small business that is hard hit by the shut-downs $10,000.  That business owner turns around and pays its ten employees $800 each.  Each employee now pays their landlords $600 rent.  Each of the 10 landlords spends $400 shopping online for groceries and birthday gifts for a family member.  All of the online store owners now each spend $200 ordering delivery dinner from local restaurants.  That initial $10,000 government grant has been turned into an additional $20,000 in economic activity!  The business carries on, and rehires all their layoffs when they reopen in a few months.

All of these purchases generate sales taxes and income taxes that are ultimately collected by various levels of government, partially offsetting the original cost of the handout. The economy shrinks dramatically during the period of lock-downs, but expands just as quickly by the fall when everyone is fully back to school and work. A few industries are still hurting (not as many people are booking cruises after the Diamond Princess) but overall an economic crisis was averted.

The Worst Case

In contrast, without any government support, that small business cannot pay its employees.  On top of that, they can’t pay their invoices for the goods on their shelves.  They can’t pay the rent for their store location.  They can’t pay their utility bills.  Sure, they may be able to hobble through for the first month, but after that they just go further into debt.  By the time the threat of coronavirus ends, the company has closed its doors permanently.  Those layoffs now become permanent job losses.  The business owner declares personal bankruptcy and loses their home.  This has become the defining moment of their life – the divide between running their own business that they loved, to losing it all.

Those ten employees can’t pay the rent, utilities, or groceries. They buy necessities on credit card debt, that takes years to pay off and lowers their credit score.

The landlord, without any rent, has to cut back the hours of the building’s security guard and landscaper, and stop planned maintenance for the building. If this goes on too long, they may consider selling the building to a developer who will tear down the rental building.

The original 10 employees, plus the security guard and landscaper all apply for employment insurance and it takes 6 months to a year to find new jobs, a direct cost to the government. Without adequate government support, the economy after Covid-19 tanks, entering a deep and long-lasting recession, with large job losses.

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All levels of government have a role to play.  Not only in providing subsidies for those who are financially impacted, but also helping with delaying our payments.  Let us pay our income taxes and property taxes later.  Or defer our water bill a few extra months.  Everything that we don’t have to pay now, especially if there are no interest or penalty charges for deferment, helps us get through.  Governments can also step in to prevent stockpiling of necessities and price gouging.

We know this is temporary, we see China’s economy is already starting to ramp up work after less than 3 months after the start of Covid-19.  The role of benevolent government is to help us get through it.

What Will the Economy Look Like After Covid-19?

What’s Happening to the Economy Now

There is really no question that the economy is experiencing a dramatic slow-down. Government spending is up, of course, with all the support programs. But household and business consumption is down. Investments are down. Imports and exports will likely both be down, as they relate directly to the demand for goods and services. Exports add to a country’s GDP while imports subtract from it, so on net we’ll see whether this is a wash.

Consumer spending contributes about 70% of GDP in the U.S. and about 60% in Canada. Since we’re mostly staying home, I think it’s safe to say that this will be substantially lower in the March to June 2020 period. We’re buying lots of groceries – especially toilet paper! – but no one is spending on a vacation. Some of our spending is more or less fixed – rent or mortgage payments, household bills, insurance premiums. We’re not going to the malls – they’re shut down – but even online shopping has lost its lustre when delivery dates are a month out. We’re used to overnight Prime!

To a great extent, much of this is temporary.  If you were planning to buy a car this spring, maybe you put it off for now.  But as long as your income wasn’t affected by the shutdowns, you’ll still buy that car in 2020.  Similarly, if you had planned a trip to Disney over March Break, maybe you go over Thanksgiving instead.

But here’s the real key. Some of us are experiencing Covid-19 as a busy work-from-home period, with a great deal of adjustment but essentially no change in income. The other group is experiencing sudden and unplanned job losses, loss of income, days that drag on with nothing to do, and in the U.S. a loss of medical coverage at a time when they might become sick. It’s a time of incredible financial stress, despite forthcoming government support.

What Happens to the Economy after Covid-19 Dissipates

No one knows how long we’ll have to remain in quarantine, with most businesses shut down. The most recent news is potentially the end of June. Let’s say we start unwinding the lock-downs in July. I expect it will happen gradually. Perhaps by region, with cities showing no recent cases of Covid-19 lifting quarantines first. Perhaps by industry, with sectors that include some extent of physical distancing restarting before those with closer quarters. For example, retail stores may open before theatres, where you’re shoulder-to-shoulder with 2,000 strangers for 3 hours.

And when the day comes when governments give us the all-clear, what then? Some people may rush out. Others may feel more hesitant. Will you limit your mall shopping to early morning and a get-in-get-out policy? Even if businesses are open, they may not have the demand to bring back all their employees at 100% time right away. If fewer people are going to restaurants in July, they’ll only bring back part of their cooking and serving staff.

However, once all the kids are back in school next September, I believe we’ll finally feel that this has passed, and life will seem more normal. We’ll start to feel more comfortable in large groups of people, and resume our typical daily routines. In the fall, we may start thinking about planning a vacation, even though the thought of sitting in a plane right now makes us anxious.

Does that mean the economy is 100% back on track by September 1st? Not exactly. Let’s look at the current economic forecast by BMO. (Keep in mind they update their forecasts regularly, so this is as of April 2.)

Real GDP Growth (Q/Q% change)	2020Q1	2020Q2	2020Q3	2020Q4	2020 Annual
Canada	-6.5%	-25.0%	30.0%	4.1%	-3.0%
U.S.	-5.0%	-25.0%	30.0%	2.0%	-2.5%

We see the first 3 months of 2020 with a decline in economic growth. January and February were probably okay, but March was a disaster that brought down the whole quarter. This is followed by a deep contraction in real GDP growth for the April-June 2020 period. But they show a massive rebound in July-September, that continues to grow at the end of the year. This looks like a recession – defined as two consecutive quarters of negative growth – for the first half of 2020. It’s a short-lived recession. Overall, though, at the end of 2020 GDP is still below where it was at the end of 2019. This is reflected in the final column, with negative annual (Y/Y% change) real GDP growth.

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I always enjoy hearing your thought and opinions. Let me know in the comments – are you more optimistic or more pessimistic about the state of the economy after Covid-19?