- KPB & Co Research
Over the last 2 months, governments across much of the world have been slowly re-opening their economies. The fact is that these economies have seen material declines in death and infection rates across their populations as social distancing measures took effect. The ruling governments in these economies have also taken the extra step of setting timelines demarcating when the unprecedented level of support that they have provided to households will end, and when existing support for firms will be modified. On top of battling a global pandemic, each government has to ensure that it keeps its treasury financially stable and that its economy continues to provide gainful employment to everyone. In this regard, we have seen where governments are skillfully reducing the level of support provided to their economies while shifting the burden of economic sustenance back to companies. Unfortunately, as social distancing measures eased, there have been sudden outbreaks of the Coronavirus in important geographies in some of these countries, leading many to wonder, what form will the "new economic normal" take.
Resurgence of COVID-19
Looking across much of Europe, East Asia, and North America, you can identify emerging patterns. As social distancing measures eased, COVID-19 re-emerged in some municipalities of these geographies, and then lockdown is re-imposed. In Florida, where lockdown measures eased going into late June 2020, the number of confirmed cases of the coronavirus grew from 100K to 200K within 2 weeks. The number of coronavirus patients seeking medical care also doubled. The surge in the number of cases forced city officials to temporarily close beaches, re-install curfews, impose mandatory mask-wearing, and shutdown areas of mass gatherings (restaurants, gyms, short-term rentals and event venues). Texas had a similar story as one of the first states to reopen in the USA. Following the reopening, governor Greg Abbott re-imposed some lockdown measures after the state's health department reported a record 6K new cases in one day. In addition, the number of Texans seeking medical attention for coronavirus related symptoms rose to a record 4.7K. Greg Abbott issued executive orders, banning all elective surgeries and procedures, limiting business establishments to operate at a maximum 50% capacity, and requiring mandatory face masks in public spaces. The steps taken by Texas followed similar steps taken by governors in North Carolina and California.
Hong Kong, which was not severely impacted by the outbreak initially, had to impose new lockdown measures in late July as it recorded around 145 confirmed cases of COVID-19, following 5 back-to-back days of increases. The government brought in: limitations of public gatherings to a maximum of two people (except for family members), limitations on dine-in for most restaurants, mandatory face masks in public outdoor places, and suspension of operations at sports and swimming pool establishments. Mainland China also saw a resurgence of the virus in the Beijing and Hebei regions, leading to the imposition of similar lockdown measures to that imposed in Hong Kong. Melbourne Australia, also saw the virus re-emerge with greater ferocity than the initial wave. According to the BBC, Daniel Andrews - Victoria State Premier - reimposed lockdown measures on the city after the state saw 191 cases in one day during late June, which at the time, was the highest rate seen since the crisis began. This rate of increase has since gone up to about 280 by early July, pushing authorities to take more aggressive measures. In Melbourne, the government requires everyone to stay indoors - only leaving to go out for essential services, distance learning in schools, and restaurants to serve takeaway food only. Similarly, Spain has been seeing substantial increases in the Catalonia and Aragon regions after lockdown measures eased. Catalonia's President - Quim Torra - outlined stay-at-home measures in July and warned that stricter lockdown measures may follow, should infection rates remain elevated over the next 10 days.
The New Norm
As time goes on the lens through which we attempt to see the future is becoming clearer, gradually bringing home the known but unwanted reality, that economic normality will not return until a vaccine is developed. Such sentiments are already being echoed in some quarters, with the president of the Federal Reserve Bank of Kansas City saying:
A renewed upsurge in infections and resumed social distancing, either mandatory or voluntary, is likely to be a persistent risk, at least until a vaccine has been developed or treatment options sufficiently improve.
In contradiction to the sentiments expressed by the British prime minister - Boris Johnson - that normality will return by October 2020, epidemiologist John Edmunds - a member of the UK Scientific Advisory Group said:
a return to pre-pandemic normality wouldn’t be possible until there’s a vaccine for the virus
Dr. Fauci, a member of the White House Coronavirus task force speaking on the “The Axe Files” podcast said that the companies behind potential vaccines told him that:
that they would have doses to the tunes of tens of millions early in the year, and up to hundreds of millions as we get well into 2021, and some companies say that even after awhile, you could get as many as a billion doses. The timetable you suggested of getting into 2021, well into the year, then I can think with a successful vaccine — if we could vaccinate the overwhelming majority of the population — we could start talking about real normality again ... But it is going to be a gradual process.
Even more important is the expected time it will take for a vaccine to become available to the general population. As expressed by Dr. Fauci, most epidemiologists are looking at a late December 2020 or early 2021 roll-out of a safe and reliable vaccine. This view is shared by scientists at the University of Oxford who are months ahead in the research process.
Back To Business
The sentiments expressed by epidemiologists suggest that we should expect economies to operate below capacity for at least another year. In a scenario where a suitable vaccine is ready by early 2021, it will take several months before the treatment is scaled and administered en-masse to the population. Until then, businesses will likely have to practice social distancing at some level to prevent the spread of the disease. To some extent, we are already seeing situations where businesses have begun to accept a more prolonged period of social distancing. Google, for example, has extended a work-from-home order until the summer of 2021. Twitter and Square have also provided their employees with a work-from-home forever option. Microsoft, perhaps being more aggressive than Apple, is permanently shutting all retail stores globally.
As businesses, investors, and entrepreneurs look to understand the likely path of business operations going forward, it is quite clear that most businesses will have to operate below capacity. Cruise ships, airplanes, restaurants among others will likely have to fill up to a maximum of 50% of total seats available, which comes with its own set of challenges. First, for such a situation to be sustainable these businesses must be able to break even at low capacity levels, else they run the risk of going into bankruptcy. At the same time, many of these businesses were heavily indebted before the spread of COVID-19, and following COVID-19 will be even more indebted as they raise capital to cover significant revenue shortfalls. Though reductions to interest rates help to keep interest costs low, many of these businesses will still have high fixed costs, which enhances the likelihood of seeking a chapter 11. Second, many of the jobs lost since the spread of the disease may not come back until economic conditions normalize. Central governments are also looking to cut down on the amount of support they provide to households for fear of their own solvency and credit quality. In this context, consumer demand will certainly remain challenged and therefore, businesses will likely have to spend heavily on marketing to get the few customers available, particularly in industries that have numerous competitors.
The global economy is entering a period where companies and their management teams will be tested. There is no question that the degree of difficulty of the challenges to come is higher than that of 2008. Many companies will be faced with the challenge of low demand, government requirements to operate below capacity, and high debt, all of which would push any company towards elimination. Staying in the black will take skill, especially where a company's balance sheet is not strong. At the same time, the rewards to finding the right survivor will be very high, so in spite of the challenges, investments have to be made and you'll just have to find the tough guy in the industry vertical you choose.