The recovery scenario of world economy in the post-pandemic era

We may well have Covid season each year in the same way we have flu season now. Influenza viruses can also have a similar pattern of mutation over time, known as “antigenic drift”, leading to reinfections. Each year’s new flu viruses are not necessarily better than the previous year’s, just sufficiently different. Perhaps the best evidence for this eventuality for SARS-CoV-2 is that 229E, a coronavirus that causes the common cold, does this already. Omicron will therefore not be the final variant, but it may be the final variant of concern. If we are lucky, and the course of this pandemic is hard to predict, SARS-CoV-2 will probably become an endemic virus that slowly mutates over time. The disease might very likely be mild as some past exposure creates immunity that reduces the likelihood of hospitalisation and death. Most people will get infected the first time as a child, which could occur before or after a vaccine, and subsequent reinfections will barely be noticed.

Only a small group of scientists will track SARS-CoV-2’s genetic changes over time, and the variants of concern will become a thing of the past – at least until the next virus jumps the species barrier. It is controversial whether viruses are alive, but – like all living things – they do evolve. This fact has become abundantly clear during the pandemic, as new variants of concern have emerged every few months. Some of these variants have been better at spreading from person to person, eventually becoming dominant as they out-compete slower versions of SARS-CoV-2, the virus that causes Covid-19. This improved spreading ability has been ascribed to mutations in the spike protein – the mushroom-shaped projections on the surface of the virus – that allow it to bind more strongly to ACE2 receptors. ACE2 are receptors on the surface of our cells, such as those that line our airways, that the virus attaches to in order to gain entry and start replicating. These mutations allowed the alpha variant, and then the delta variant, to become globally dominant. And scientists expect the same thing to happen with omicron. The virus cannot, however, improve indefinitely. The laws of biochemistry mean that the virus will eventually evolve a spike protein that binds to ACE2 as strongly as possible. By that point, the ability of SARS-CoV-2 to spread between people will not be limited by how well the virus can stick to the outer surface of cells. Other factors will limit virus spread, such as how fast the genome can replicate, how quickly the virus can enter the cell via the protein TMPRSS2, and how much virus an infected human can shed. In principle, all of these should eventually evolve to peak performance.

There are lines outside stores, but they are often due to physical-distancing requirements. Theatres are dark. Fashions are in closets rather than on display. If the Musée du Louvre were open, the lack of tourists might even create the opportunity for an unobstructed view of the Mona Lisa. In these and other ways, consumers have pulled back. As consumer confidence returns, so will spending, with “revenge shopping” sweeping through sectors as pent-up demand is unleashed. That has been the experience of all previous economic downturns. One difference, however, is that services have been particularly hard hit this time. The bounce back will therefore likely emphasize those businesses, particularly the ones that have a communal element, such as restaurants and entertainment venues. That isn’t to say that consumers will act uniformly. McKinsey’s most recent consumer survey, published in late October last year, found that countries with older demographics, such as France, Italy, and Japan, are less optimistic than are those with younger populations, such as India and Indonesia. China was an exception—it has an older population but is conspicuously optimistic. But China’s profile proves a larger point. The first country to be hit by the Covid-19 pandemic, it was also the first to emerge from it. China’s consumers are relieved—and spending accordingly. On Singles Day, November 11, the country’s two largest online retailers racked up record sales. That wasn’t just a holiday phenomenon. While manufacturing in China came back first, by September, so had consumer spending. Except for international air travel, Chinese consumers have begun to act and spend largely as they did in precrisis times. Australia also offers hope. With the pandemic largely contained in that country, household spending fueled a faster-than-expected 3.3 percent growth rate in the third quarter of 2020, and spending on goods and services rose 7.9 percent.

People who travel for pleasure will want to get back to doing so. That has been the pattern in China. The CEO of one major travel company told us that, beginning in the third quarter of 2020, business was “pretty much back to normal” when referring to growth. But it was a different normal: domestic travel was surging, but international travel was still depressed given pandemic-related border restrictions and concerns about health and safety. In China as a whole, hotel occupancy and the number of travelers on domestic flights were more than 90 percent of their 2019 levels at the end of August, and over the October Golden Week holiday, more than 600 million Chinese hit the road, around 80 per cent of last year’s figure. Because of confidence in the country’s health and safety measures, domestic travel is almost back to the level seen prior to the pandemic, and high-end domestic travel is actually ahead of it. By definition, leisure travel is discretionary. Business travel is less so. In 2018, business-travel spending reached $1.4 trillion, which was more than 20 percent of the total. The larger context is also informative. History shows that, after a recession, business travel takes longer than leisure travel to bounce back. After the 2008–09 financial crisis, for example, international business travel took five years to recover, compared with two years for international leisure
travel.

Regional and domestic business travel will likely rebound first; some companies and sectors will want to resume in-person sales and customer meetings as soon as they safely can. Peer pressure may also play a part: once one company gets back to face-to-face meetings, their competitors may not want to hold back. All told, however, a survey of business-travel managers found that they expect business-travel spending in 2022 will only be half that of 2019. While business travel will return at large scale, and global economic growth will generate new demand, executives in the field think that it may never recover to the 2019 level.

In short, leisure travel is driven by the very human desire to explore and to enjoy, and that has not changed. Indeed, one of the first things people do as they grow more prosperous is to travel—first close to home and then further afield. There is no reason to believe that the rise in global prosperity will reverse itself or that human curiosity will diminish. But the effective use of technology during the pandemic—and the economic constraints that many companies will face for years after it—could augur the beginning of a long-term structural change in business travel.

Plato was right: necessity is indeed the mother of invention. During the Covid-19 crisis, one area that has seen tremendous growth is digitization, meaning everything from online customer service to remote working to supply-chain reinvention to the use of artificial intelligence (AI) and machine learning to improve operations. Healthcare, too, has changed substantially, with telehealth and biopharma coming into their own.Disruption creates space for entrepreneurs—and that’s what is happening in the United States, in particular, but also in other major economies. We admit that we didn’t see this coming. After all, during the 2008–09 financial crisis, small-business formation declined, and it rose only slightly during the recessions of 2001 and 1990–91. This time, though, there is a veritable flood of new small businesses. In the third quarter of 2020 alone, there were more than 1.5 million new-business applications in the United States—almost double the figure for the same period in 2019.

The great acceleration in the use of technology, digitization, and new forms of working is going to be sustained. Many executives reported that they moved 20 to 25 times faster than they thought possible on things like building supply-chain redundancies, improving data security, and increasing the use of advanced technologies in operations.How all that feeds into long-term productivity will not be known until the data for several more quarters are evaluated. But it’s worth noting that US productivity in the third quarter of 2020 rose 4.6 percent, following a 10.6 percent increase in the second quarter, which is the largest six-month improvement since 1965.13Productivity is only one number, albeit an important one; the startling figure for the United States in the second quarter was based in large part on the biggest declines in output and hours seen since 1947. That isn’t an enviable precedent.More positively, in the past, it has taken a decade or longer for game-changing technologies to evolve from cool new things to productivity drivers. The COVID-19 crisis has sped up that transition in areas such as AI and digitization by several years, and even faster in Asia. A McKinsey survey published in October 2020 found that companies are three times likelier than they were before the crisis to conduct at least 80 percent of their customer interactions digitally.

The writer is MD and CEO of Community Bank. He can be contacted at [email protected]