COVID-19: Implications for business

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The coronavirus outbreak is first and foremost a human tragedy, affecting hundreds of thousands of people. It is also having a growing impact on the global economy. This article is intended to provide business leaders with a perspective on the evolving situation and implications for their companies. The outbreak is moving quickly, and some of the perspectives in this article may fall rapidly out of date. This article reflects our perspective as of March 9, 2020. We will update it regularly as the outbreak evolves.

COVID-19: Briefing note, March 9, 2020

A range of outcomes is possible. Decision makers should not assume the worst.

less than ten weeks have passed since China reported the existence of a new virus to the World Health Organization. This virus, now known as SARS-CoV-2, causing COVID-19 disease, spread quickly in the city of Wuhan and throughout China. The country has experienced a deep humanitarian challenge, with more than 80,000 cases and more than 3,000 deaths. COVID-19 progressed quickly beyond China’s borders. Four other major transmission complexes are now established across the world: East Asia (especially South Korea, with more than 7,000 cases, as well as Singapore and Japan), the Middle East (centered in Iran, with more than 6,500 cases), Europe (especially the Lombardy region in northern Italy, with more than 7,300 cases, but with widespread transmission across the continent), and the United States, with more than 200 cases. Each of these transmission complexes has sprung up in a region where millions of people travel every day for social and economic reasons, making it difficult to prevent the spread of the disease. In addition to these major complexes, many other countries have been affected. Exhibit 1 offers a snapshot of the current progress of the disease and its economic impact.

Exhibit 1

The next phases of the outbreak are profoundly uncertain. In our view, the prevalent narrative, focused on pandemic, to which both markets and policy makers have gravitated as they respond to the virus, is possible but underweights the possibility of a more optimistic outcome. In this briefing note, we attempt to distinguish the things we know from those we don’t, and the potential implications of both sets of factors. We then outline three potential economic scenarios, to illustrate the range of possibilities, and conclude with some discussion of the implications for companies’ supply chains, and seven steps businesses can take now to prepare.

Our perspective is based on our analysis of past emergencies and on our industry expertise. It is only one view, however. Others could review the same facts and emerge with a different view. Our scenarios should be considered only as three among many possibilities. This perspective is current as of March 9, 2020. We will update it regularly as the outbreak evolves.

For the full set of our latest perspectives on COVID-19, download our briefing note and full briefing materials.

What we know, and what we are discovering

What we know. Epidemiologists are in general agreement on two characteristics of COVID-19:

  • The virus is highly transmissible. Both observed experience and emerging scientific evidence show that the virus causing COVID-19 is easily transmitted from person to person. The US Centers for Disease Control and Prevention estimates that the virus’s reproduction number (the number of additional cases that likely result from an initial case) is between 1.6 and 2.4, making COVID-19 significantly more transmissible than seasonal flu (whose reproduction number is estimated at 1.2 to 1.4) (Exhibit 2).

Exhibit 2

  • The virus disproportionately affects older people with underlying conditions. Epidemiologists Zunyou Wu and Jennifer McGoogan analyzed a report from China Centers for Disease Control and Prevention that looked at more than 72,000 cases and concluded that the fatality rate for patients 80 and older was seven times the average, and three to four times the average for patients in their 70s.1 Other reports describe fatality rates for people under 40 to be 0.2 percent.

What we are still discovering. Three characteristics of the virus are not fully understood, but are key variables that will affect how the disease progresses, and the economic scenario that evolves:

  • The extent of undetected milder cases. We know that those infected often display only mild symptoms (or no symptoms at all), so it is easy for public-health systems to miss such cases. For example, 55 percent of the cases on board the Diamond Princess cruise ship did not exhibit significant symptoms (even though many passengers were middle-aged or older). But we don’t know for sure whether official statistics are capturing 80 percent, 50 percent, or 20 percent of cases.
  • Seasonality. There is no evidence so far about the virus’s seasonality (that is, a tendency to subside in the northern hemisphere as spring progresses). Coronaviruses in animals are not always seasonal but have historically been so in humans for reasons that are not fully understood. In the current outbreak, regions with higher temperatures (such as Singapore, India, and Africa) have not yet seen a broad, rapid propagation of the disease.
  • Asymptomatic transmission. The evidence is mixed about whether asymptomatic people can transmit the virus, and about the length of the incubation period. If asymptomatic transfer is a major driver of the epidemic, then different public-health measures will be needed.

These factors notwithstanding, we have seen that robust public-health responses, like those in China outside Hubei and in Singapore, can help stem the epidemic (Exhibit 3). But it remains to be seen how these factors will play out and the direct impact they will have. The economic impact too will vary considerably.

Exhibit 3

Economic impact

In our analysis, three broad economic scenarios might unfold: a quick recovery, a global slowdown, and a pandemic-driven recession. Here, we outline all three (Exhibit 4). We believe that the prevalent pessimistic narrative (which both markets and policy makers seem to favor as they respond to the virus) underweights the possibility of a more optimistic outcome to COVID-19 evolution.

Exhibit 4

Quick recovery

In this scenario, case count continues to grow, given the virus’s high transmissibility. While this inevitably causes a strong public reaction and drop in demand, other countries are able to achieve the same rapid control seen in China, so that the peak in public concern comes relatively soon (within one to two weeks). Given the low fatality rates in children and working-age adults, we might also see levels of concern start to ebb even as the disease continues to spread. Working-age adults remain concerned about their parents and older friends, neighbors, and colleagues, and take steps to ensure their safety. Older people, especially those with underlying conditions, pull back from many activities. Most people outside the transmission complexes continue their normal daily lives.

The scenario assumes that younger people are affected enough to change some daily habits (for example, they wash hands more frequently) but not so much that they shift to survival mode and take steps that come at a higher cost, such as staying home from work and keeping children home from school. A complicating factor, not yet analyzed, is that workers in the gig economy, such as rideshare drivers, may continue to report to work despite requests to stay home, lest they lose income. This scenario also presumes that the virus is seasonal.

In this scenario, our model developed in partnership with Oxford Economics suggests that global GDP growth for 2020 falls from previous consensus estimates of about 2.5 percent to about 2.0 percent (Exhibit 5). The biggest factors are a fall in China’s GDP from nearly 6 percent growth to about 4.7 percent; a one-percentage-point drop in GDP growth for East Asia; and drops of up to 0.5 percentage points for other large economies around the world. The US economy recovers by the end of Q1. By that point, China resumes most of its factory output; but consumer confidence there does not fully recover until end Q2. These are estimates, based on a particular scenario. They should not be considered predictions.

Exhibit 5

Global slowdown

This scenario assumes that most countries are not able to achieve the same rapid control that China managed. In Europe and the United States, transmission is high but remains localized, partly because individuals, firms, and governments take strong countermeasures (including school closings and cancellation of public events). For the United States, the scenario assumes between 10,000 and 500,000 total cases. It assumes one major epicenter with 40 to 50 percent of all cases, two or three smaller centers with 10 to 15 percent of all cases, and a “long tail” of towns with a handful or a few dozen cases. This scenario sees some spread in Africa, India, and other densely populated areas, but the transmissibility of the virus declines naturally with the northern hemisphere spring.

This scenario sees much greater shifts in people’s daily behaviors. This reaction lasts for six to eight weeks in towns and cities with active transmission, and three to four weeks in neighboring towns. The resulting demand shock cuts global GDP growth for 2020 in half, to between 1 percent and 1.5 percent, and pulls the global economy into a slowdown, though not recession.

In this scenario, a global slowdown would affect small and mid-size companies more acutely. Less developed economies would suffer more than advanced economies. And not all sectors are equally affected in this scenario. Service sectors, including aviation, travel, and tourism, are likely to be hardest hit. Airlines have already experienced a steep fall in traffic on their highest-profit international routes (especially in Asia–Pacific). In this scenario, airlines miss out on the summer peak travel season, leading to bankruptcies (FlyBe, the UK regional carrier, is an early example) and consolidation across the sector. A wave of consolidation was already possible in some parts of the industry; COVID-19 would serve as an accelerant.

In consumer goods, the steep drop in consumer demand will likely mean delayed demand. This has implications for the many consumer companies (and their suppliers) that operate on thin working-capital margins. But demand returns in May–June as concern about the virus diminishes. For most other sectors, the impact is a function primarily of the drop in national and global GDP, rather than a direct impact of changed behaviors. Oil and gas, for instance, will be adversely affected as oil prices stay lower than expected until Q3.

Pandemic and recession

This scenario is similar to the global slowdown, except it assumes that the virus is not seasonal (unaffected by spring in the northern hemisphere). Case growth continues throughout Q2 and Q3, potentially overwhelming healthcare systems around the world and pushing out a recovery in consumer confidence to Q3 or beyond. This scenario results in a recession, with global growth in 2020 falling to between –1.5 percent and 0.5 percent.

Supply-chain challenges

For many companies around the world, the most important consideration from the first ten weeks of the COVID-19 outbreak has been the effect on supply chains that begin in or go through China. As a result of the factory shutdowns in China during Q1, many disruptions have been felt across the supply chain, though the full effects are of course still unclear.

Hubei is still in the early phases of its recovery; case count is down, but fatality rates remain high, and many restrictions remain that will prevent a resumption of normal activity until early Q2. In the rest of China, however, many large companies report that they are running at more than 90 percent capacity as of March 1. While some real challenges remain, such as lower than usual availability of migrant labor, there is little question that plants are returning back to work quickly.

Trucking capacity to ship goods from factories to ports is at about 60 to 80 percent of normal capacity. Goods are facing delays of between eight and ten days on their journey to ports.

The Baltic Dry Index (which measures freight rates for grains and other dry goods around the world) dropped by about 15 percent at the onset of the outbreak but has increased by nearly 30 percent since then. The TAC index, which measures air-freight prices, has also risen by about 15 percent since early February.

In the next few months, the phased restart of plants outside Hubei (and the slower progress of plants within Hubei) is likely to lead to challenges in securing critical parts. As inventories are run down faster, parts shortages are likely to become the new reason why plants in China cannot operate at full capacity. Moreover, plants that depend on Chinese output (which is to say, most factories around the world) have not yet experienced the brunt of the initial Chinese shutdown and are likely to experience inventory “whiplash” in the coming weeks.

Perhaps the biggest uncertainty for supply-chain managers and production heads is customer demand. Customers that have prebooked logistics capacity may not use it; customers may compete for prioritization in receiving a factory’s output; and the unpredictability of the timing and extent of demand rebound will mean confusing signals for several weeks.

Source : https://www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business?cid=other-eml-nsl-mip-mck&hlkid=889f9c230f214a76911941b688aa29a1&hctky=11706684&hdpid=802e7585-5757-4ed6-9a6c-de278572bdf9

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