We All Know This…
The global COVID-19 pandemic is shaping business decisions and government actions hour by hour. During these last two months, first, in Asia, then in Europe and North America and other economies, governments have been stepping in to make unimaginable decisions in impossible time frames to limit economic damage whilst controlling as best as possible the impact on their people and health services. Let’s be optimistic. The horrifying impact is hopefully over the worst for now – programmes that bring about smart social distancing, population testing are being introduced. The arrival of a new economic and social normality is beginning to dawn on us. Until this disease is eradicated from the planet this will be at the top of our daily task list.
The Covid-19 Trail of Destruction
The Covid-19 trail is truly devastating. It’s a given that many economies, large and small, now have to suffer face the consequences – not just the thousands of unnecessary and untimely deaths but the depletion and decimation of our economies. Some affected economies and businesses, however, will ride out the storm better, reaching some kind of new social and business normality soon. However, this is not going to be a one time fix. All the time economies will be weighing up the risks of further spikes of this all-consuming global disease.
Which Economies are at Risk?
We can now see that Q1 2020 was already heavily affected. Asian economics struggled the most, whereas Europe started to feel the full force from early/mid-March. The IMF stated mid-April that global growth in 2020 will fall to minus 3 per cent. This is a huge downgrade of 6.3 per cent from January 2020 statement. It makes these time of global lockdown the worst recession since the Great Depression, and far worse than the Global Financial Crisis. Assuming the pandemic fades in the second half of 2020 the IMF projects global growth in 2021 to rebound to 5.8 per cent.
GDP Global’s economics team expect that in Q2 the full impact of the economic lockdown in Europe and North America will be tsunami-like, of permanently change economies and livelihoods. Stock markets will be reset following huge corporate closures and restructuring, similar to or bigger than the 1999 and 2008 crises. This time too, all heavily-indebted countries – those with greater than 80% Debt to GDP ratios, will be wondering how to restructure their public economies over the next 10-20 years. 30 countries will be so affected. These include developed economies such as the US, Canada, most of the Eurozone countries, the UK, Japan, whose reputation of good standards of fiscal discipline and exposure to global markets, will determine their relative success. It’s worth clicking the listing to see if your country is amongst those most at risk. These and other economies are already seeking bailouts and pledges of support from international and regional financial organisations such as the IMF and the ECB.
Despite the best efforts of governments and businesses to deal with the worst outcomes of this global shock, jobs and livelihoods will be affected. Unemployment in large and medium-size economies will rise and stay in double figures for the foreseeable future. Paradoxically, a severe skills shortage, amongst other necessities, will stimulate business process reengineering, and more job losses as a consequence.
We can expect to see a rise in global political tensions
GDP feels that global trade will be heavily impeded till Q3/4, awaiting an upturn in 2021. However, we should expect a heating up of global political tensions, as the United States and China trade blows and seek allies. Europe and other countries will be encouraged to show their colours. Demands for economic reparations from China have already started. While this won’t happen we expect there to be many demands on China to provide trade debt write-downs by those who feel it has significant culpability for this global economic disaster.
FDI and Trade Impact
As recently as 20 January UNCTAD reported that global foreign direct investment (FDI) totalled US$1.39 trillion in 2019, slightly less than a revised $1.41 trillion for 2018. They expected that flows would rise moderately in 2020 by up to 5 per cent year on year. By 8 March that had changed dramatically. As the full impact of global lockdown becomes clearer, FDI is forecast to shrink by 5%-15%. GDP Global expects FDI flows will be negative in all economies as investors put their plans on ice until the inherent risks to global value chains become a reality.
As for trade, IHS Markit, January 2, predicted that world merchandise trade volume would grow by 2.7% in 2020, accompanied by real GDP growth of 2.5%. Trade volume growth would also increase to 5.0% in 2021 with GDP growth at 2.7%. The Centre for Economic policy Research (CEPR) forecasts a bleak outlook for 2020, with trade possibly declining by between 13% and 32%. Some recovery is expected in 2021 but in the meantime, the damage will have been done to all economies.
The Impact on Global Business
Governments and international businesses will, in all likelihood, seek to recalibrate their exposure. The public debate will be ugly at times. International businesses will be forced to review their global value and supply chains. There are no winning locations at the moment. Whilst many businesses will succumb other businesses will respond, taking the opportunity to accelerate organisational change, transforming towards more investment in technology and automation, most likely focusing on the quality of skills rather than numbers of workers. Foreign investor disinvestments, facility shutdowns, job layoffs, so-called rightsizing, will create unmanageable levels of unemployment in many countries. This trend will be with us for the next 12-18 months and will lead to a permanent and fundamental shift in doing business, through the adoption of AI adoption, less overall employment, more employment in knowledge workers.
Investment and Trade Promoters – Let’s Consider your Options?
National, regional and local governments worldwide are facing critical questions. What will be the implications for their economies in the immediate and longer-term? How should economic promoters respond? GDP Global recommends to governments and especially to their economic, investment and trade promotion organisations, to follow these steps today – whilst still in or just emerging from lockdown, as well as in the coming months.
- Take stock of your investors – Research. Company surveys; Business Retention and Expansion (BRE). Get in contact with your existing business and investor base, whether of local or international origin. Find out how companies are thinking about this crisis. Understand the issues they and their industries are facing, both globally and locally. Are they suffering a partial or total drop in demand for their products and services (in many cases their business will have dried up completely)? What forms of business disruption are they facing? This could be in terms of international and local product supply, global logistics; financing matters. What responses, including restructuring, are your investors considering?
- New Investment Promotion Planning. To make sense of this business feedback, consider it in terms of the local economic impact in the immediate term (three months), short terms (six months) and medium-term (12 months). Yes, at a time of crisis, timescales are compressed. IPA analyses should consider groupings of companies according to their challenges. Think especially of the most important foreign investors; typically 20% of foreign investors will account for 80% of the national or regional FDI stock as well as being important to locally based suppliers. Determine which businesses will have the greatest value to your region in the medium and longer-term (next three years) and of those, which can be supported by your IPA. You will have to make some tough choices. Focus on companies that really matter to your economy. For others investors, direct them to other business support groups that may be able to help, e.g. local authorities, chambers of commerce, business advisors, accountancy firms, banks, national finance intermediaries, even insolvency specialists. Above all, make sure that no company is missed or neglected.
- Reorganise your teams – BRE. Re-organise your IPA. Scale-up (think of at least triple) the number of staff and consultants that will focus on BRE. Organise your resources into task forces, each with clear BRE objectives and targets. Focus on what each task force needs to deliver, day by day, in terms of support packages of business services and financial services, that will help to keep factories and offices running through the difficult months ahead. “Cash is King” for businesses at the moment. So, work closely with banks and public sector lenders to ensure they are easing and facilitating finance where possible. Work with companies and the authorities to obtain payment deferrals of local taxes and business rates, VAT collections, corporation tax payments, even social taxes. Seek the same from commercial and industrial landlords and utility companies – encourage them to support their existing tenants through the coming months with deferred lease and rental charges.
- Implement 12 month and two-year transformation plans as quickly as possible between your agency and its most important companies. Agree what support your agency task forces can organise and provide to companies. In turn, seek an understanding and determination from companies to maintain jobs, invest in new facilities and new products. If they need it, help companies to explore new export markets where appropriate.
- Focus on a sustainable future. Focus on helping companies to transform. On the positive side, this will mean encouraging companies to re-invest. It may mean companies having to downsize, but this is worth supporting if it means companies will stand a better chance of surviving in the longer term.
- Export market intelligence. Many of your businesses will be export-driven. Your trade promotion agency or division will be a vital beacon in identifying emergent export opportunities. Export market intelligence is key for companies. Of course, exports are vital for your broader economy in that it supports employment as well as the balance of payments. You may find that your national currency has taken a hit compared with other economies. Use the new-found financial advantage of more competitively priced export products to support exports to seek new customers.
- Trade development programmes. Your trade promotion agency or division will also be vital in providing assistance to companies to ramp up their export capabilities. Help companies and exporter groups (for example, export councils) with important business areas such as accessing global value chains, preparing for international supply chain and purchasing standards, how to access trade finance to support their export drive, how to price their exports. Ensure companies are proficient in export procedures by introducing them to export groups, freight forwarders, export agents, customs and logistics experts; help companies to find international buyers, agents or distributors.
- Reformulate policies and strategies. The radical change that is expected following this pandemic will require the entire government economic agenda to be reviewed. Consider the importance of your country’s enterprise economy – is it too reliant on foreign business or beneficiated commodity exports? What can be done to stimulate SME start-up and growth? Consider all possible measures to stimulate flexible working and jobs in the so-called gig economy. Are the costs of start-up and operation as a sole trader or SME at a best practice competitive level? Or do government regulations, red tape and taxation need to be radically overhauled?
- Engagement in the global economy. At a national level, your government will also need to reconsider its trading relationships with the rest of the world and, where appropriate, its regional relationships. In a bid to get the country on a new economic growth path, your government should be reviewing industrial policy, including the need to stimulate certain sectors, options to open up other sectors to painful but needed privatisation. Labour policy too should be reviewed to avoid the social debilitation of structural unemployment. This will include options for more flexible labour market arrangements, whilst enhancing working conditions and social benefits for those who face temporary or intermittent employment.
- Stimulate the innovation economy. This is certainly the right time to ensure timely steps are taken to stimulate not only an enterprise economy but also an innovation economy that is not dependant on multinational business and/or commodity exports. FDI is fine, of course. When FDI dominates an economy this is risky and undesirable, especially in times of global uncertainty. This is the time to stimulate your country’s innovation economy, using timely government intervention that supports triple-helix collaboration between with universities, technical institutes and innovative business.
- Look after your nation and regional brand. Last but by no means least in the top 10 priorities for government and its economic promotion body, is to nurture the sense of national pride in the economy and the positive perceptions of your region abroad. To achieve this, make sure that your country’s international and economic aspirations permeate every aspect of your agency’s priorities and as your organisation goes about its work. Clearly focus your organisation’s energies on the nation’s challenges. Show leadership in your organisation, applauding effort and success. Encourage citizens to prepare themselves to engage in a modern job market, that provides attractive and sustainable jobs – even in creating their own businesses. Be open and transparent about failings and limitations in government actions. Stimulate business to take the necessary risks – be kind and supportive to business entrepreneurs that fail on their way to success. Overseas, make sure that you are aware of how other nations and business think of your homeland. Show that your county is thriving on tenacity and has a determination to improve – to become a more admired nation. Of course, emphasise the qualities of your nation’s products and services through nation branding campaigns, export marketing and promotion.
It’s time for some action!
So colleagues in economic, investment and trade promotion, there is a lot to do. Undertake your role assiduously and with conviction as you bring success to your country. Your best efforts have never been so much needed!