Friday, June 26, 2020

Five possible scenarios of the economy in the future

[Editor's Note: 
Every day we get new and often conflicting messages about the Covid-19 pandemic and the economic outlook. It is very difficult for most companies to think out farther than "how to re-open" and "how to survive." However, as we have learned from previous economic downturns and disruptions, the most significant competitive advances (and retreats) come during these events and the subsequent recoveries. Thinking through the possible scenarios of the future and being prepared to adjust as they play out will be critical to future success. I hope you find this thought-provoking.  -dpm]

 Five possible scenarios of the economy in the future    

[Scenarios - in no particular order]
1. Paralysis/Survival: L-shaped recovery This describes a situation where the pandemic will persist and, similar to the Spanish Flu pandemic (1918-1920), the second wave may be worse than the first. Government and the healthcare system are overwhelmed once again by a second wave and the pandemic persists through 2021 causing very serious long term global economic consequences.

This, clearly, is the worst-case scenario. In this situation, "unexpected" and disruptive events will increase over the next two to three years, and companies (and/or economies) will react by pulling into a protective shell. The shocks include the failure to contain COVID-19 across the globe, the potential that a successful vaccine in sufficient production volumes is unavailable through 2021, and there are repeated economic shutdowns due to significant "flare-ups" of infection. Isolationism and protectionism may prevail. Unemployment remains at very high levels through 2021. Companies (could) react by trying to protect existing assets with continued layoffs, reduced R&D investment, reduced product development, and lower foreign direct investment. Consumers may compound the problem by continuing to reduce spending dramatically.

The bottom line in this scenario:A long, global recession, possible depression

 2. Slow Growth / Long recovery - The Swoosh-shaped or 
"Bathtub -shaped (__)
This scenario predicts a future where the impact of Covid-19 will persist, and the economy will take several years to recover.

This, too, is a grim scenario, though not as irredeemably dismal as the previous one. In this case, "disruptive events with moderate impact continue, and while seen as normal, they result in slow economic growth. This scenario would be marked by debt and currency problems in key world economies, though a full-blown long-term global depression is avoided. Unemployment would continue to be higher through 2021 and well into 2022, and consumer confidence would remain low. High unemployment numbers will continue for several years, taking almost a decade to return to pre-pandemic levels. Companies would learn to cope with their losses. They would make modest investments. The rebuilding of consumer confidence begins on a long, low trajectory, especially in areas such as restaurants, hospitality and travel.

The bottom line in this scenario: Life becomes hopeful but it's a long grind to full recovery. Trends such as remote work, decline in bricks & mortar retail, meal and grocery delivery, etc., are accelerated.

3. Thriving with Chaos (or Thriving with COVID-19): U-shaped recovery The Pandemic persists past initial projections placing a burden on governments around the world that struggle to handle the crisis. Public-private partnerships emerge as companies across industries partner to respond to critical needs and needed innovationExternal events will be uncertain and surprising, but companies will respond mostly in an active and opportunistic fashion.

In this scenario life is still gray, but sunlight begins to filter through the gloom in some areas. The unpredictable, disruptive events of the pandemic" would continue, but "corporate and national resolve to be successful in the face of adversity" would drive modest prosperity. While uncertainty would continue, companies take a more empathetic stance to best serve employees, customers, stakeholders. New employee and customer safety measures, new facility layouts, regular testing, social distancing, flexible scheduling, and remote work (telework) would be considered a cost of doing business. Companies would try to seize business opportunities amid the disruption and uncertainties and make increasing investments in areas that seem to be potentially profitable. The economy is slow to improve through 2020 and 2021, but then rebounds sharply.

The bottom line: Life could be better, but there's money to be made if you know where to look.

4. Growth - The V-shaped recovery  In this scenario, external events will be known and expected, and companies will respond actively and aggressively. There is no second wave of the virus, Mechanisms to combat the virus (such as vaccines developed in record time by the end of 2020 and produced in sufficient quantities) are mobilized and lead to effective prevention and treatments. A Global "Marshall Plan" is developed to vaccinate not only the United States, but also the world.

This, clearly, is the best-case scenario, one in which countries and peoples of the world recognize common goals and focus on healthcare and economic development as the route to permanent stability. The key features of this scenario would be that the recession proves short-lived through 2020, the economy begins to rebound in 2020 but improves sharply in 2021 to return to some normalcy. Consumer confidence responds in very short order as the virus recedes.

The bottom line: The COVID-19 pandemic disrupts society, but despite a slow start, is curtailed by an increasingly effective health system and government response. As the storm passes, Life's return to normalcy is swift.

5. False Optimism - Sharp Uptick followed by a long swoosh. In this scenario, as economies open up, there is a surge of pent-up demand amidst quarantine fatigue. However, as the pandemic persists past initial projections, the reality of a long grinding recovery becomes apparent. Conditions are similar to the long slow recovery outlined in scenario #2 (above).

The bottom line in this scenario: There is a false optimism that results from an early surge in the economy. Then reality sinks in and while life becomes hopeful, it's a long grind to full recovery. Trends such as remote work, decline in bricks & mortar retail, meal and grocery delivery, etc., are accelerated.

Beware trying to guess the future. Many organizations lock in on a view of the future. With so many uncertainties that would be a mistake that could result in a lack of preparedness.

If these five scenarios - or a combination of them - represent what lies ahead in the next several years, what strategies should companies put in place today to deal with them?  Clearly, though, neither these scenarios nor the strategies that follow from them will apply across the board. The scenarios will play out differently not only in different industries, but also in various regions of the country and the world. Accordingly, the strategies that companies develop to cope with these situations will need to vary to reflect these differences.

It would also be a mistake to allow the uncertainties that prevail today to put business decision making on hold. The future may be unclear, but one thing is certain: In today's circumstances, scenario planning is more than a tool. It is a weapon to combat uncertainty, and the future will belong to companies and executives that wield it well.   
How well is your company prepared to respond? Are you taking control of the things that you can? Are your actions strengthening your company - or weakening it? Are you building flexibility into your plans? Have you changed your approach to planning?

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