“Historically, pandemics have forced humans to break with the past and imagine their world anew. This one is no different. It is a portal, a gateway between one world and the next.” – Arundhati Roy, The Pandemic Is a Portal
Everyone is curious about what business will look like in the post-pandemic world. But, it’s easy to lose interest when articles are saturated with economics concepts that non-economists don’t understand. Have no fear, this an easy read that attempts to put some of the things we’ve been hearing into an easy-to-understand format – starting off with an individual perspective, and ending with a global economy perspective.
Work from home is the new norm.
Working from home has benefitted both businesses and their people because businesses have reduced their overhead expenses, and people have more control over their time. Now, we are gradually returning back to our offices only a few days a week, with more control over our time and commutes. Furthermore, the lonely aspects (or busy aspects if you’re also managing your children’s schooling) of working from home might now fill people with excitement on their days in the office.
Of course, we can’t talk about “all the savings” without discussing the digital transformation costs required to keep a remote workplace connected. Those costs to some businesses turned into massive revenues for companies such as:
- Amazon, which sought out to hire 100,000 warehouse workers to meet consumer demand,
- Microsoft, which said that it’s Microsoft Teams users grew by 37%,
- Netflix, which saw downloads of it’s app increase by 9% in the United States, 35% in Spain, and a whopping 66% in Italy.
Health screenings will be more common.
Heading into the office for today? Expect a health screening. Sergio Rebelo, an international finance professor at the Kellogg School of Management at Northwestern University, predicts that virus screening after COVID-19 will be what national security was after 9/11. As a result, health infrastructure will increase and our preparedness to respond to future health threats increases. Some countries have already instituted mandatory temperature checks when entering public buildings.
Office rent might go down.
Working from home, layoffs, and the rise of co-working spaces reduced the demand for office space in some regions. This opens the office space market to new, more cost-effective co-working spaces that could drive down the cost of traditional owning or leasing. “Companies could see this as an opportunity to downsize, to reduce operating costs, and invest more in technology”, says Paul Stapley, Vice President, Project Management, WSP Canada.
WeWork is one such company that offers subscription-style workspaces. Recent cost-cutting and the increased demand for workspace flexibility has the company on track to be cashflow positive by 2021. According to Magnus Meyer, Managing Director WSP Nordics & Continental Europe, “this crisis is probably going to accelerate the need for modern, flexible office space with lots of services. The buildings that suffer will be the older ones that tenants just don’t want any more. They’re just the wrong product.”
Vancouver might be showing different trends, however. Office leasing costs have not decreased despite the office vacancy increasing to Statista‘s reported 4.9% at the end of Q2 2020. Tony Quattrin, the vice chairman of capital markets for CBRE in Vancouver, explains that this trend is due to tech companies seeing Vancouver as an industry hotspot. To the contrary, subleasing has increased by approximately 500,000 sq. ft. from the end of 2019, which could mean that tenants are subleasing to cover expenses of keeping their empty office spaces.
The birth and growth of start-ups.
People are stuck at home, bored, and concerned about the security that their job offers them. This is the perfect recipe for a new start-up because creativity and efficiency are at their highest when resources are hard to come by, particularly funding. Globally, Startup Genome found that 65% of start-up businesses will run out of funding in 6 months or less.
The small size of start-up companies, compared to large corporations, allows them to react more quickly to changing market conditions. Start-ups also have long-term effects on employment, and with big companies going under as a result of COVID-19, start-ups will rise up to take up the extra space. This will not be the first time this has happened either. Dropbox, Uber, Airbnb, WhatsApp, Groupon, and Pinterest, were once start-ups that experienced significant growth in the aftermath of the 2008 global financial crisis. This time around, it will be telehealth, technology, remote work, drones and robotics, and distance learning that are likely to get the boost.
Supply chains and production will be more localized.
Global supply chains were devasted as the movement of goods and materials halted during the beginning of the pandemic. Goods and materials security is greater when businesses are closer to their suppliers, so more companies will entertain reshoring their supply chains and production.
Off-shore supply chains and production result in a lower cost of goods sold, implying that reshoring will cause the opposite unless the shift to nationalizing production involves advanced automation. At first, this will be extremely concerning to labourers who are fearful of losing their jobs; however, as manufacturing economies are more automatized, production efficiency will increase, the price of goods will remain stable, and the reallocation of labour will result in new career opportunities that we can’t yet imagine.
Additionally, Ian Bremmer, president and founder of Eurasia Group, predicts that businesses will shift from just-in-time production, to what The Financial Times calls just-in-case production. COVID-19 has taught us that the just-in-time model is excellent in certain market conditions with little variability and that the model comes at the sacrifice of resilience. The benefits of just-in-time models don’t matter when your business is struggling to supply goods, or worse, ceases to exist. The emergence of a just-in-case model would incorporate buffers that will protect against future economic threats.
Governments will be protective of domestic industries attracting foreign investment.
The post-pandemic unpredictability of global cash flow has caused greater ambivalence on both ends of the foreign investment table. First, foreign investors are eager to invest while market valuations are low because the potential for ROI is greater. Second, governments and corporations are wary over foreign investments because of the effect the foreign investor could have on a local economy. The latter was always true in the pre-pandemic world, but now, this concern is greater than ever due to the fragility of current economies. It may be in governments’ and companies’ best interest to limit foreign investment so as to keep industries on domestic soil. This is particularly important to consider in the areas of food production, health care, vaccine research, technology, and other essential industries of our time because accepting foreign investment from the wrong groups can disassemble the local economies we are trying to rebuild. Australia was one of the first countries to put protectionist measures on foreign investments – as Treasurer of Australia and Deputy Leader of the Liberal Party in Australia Josh Fyndenberg said, “We do not want any predatory behaviour.”
Governments could increase income taxes, or create an altogether new crisis response tax.
Governments have been “playing the role of insurer and investor of last resort” according to Sergio Rebelo (from point 2). He goes on to say that “public debt will balloon, creating financial challenges around the world.”
In Canada alone, the Canada Emergency Response Benefit (CERB) and Canada Emergency Student Benefit (CESB), Canada Emergency Business Account loans, and small business emergency wage subsidies are the greatest expenses. These expenses are being incurred during a time tax revenues are staggeringly low due to not being able to collect income tax from unemployed citizens.
According to Trevor Tombe, associate professor of economics at the University of Calgary, one way we can pay our pandemic response debts is through a COVID-19 Debt Repayment Fund. This fund would collect special taxes similar to how Canadians pay GST or HST on purchases. Many Canadians will question if a tax like this would ever be removed from government revenues, long after pandemic response debt has been paid. Tombe admits that an idea like this needs to be investigated more.
Royce Mendes has other ideas, however. As a senior economist at CIBC Capital Markets, Mendes claims that there may be a possibility that Canadians won’t see their taxes increased. Mendes quotes, Canada had “the lowest central government debt-to-GDP ratio” in all of the G7 economies, which improves the outlook for Canadian economic recovery. Unlike previous recessions, the COVID-19 recession has forced interest rates extremely low which means that Canadian government could repay all of its COVID-19 response debt by borrowing for 10 years at a rate of 0.6% at little-to-no increase in taxes for Canadians.
Either way, the Canadian economy will need to grow past pre-pandemic statistics in order to pay back it’s crisis response debt.
Economic weirdness for a while…
Canada’s GDP is projecting a drop from $1,736 billion USD in 2019, to $1,670 billion USD by the end of 2020. When GDP drops, so does consumer spending and corporate earnings. Naturally, the stock market will follow. Or so we thought…
The TSX was at it’s lowest on March 23, 2020, just as businesses were closing and the lockdown began. Since then, it’s been steadily increasing to just below pre-pandemic levels despite GDP decreasing. Three theories attempt to explain this:
- The first theory is that people are investing in the stock market while prices are low to increase future returns.
- The second theory is that people are speculating on share prices, and then buying and selling shares multiple times in one day. The stock exchange tells us that recent stock value increases are a result of speculation.
- The third theory is foreign investment and/or speculation. Offshore currencies may be finding their way into the stock market which explains why GDP remains low compared to what is happening on the stock market.
Either way, both investing and speculation will increase stock prices and stimulate growth which will then increase GDP. Praveen Chakravarty on BloombergQuint quotes “I do not have any clear answers to explain why [global stock markets] are so euphoric when the entire economy is feeling despondent.” Summary? Stock exchanges are doing weird things, and all we have are educated guesses as to why. And… this is likely to continue for a while.
Additional sources used:
- New York Times, Big Tech Could Emerge From Coronavirus Crisis Stronger Than Ever
- WSP, How Will COVID-19 Change Demand for Office Space
- Real Estate News Exchange, Vancouver Office Market Riding Out Pandemic: CBRE
- Statista, Vacancy Rate of Office Space in Vancouver Q2 2020, by Submarket
- Resume Lab, Gig Economy: Statistics and Definition
- International Monetary Fund, Life Post–COVID-19
- World Economic Forum, Foreign Investment Is Drying up Thanks to COVID-19 but There May Be a Silver Lining
- Investment Executive, How will Canada pay for its Covid-19 response?
- Global News, Ottawa’s Coronavirus Deficit Will Take ‘Many, Many Years’ to Pay Down: Economist
- Maclean’s, Why Canada Might Need a Temporary COVID-19 Tax and Repayment Fund