October 29, 2020

Guide to the next recession: how it will affect sectors and companies | Companies

Go ahead: no one knows what will happen. There are no close precedents for health emergencies of this nature and scope, and therefore their impact on the real economy has not been historically tested either. What comes closest to it is the epidemic of severe acute respiratory syndrome (SARS), which in 2003 also raised health alarms in half the world, but whose spread was relatively limited (about 8,000 cases were counted at global level, compared to more than 200,000 current coronavirus). However, its impact on markets and companies was extremely harsh: it took ahead 1% of China’s GDP and 2.5% of Hong Kong, among others.

What is now is something else. The collapse of stock indices worldwide, with cumulative declines in the past month of between 30% and 40%, is a first witness to the importance of the problems ahead for the world economy. Most experts predict that the crisis will be transitory (of a few weeks or a few months), but the blow is being very hard and it will not be easy for economic activity to return to normal or cruising speed before the outbreak epidemic. It will depend on the depth of the health crisis and the effectiveness of the contagion prevention and economic response measures that are being implemented worldwide.

The ideal for Spain would be to experience a recovery of GDP in V, but this growth profile seems improbable in view of the weight of intensive sectors of personnel and relatively qualified workforce of our economy, unlike other economies such as the United Kingdom or Germany. .

In the case of Spain, economic activities linked directly or indirectly to tourism and consumption are going to be especially punished (they are already being) due to the pandemic. Therefore, it is expected that the recovery pattern of the Spanish economy will end up looking more like a U (GDP recovers after a languishing stage, but with permanent loss of production) or even an L (the virus would cause damage structural in the economy with an impact on the supply side, especially in the labor market).

The collapse of the stock markets worldwide is a first witness of the importance of the problems that lie ahead for the world economy

With these expectations, there is little doubt that Spain, like most of the western economies, must prepare for a recession in 2020, with a drop in GDP in annual terms possibly greater than 1.5%. The intensity of the fall will depend to a large extent on the duration of the acute phase of the pandemic: if the summer tourist campaign develops with a certain normality, and consumption and investment hold, the prospects will improve significantly.

Double impact

By business sector, the impact of the Covid-19 has a double trajectory, depending on how it affects the supply of goods and services (that is, if it damages the companies’ supply capacity) and / or income (if it is foreseeable slowdown in demand). Applying this double scale of risks, the most affected sector will probably be (see graph) the automotive sector, since it combines a foreseeable sharp drop in consumer demand with the interruption of the supply of its raw materials.

This last negative repercussion is more than a potential risk, since we are seeing how automobile manufacturers are temporarily closing their plants in Europe and the United States, partly to prevent contagion, but also precisely because of the impossibility of guaranteeing good operation of its supply chain, which depends in part on its Asian suppliers. Not very different is the situation of the distribution or retail (non-food) sector, also hit by the drop in demand and supply limitations.

The tourism and transport sector is also on the target of the crisis. Demand restrictions have already started (ban on parties and trips, limitation of transport between certain areas, mandatory closure of establishments, etc.) and it is expected that they will continue to be very severe in the coming weeks, so it is expected sharp drop in income.

In the lower left corner of the graph are the business sectors least exposed, in relative terms, to the consequences of the coronavirus, such as real estate or activities related to telecommunications. All of them are relatively protected against the risks of limited supplies and falling demand.

A second level of analysis is that of the impact of the crisis on the different functions of company management. What areas will be most affected? What are the measures that companies must implement in these critical areas?

The management of the box will be critical in the coming months to ensure survival: it is necessary to ensure strict control of the currency, and direct “from close” and day to day, the running of the business and commercial operations, limiting expenses and investments not essential. It is necessary to adapt the labor operations, ensuring the continuity of the “essential” business functions, while guaranteeing the health security of the workers.

Deploy measures in the field of operations, ensuring the continuity of production and maintaining commercial momentum, exploring new channels and alternatives in a creative way, developing a battery of communications for the main stakeholders, and ensuring the formation of “crisis teams” Dedicated to senior management, they will complement an effective crash plan to ensure business continuity.

In subsequent issues of this guide we will try to answer these questions and delve into each of these functions.

Bernat Figueras, Partner in charge of Strategy &, strategy consultant at PwC


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