The ways we live and work are constantly evolving, but every so often a catalyst comes along that shakes them up and changes them forever. Once the health crisis has abated, will the coronavirus turn out to be just such a catalyst? In the coming weeks, in a series of blogs which we summarize below, we’ll examine the potential long-term effects across the economy and society.
In times of crisis, a cottage industry of prognosticators emerges, anticipating all sorts of consequences that never actually come to pass. Indeed, after past pandemics, many aspects of life continued as before. But some things did change. For instance, prior to the 1918 Spanish flu, Americans frequently drank from a common cup in schools, offices, and on trains. Banning those shared cups was a simple solution to slow the spread of the virus and changed people’s behavior forever.
In the moment, it’s easy to over-extrapolate and imagine lasting changes which never ultimately occur. On the one hand, we want to stretch our minds to picture the lines along which the future could unfold. On the other, we want to retain the humility that goes along with forecasting anything into the distant future. As such, we focus more on the impacts on existing trends, to ground our analysis on changes that are more likely to happen rather than ones that are possible but further afield.
The coronavirus pandemic appears to have accelerated several ongoing trends and could cause a reversal in others. These ramifications span the macroeconomic tides that drive asset values, the adoption of rising technologies, the operations of companies across a broad swath of industries, and the direction of public policy and politics.
The End of the Era of Good Macro?
First, the US economy and investors have benefited from decades of “good macro”—low inflation, falling interest rates, and stable growth. That landscape has been conducive to most asset classes. However, the rapid rise in the federal budget deficit and swift expansion of the Federal Reserve balance sheet in response to the crisis may threaten that regime going forward.
Elevated debt levels could lead to lower growth, higher taxes, and/or higher inflation, posing challenges for the economy and investors. However, while the long run risks have risen, a “bad macro” outcome is far from certain. We believe the “good macro” regime can survive but recognize the risk both to the economy and to our clients’ portfolios in the event of a major phase change.
A Tailwind for Technological Adoption
Another major set of trends is technological and based on the multi-decade trend toward more digital lives. Over the years, this trend has led to substantial productivity improvements and an increase in the standard of living around the world. On the other hand, due to winner-take-all dynamics inherent in these industries, it has also led to the rise of a number of natural oligopolies, shifting the balance of economic power. As we stand today, the internet has created opportunities for many people to work from home, study from home, and even see your doctor from home. Over the years, we’ve witnessed more and more people doing each of these things online and we’ve expected those trends to accelerate in the future.
As a result of the pandemic, we’ve just condensed several years of technological change into a period of weeks. While that may reverse to an extent as lockdowns end and the world normalizes, the trajectory of trends like telecommuting, telemedicine, and online education are now permanently higher.
Adapting Business Models
Business operations may also shift. Efficiency has been the guiding principle behind supply chains and capital allocation for decades, but now the benefits of robustness have become more apparent. In addition, recessions are catalysts for automation and computerization—we expect this one to be no different and expect more aggressive adoption of industrial technology in the wake of the recession.
Certain industries may find themselves particularly exposed. Financing terms in supply chains could change, stronger companies could take advantage of competitors’ or adjacent firms’ weakness to become more integrated, demand for office space and hotel rooms in the future could be reduced, and much more.
A Changed Geopolitical Landscape
Global politics and public policy may also be altered by the pandemic, with the consequences likely rippling through the US and world economy for years to come.
Domestically, the modern US healthcare system and social safety net are being challenged in a way they never have, dating back to their rise out of the New Deal and Great Society movements. We expect them to come under political pressure to incorporate the lessons of this pandemic.
Internationally, cooperation to address the coronavirus has been hampered by populism and nationalism, and we’re seeing even more tension between the US and China than we already experienced during the trade war. The rise of China and the integration of global supply chains has led to improved growth and reduced inflation throughout the developed world over the past several decades, but also to a growing populist backlash. The competition between the US and China is at a critical phase as the US has ceded global leadership in this crisis, leaving a vacuum in international affairs. The extent to which China capitalizes on that vacuum will have lasting consequences.
Finally, both inside the US and around the world, major socioeconomic divides have been exacerbated and exposed—the weight of the crisis is falling more heavily on the working class and minority communities. This will demand real attention from policymakers and potentially prompt social and political volatility in the future.
What Lies Ahead
This blog series will delve into all of these areas, but there are many additional consequences of the pandemic to consider. Every industry faces its own set of tailwinds and headwinds arising from this crisis. Each theme above will act as a wedge in the economy, creating vulnerabilities in some areas and opportunities in others. These themes will guide us, but we may also branch off in separate pieces to focus on particular industries and highlight the insights of our analysts.
Overall, the coronavirus pandemic could catalyze a variety of changes for the way we live and work. While we expect most aspects of life to normalize when the pandemic has passed, these impacts will lead to a different future than we would have seen otherwise. By actively imagining them, we can prepare for what lies ahead.
The first blog in the series, The End of The Era of Good Macro, can be found here.