Covid-19 is currently proving to be a tortuous and long-drawn affair with highly uncertain economic outcomes. However, some observers are holding out for a rapid V-shape recovery when the pandemic draws to its eventual conclusion. “At the moment, the story looks very good. We’re set for a V-shaped recovery,” White House adviser and National Economic Council Director Larry Kudlow said as recently as June 30. Still, consulting firm McKinsey says such a prediction is probably over-optimistic at best. 

“For folks to be convinced that it will be more V-shaped… you would have to see a significant step up in the containment of the virus and an acceleration of the development of a vaccine,” says Lin Diaan-Yi, McKinsey’s Singapore managing partner. Enough time has passed, she argues, to indicate that such a scenario will not emerge since unprecedented levels of government stimulus has yet to result in a sharp improvement in economic performance. 

For Singapore, the year has been dominated by the battle to contain the pandemic and the headline-hogging stimulus and support packages to the tune of nearly $100 billion. Even with this booster equivalent to some 20% of the GDP, this year will be the sharpest economic contraction for Singapore ever. The world economy, meanwhile, is seen to contract 4.9% this year, according to a June 24 estimate put out by the International Monetary Fund, before a rebound of 5.4% come 2021. 

From the perspective of McKinsey, the dominant scenario for recovery resembles a “Nike swoosh”, where a sharp downturn is followed by a more muted and long-drawn recovery. The model — one of nine developed by the global consulting firm — expects the economy to fully recover only in 2Q2021. ESSEC Business School economist and Sengkang GRC Member of Parliament Jamus Lim notes that most economists are predicting that recovery will fall between a U-shaped and L-shaped curve, though they are not confident that the global economy will completely recover to its original trend. 

The “Nike swoosh” scenario predicted by McKinsey, however, assumes that governments will have to achieve at least effective control of viral outbreaks with only a few localised occurrences of Covid-19, as well as a partially effective economic policy interventions where economic damage is partially offset and a banking crisis avoided. Should governments prove incompetent in both the public health and economic dimensions, the recovery could quickly take on L-shaped characteristics — including the self-reinforcing recession dynamics and widespread bankruptcies and credit defaults — with little hope of an economic recovery in the worst-case scenario. 

“Greater intervention by the public sector is justified by the emergency for as long as exceptional circumstances persist, but must be provided in a transparent manner and with clear sunset clauses,” argues a team of IMF economists. They note that high levels of collaboration, transparency and trust between governments and citizens are essential to defeat the pandemic conclusively. Unfortunately, with the rise in popular distrust of government and governing elites around the world, such trust and cooperation may prove hard to come by. 

A silver lining amid the dark clouds, however, is that intra-Asia trade has increased significantly during the course of the crisis. Lin says this covers not only the flow of goods and services between countries, but also people flows within Asia as well. Recovery is likely to occur on a regional basis starting with intra-Asian people-to-people flows as the pandemic begins to lift, before inter-regional trade with Europe and the US to eventually follow. 

A time for reinvention

No matter what sort of hand global economic forces deal to business, firms will have to completely reinvent themselves for the prematurely-born digital economy. It has become almost a cliche in the business world to observe that Covid-19 has brought on years of transformation within a few weeks, with work from home (WFH) arrangements and travel bans pressuring firms to quickly digitalise their operations. What is clear though is that firms that do not adapt to this “new normal” will be the first to go, while those that digitalise successfully may yet survive. 

Vinayak HV, senior partner and leader of McKinsey Digital in Southeast Asia, observes three key trends underpinning the post-Covid digital acceleration. These include firstly consumer behaviour, which has been transformed drastically from the increasingly digital nature of consumption following the introduction of lockdown measures, and second the nature of work, which has been radically changed by the growing prevalence of WFH. Most crucial of all perhaps is the organisational aspect of this transformation, where firms will have to develop agility and reimagine their business models to grapple with the former two changes. 

“Organisations which were agile or had undertaken an agile transformation were fundamentally able to respond to the crisis significantly faster than organisations which had not,” says Vinayak. Moreover, the biggest thing on the mind of business and CEOs is not just to return to pre-Covid levels of performance, but rather to completely reimagine their businesses and organisation for a much-changed business environment. A McKinsey article even observes that paradoxically, in a time of massive disruption, inertia is in fact riskier than change, fuelling firm innovation rather than prompting a retreat into fearful reactionism. 

“How can we ever tell ourselves again that we can’t be faster? We have proved that we can. We’re not going back,” one business leader tells McKinsey, which notes that bold experiments and new ways of working are now “everyone’s business” rather than for hot-blooded start-ups. The McKinsey article calls on firms to revisit their corporate identity and the causes and values they stand for, translate this into a flatter, more people-centred and agile operating structure and learn about new ecosystems and technologies that will dominate the post-Covid economy. 

Yet, it is this rapidly changing economic landscape that will see opportunities for start-ups to thrive even in the face of significant economic pressure. While businesses will be hard-pressed in the near-term to ensure their survival amid cash flow pressure and lower funding availability, the rapid changes in the post-Covid economy will likely result in new problems and challenges that agile and resilient businesses can develop solutions for. Seizing the opportunities at this pessimistic juncture could see firms gaining first mover advantage in the economy of the future. 

“The Covid-19 pandemic has clearly confirmed the maxim that crisis breeds innovation and opportunity. We have been reminded that World War Two yielded the first programmable digital computers as well as unexpected discoveries like super glue,” says Dirk G. Schroeder, associate professor of social entrepreneurship and global health at Emory University in an op-ed for the Harvard Business Review. 

McKinsey’s Vinayak made a similar observation that it was precisely at the height of the Global Financial Crisis when many ubiquitous tech unicorns like Airbnb and Amazon really took off. Significant business opportunities lie in an emerging generation of older tech users who are emerging as people shift more of their lives onto cyberspace, he says. Having once shunned digital technology due to inertia, many in the older generation have been forced into migrating online by the imposition of lockdown measures only to find themselves in an unfamiliar “millennial’s world”. Firms that act to develop products that provide value-add to these older users, Vinayak reckons, have much room for expansion into this new market segment. 

Ultimately, what prevents a firm from digitising is not so much financial or material obstacles, but rather a mindset that resists change. Vinayak notices that most firms do not digitialise earlier as they lack an appetite for risk and agility in decision making, Covid-19 has accelerated decision-making by forcing executives to take risks and make decisions more quickly to ensure their survival. Lin also adds that in McKinsey’s discussions with businesses and executives, her goal is to convince firms to ride on the momentum of change brought on by the pandemic to speed up their process of digital transformation. 

“All our conversations are around this reimagine point… which shows you that you are able to do it and now you kind of earn the right to reimagine and leapfrog and therefore reinvent [their operations],” she reflects. Firms willing to ride the wave of change brought on by Covid-19, she believes, will prove to be long-term winners, creating an increasingly vast chasm between themselves and those unwilling to contemplate the possibility of reinventing themselves for the future.