While coronavirus rages on, a sustained economic recovery is impossible

Individual businesses and sectors are having to get creative, and in many ways they predicted some of the issues in advance and have adapted, writes Hamish McRae

Paradoxically, the response of companies to the crisis is becoming clearer than the shape of the crisis itself (Getty)

California orders bars in virus hotspots to shut. Leicester, unlike the rest of England, has to delay the reopening of its pubs and restaurants. North Rhine-Westphalia, Germany’s most populous state, is shutting some of its bars, cinemas and gyms. Victoria, Australia, is imposing a four-week lockdown. And the World Health Organisation warns that the worst of the pandemic “is yet to come”.

That is just a random snapshot of the news of the past two or three days. There are many other examples of outbreaks that tell us that, while the global economy may have hit bottom in the second quarter of the year, Covid-19 will continue its destructive path for a while yet. While it does so, a sustained global economic recovery is impossible. Economists can make guesses as to the profile of growth in the months ahead but the uncertainties are huge – and companies have to live with that.

Paradoxically the response of companies to the crisis is becoming clearer than the shape of the crisis itself. At the risk of overgeneralising, there seem to be three main elements to this. They are shortening supply chains, planning for much more variable demand and building up more robust balance sheets. The net result will be a higher-cost but more resilient world economy. A word about each.

Simplifying supply chains had already begun before Covid-19 struck. The US-China trade war had obviously made companies in the US try to rely less on Chinese imported components, and European firms followed suit. But you can trace the push to simplify back even earlier, to around 2014, when global trade stopped rising as a percentage of world GDP. The word “reshoring” – bringing back production to the home country – goes back further. A pressure group, The Reshoring Initiative, was founded in the US in 2010.

So, what has happened now is a reinforcement of an existing trend. A much-publicised example has been the revival of the production of personal protective equipment in the UK. When British hospitals found they were short of kit, it transpired that almost all of it was imported. The government was scrambling around the world trying to find companies that could make it. Now, it looks as though the UK will be making about 20 per cent of its needs domestically by the end of the year. That may not sound a lot, but it is a base that can be built on – and it is a small example of a global wave. You pay a bit more for security of supply.

Planning for variable demand is something that companies do all the time. What will growth be this year? Might there be a recession? Do we put on a night shift? But they have never experienced anything on this scale: not just a fall in demand, but for an airline or a restaurant, zero demand. What do you do? It is impossible to generalise, but you just have to look at the world about us to see the myriad ways in which businesses are adapting. Pubs are converting car parks to beer gardens, airports are installing instant temperature checking, shops are managing flow patterns.

We don’t know what will be the implications for employment. On the one hand, if more staff are needed to monitor customer flows, that creates jobs and, of course, adds to costs. On the other hand, if restaurants have to simplify menus and service to control costs as numbers are down, they will use fewer staff. We do however know that there will be even more pressure on a flexible labour force: fewer full-time staff jobs and more self-employed and part-timers.

The third shift is towards more resilient balance sheets. Companies that have borrowed a lot are especially vulnerable to disruption, while those that are cash-rich can pick off parts of the business that others have to sell. BP’s sale of its petrochemicals business to Ineos looks like an example of that. The airlines are seeing a huge sorting out of the strong and the weak. We don’t know whether Sir Richard Branson’s Virgin Atlantic is going to be rescued, but we know others, such as American Airlines, are secure.

The advantage to a company of being highly geared is that if all goes well it will make a higher return on equity than it otherwise would. The disadvantage is that if things don’t go well it goes bust. Shareholders wanted to see a high return on equity and supported gearing. Now that many companies have seen shareholders pretty much wiped out, the mood is rather different.

The world economy will recover. But after a blow like this, the new normal will be different from the old normal. We are getting a glimpse of the new normal – an economy that will be less “efficient” in the narrow sense of the world, but more resilient to shocks.