COVID-19: Fastforwarding negative economic trends
Updated: Mar 19
COVID-19 served as a fast forward button to all negative trends that were already happening in the world economy, says Koray Köse, Senior Director, Supply Chain Research and Advisory at Gartner. In an interview with The Logistics Point the expert explains what is happening in the world economy, how can companies and governments respond better and what the post-COVID-19 world would look like.
The world saw the longest term of increasing economy, but the expert explains that it was going to enter a phase of reckoning where markets would adjust even without the current crisis. The present COVID-19 situation served as an amplifier and propelled forward some of the negative and damaging behaviour that was already in the world economy. ‘We have seen indicators in the global financial market which have been clear but very shortly after irrationally responded to,’ Köse says. ‘In one quarter in Europe we had signals for recessions and then in the next it seemed everything was normal,’ he continues giving as an example the German manufacturing sector that experienced an unexpected recovery at the end of 2019, despite disappointing results before that.
‘We were expecting the turn away from strong expansion to come differently,’ Köse comments.
The news that Saudi Arabia and Russia have entered a price war, triggered by the coronavirus, is another negative sign which will additionally bring problems to the world economy and speed up all negative trends that experts were warning about. ‘It is almost as if we are watching a movie on fast forward,’ Köse says. Different negative events are happening at the same time which puts pressure on weak companies and countries and will flow to the world economy as well.
The coronavirus and the OPEC discussions with Russia have triggered the biggest stock market loss in years. Köse believes that a lot of people have not come to terms with what exactly has happened and how significant this event is. Germany hasn’t seen such decline since 2001 and the USA since 2008.
Lockdowns and tax cuts
Before the lockdown in Italy the economy was already struggling. The current crisis could turn out to be what takes the country into a recession. ‘A complete lockdown doesn’t necessarily help the industry,’ Köse says. In the US the government is talking about tax cuts and keeping people working. These are signs of drastic measures as usually governmental intervention takes longer and is only implemented after careful consideration.
Real win or PR
To deal with the crisis the Chinese government is putting a lot of money into the market as specifically SMEs are exposed to conditions that could see them close down. ‘It is premature to open the factories due to the fact that the unknown factor of the labour force being infected or not could mean you are lucky and at some point there will be a case in the factory and then it will have to close again.
How are you going to rehire and retrain people in the short time frame?’ Kose asks.
He says any benefits from opening factories earlier will be wiped out if new cases are confirmed.
Köse talks about the importance of Crisis Management in the current situation. ‘Every company takes pride in it,’ he explains. ‘Dynamic risk management is something I have been trying to preach for years.’ Köse continues about the importance of having multiple sources of supply and how companies put themselves at risk believing that it is easier to control one supplier. However, he acknowledges the challenges with multiple suppliers. So where is the middle ground in the current situation?
First we need to separate politics from health issues from supply chain,’ Kose answers. He thinks having the mindset that the world will solve the equation by improving all variables at the same time is wrong. He suggests that governments should think about each of them independently. ‘What can we do to protect our workforce and utilise technology and innovation to keep up production?’ he asks. Short term targets are not going to help companies in the long run.
‘Companies that are still delivering are the ones that will see a huge difference in a couple of months or years,’ the expert explains. ‘One will be the extreme winner and the others the extreme losers.’
Köse continues by saying that we need to think about methodologies and technologies that can be applied to the supply chain now and take some of the burden and the heat. Shifting factories from one place to another is not going to prove a resilient strategy. ‘The human dependency should be only there where it adds value,’ Köse tells. ‘Low cost countries are trying to utilise the cheap labour force and not put huge capital investment.’
Predict the unpredictable
The crisis has put the world in a limbo but Köse believes that many of the economic predictions put forward for 2020 and 2021 are still applicable. ‘We don’t understand why we were in a situation with continued expansion with signs of recession,’ he says. ‘There was no fundamental explanation for the additional growth, the peak in the stock markets. We were talking about a recession and the need to prepare for one way before the coronavirus.’
The conclusion is that no matter what the cause of the recession would be only resilient supply chains will be able to cope.
‘We would see market and countries trouble,’ Kose continues and gives the example of Lebanon announcing it could no longer pay its creditors.
Although the state is not a significant contributor to global growth, economically weaker countries could be used as first signs for overall problems. Italy is taking the same path and the expert believes the next European country to struggle will be Spain.
Financial markets already deal with negative or extremely low interests rates in Europe so any economic response will be limited. ‘They have limited ability to do something through monetary policy,’ Köse says.
Once the coronavirus is gone, other topics will come up again. This will include the trade war between the USA and China. ‘They will be much more intense,’ Köse says. ‘If we are truly going into a recession trade wars are going to be even more significant.’