The coronavirus pandemic: a “black swan” event

The COVID-19 pandemic has sent a global shockwave. According to EY experts, it meets all the criteria of a “black swan” event. It was impossible to predict and has a huge impact on reality, as confirmed by surveys conducted by PwC and McKinsey.
The coronavirus pandemic: a “black swan” event

According to Nassim Nicholas Taleb, the author who came up with the concept of “black swan” events, ignoring things which cannot be predicted is not the most important source of risk. Instead, a much greater threat for businesses lies in the misbelief that everything is under control. The pandemic caused by the coronavirus has already had an unprecedented impact on individual, the society, and the economy.

EY started the arrangements for its annual Global Capital Confidence Barometer (this year’s edition is entitled “How do you strike a balance in the midst of a crisis?”) in early February of 2020. The initial responses of the survey participants were optimistic, but in mid-February, the moods changed. The coronavirus created new risks and previously unpredictable challenges. The survey respondents emphasize, that the actual impact of the pandemic on revenues and profitability is still unknown, and that they have not yet developed new strategic plans.

According to EY experts, most companies will encounter some difficulties, and their ability to respond to this “black swan” event is being tested in the real time. Three-quarters of all the respondents assume that the coronavirus will have a severe negative impact on global growth, while 27 per cent believe that the impact will be weaker than is currently assumed. However, there are no respondents anticipating no impact at all.

None of the previous crises have prepared companies for a global health emergency, so there is no model for predicting the ultimate outcome of the current situation. All the executives surveyed by EY agree, however, that in the short-term the pandemic disrupts supply chains and reduces consumption.

According to PwC’s report “COVID-19 CFO Pulse”, as many as 73 per cent of CFOs (Chief Financial Officers) in the world are concerned about the impact that the COVID-19 pandemic will have on their companies, while 80 per cent expect a decrease in revenues. They are also aware that they will have to take the pandemic into account in their financial reporting. More than half (53 per cent) intend to include information concerning the pandemic in the financial statements, while 48 per cent want to list it as a risk for the conduct of their business activity.

According to EY, the lockdown introduced in China and then also in other countries revealed the weakness of the existing supply chains. Becuse of that, more than half of the survey respondents (52 per cent) intend to take steps to change their supply chains. The CFOs surveyed by PwC are tasked with finding ways to counteract the effects of the crisis. Because of that, 77 per cent of them are considering cost containment measures, while 65 per cent are examining the possibility of halting their investment plans. Since many of the employees are already working from home, companies will certainly attempt to reduce their office space costs.

Among the companies surveyed by EY, 47 per cent are already taking active steps to reconfigure their supplies and 36 per cent are accelerating investments in automation. At the same time, 39 per cent of the companies are focusing on managing their workforce. The respondents surveyed by PwC recognize, that the cost reductions will have an impact on the workers: 42 per cent are considering the possibility of compulsory leave for their personnel, while almost a third (28 per cent) do not rule out collective layoffs. On the other hand, 40 per cent of the CFOs expect that workers will soon start demanding greater protection from the employers.

According to the EY survey, strained cash flows are the most important immediate effect of the pandemic, experienced by most companies. Among the respondents, 39 per cent claim that the coronavirus outbreak will significantly impact their profitability and margins, 56 per cent believe that it will only have a minor impact, and only 5 per cent believe that it will have no impact at all. According to EY experts, the coming slowdown, or even economic crisis, will primarily affect the companies which have already struggled with maintaining profitability before the outbreak of the pandemic. Because of that, almost half of the companies surveyed by PwC (45 per cent) intend to take advantage of the assistance programs offered by the individual governments. The experts at PwC point out, that the number of companies using such aid is likely to increase along with the duration of the pandemic.

The consumers rule

EY also draws attention to the fact that the social distancing will lead to shifts in the purchasing habits of consumers, impacting sectors such as the automotive industry, transportation, manufacturing, and consumer goods. There are also certain sectors that will benefit from that shift – the media, telecommunications, and technology. This is confirmed by McKinsey’s study “A global view of how consumer behavior is changing amid COVID-19”. The report indicates that European consumers are looking to the future with anxiety. The people of India are the most optimistic, with as many as 56 per cent expressing a positive outlook. They are followed by the Chinese, among which 53 per cent declare that they are optimistic about the future. A similar opinion is shared by 37 per cent of the citizens of the United States. Among the Europeans, one-fourth of Germans hope that everything will end well. The Japanese people are the most pessimistic, with only 5 per cent looking to the future with hope.

Nearly half of the respondents in McKinsey’s survey are afraid that their incomes might decrease. The share of consumers concerned about the possibility of reduced incomes reaches 25-49 per cent among respondents in the United States, most European countries, as well as Japan and India, whereas in Germany, Brazil, South Africa, and South Korea this share reaches 54-63 per cent.

All these people have one thing in common — reduced spending. According to McKinsey, the rapid growth of online shopping does not offset the overall decline in sales resulting primarily from the closure of stores (with the exception of grocery stores and pharmacies). Customers are now spending less and less on restaurants, apparel, footwear, travel, but they have increased their expenditures on food and home entertainment.

How long will this last?

Thus far, in the case of most pandemics, the economic recovery curves has had the shape of the letter “V”, with a rapid increase in the activity of companies immediately after the end of the pandemic. Among the entities surveyed by EY, 38 per cent believe that this will also be the case this time, with a rebound beginning already at the end of this year. But more than half of the respondents (54 per cent) are of the opinion that the curve will assume the shape of the letter “U”, which means that the negative effects of the pandemic will persist for a longer period of time. In their view, economic recovery will not come until 2021. There is also a small group of pessimists (8 per cent) who believe that the curve will be L-shaped, with the subsequent recovery occurring no earlier than in 2022. Despite all the concerns, more than half of the CFOs surveyed by PwC look to the future with optimism. According to 56 per cent, their organization could return to “business as usual” within three months after the end of the pandemic.

While focusing on solving the ongoing problems resulting from the pandemic, the executives are also trying to develop plans for the future. Many of them are taking advantage of the experience acquired in the years 2008-2012. Despite the drop in the number of mergers and acquisitions, this was a good time to make purchases of valuable assets at bargain prices, which later facilitated rapid business expansion after the crisis came to an end. According to the PwC survey, one third of CFOs do not intend to change their approach to mergers and acquisitions. The executives surveyed by EY look to the future with cautious optimism, which is still stronger than in the second half of 2019.

Meanwhile, the consumers seem to have a different opinion on this matter. More than 75 per cent expect that the economic effects of the coronavirus will be felt for more than 2 months, while 50 per cent believe, that they will persist for four months or more. In China and in the Unites States, which are more optimistic than the rest of the world, more than 90 per cent of the respondents expect that everything will return to normal after more than 2 months, and 50 per cent believe that their financial situation will improve in 4 months at the earliest. According to the survey, among Europeans, and especially among the consumers in Germany, the United Kingdom and France, around 60 per cent believe that more than two months will be needed before things get back to normal. This stands in contrast to the opinions expressed by South Koreans and the Japanese. In both of these countries virtually everyone is convinced that their financial problems will last longer.

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