Post-Pandemic Economy: Building a Bridge

Prepared by BMO Capital Markets Economic Research

(For an in-depth version of this article, click here to read our Special Report.)

While policymakers, markets, and businesses are all still dealing with the effect and extent of the deep economic downturn, attention is turning to what the economy will look like after the storm. Much of the debate is focused around the shape of the macro recovery, with many dismissing the prospects of a V-shaped rebound. And we would readily allow that many sectors and industries face a long, grinding recovery, and some businesses may never fully return to ‘normal’. While parts of the North American economy may partially open in May, there is a risk that we could be looking at 18 months of rolling shutdowns. However, just because the economy will look different and there will be some activity lost forever does not imply that this rules out a broader recovery.

Some sectors will naturally rebound quickly as distancing measures lighten, and others could even see accelerated growth in the new circumstances. So, instead of focusing on the negatives and the downside risks—as some are wont to do—we would prefer to highlight some of the opportunities for the future, which could help support and reinforce the economic recovery on the other side of the deep chasm we are crossing.

Specifically for Canada, the nation has long struggled with weak productivity relative to its key peers, and lagged generally on the innovation front (Chart 1). Some of the changes that have been abruptly foisted upon businesses and workers by the shutdowns may be the spark that helps close that gap. Just one small, but illustrative, example is the rapid-fire innovations that Statistics Canada has unveiled amid the crisis, delivering detailed economic information in a much more timely basis. Even in our business, people are talking about changes made in the past month that took days or hours which, in “normal” times, may have taken months or years.

We turn below to some sectors that may be fundamentally changed by broad developments that could unfold as a result of this unique episode, and discuss some potential opportunities in the years ahead. One over-arching theme is that the crisis may accelerate and accentuate some trends that were developing in any event. However, it may also lead to some adjustments that may not have happened otherwise:

Supply-Chain Dynamics

There is a strong possibility that regulatory changes and government procurement adjustments could prompt more domestic production of medical supplies, drugs, and some resource products. From a business perspective, there will at the very least be an extensive re-examination of supply chains, and the possible shortening of such—to the benefit of manufacturing activity in North America.

As well, firms could invest in building some redundancy into systems and may look at maintaining greater stockpiles in the future, giving at least a temporary boost to inventory accumulation. The review of supply chains and inventory stockpiles was already under intense scrutiny in the wake of recent trade wars—the pandemic has likely accelerated and intensified those reviews.

The jarring shifts in consumer demand associated with the outbreak have also exposed weaknesses in retailers' logistics systems. This issue is particularly acute in Canada, where the retail and logistics sectors have traditionally lagged their more productive U.S. counterparts. IDC Canada found that 77% of Canadian retailers did not have a strategy for innovation in 2018. The scope for further technology investments in the retail and logistics sectors in Canada could not come at a more critical juncture, especially to meet requirements for the rapidly growing e-commerce demand and realize cost efficiencies.

Remote Working

They say necessity is the mother of invention. With effective remote-working capabilities now in place, many companies could discover that it’s simply cheaper to maintain a significant portion of staff at home, with possibly little attendant loss in productivity. This could eventually serve up savings from forgone office space, travel expenses and overhead. About one-third of employees can work remotely at least for some time, and this ratio is closer to three-quarters for employees in professional, technical and financial services. According to Global Workplace Analytics (GWA), remote working in the U.S. has been growing about 10% per year for a decade, while the Federal Reserve estimates the share of the labour force working remotely has tripled in the past 15 years. GWA estimates the average company saves about US$11,000 for each employee that works remotely for half the year due to better productivity, less absenteeism and lower real-estate costs. It also estimates that employees can save from $2,500 to $4,000 annually on commuting and food expenses.

At the very least, this enforced “work-from-home” policy has introduced options that were never thought possible. Operating from home has drummed up demand for specialized office equipment and furniture. This includes home office supplies, desks, chairs, printers, laptops, tablets, and cellphones. Demand has surged for services such as VOIP connections and greater bandwidth. Technology is critical for effective telecommuting. We’ve seen a huge increase in web conferences and group chat sessions to keep conversations and discussions flowing, using a variety of now-familiar applications. As time goes on, we’ll realize the limitations of some of these applications, while security will remain an issue—no one wants an uninvited guest crashing their virtual meeting.

E-commerce and Mobile Banking

To most retailers, the abrupt downturn in the economy feels like a depression, but not for those with a strong on-line offering. Long before COVID-19, bricks-and-mortar stores were challenged by mushrooming e-commerce. U.S. on-line retail sales grew at an average annual rate of 15% between 2012 and 2019, accounting for 11% of all retail spending last year. Many small business owners have moved their operations online during the pandemic, including fitness instructors providing remote exercise lessons and doctors diagnosing illnesses. Some may opt to continue operating online after the pandemic passes, saving rent and overhead. Self-quarantining has driven more shoppers online, which could drive a more permanent shift in consumer behaviour, notably among seniors.

In the banking sector, customers who were previously somewhat reluctant to transact online likely appreciate more of the benefits of doing so now, in terms of convenience and savings in time and money. A survey commissioned by the Canadian Bankers Association in December 2018 found that 91% of Canadians think new technologies have made banking more convenient, and three-quarters use online and mobile banking to conduct most of their transactions. These figures have likely only increased since then, especially so during the social distancing. As more transactions migrate online, financial institutions may restrain their physical footprints without sacrificing customer service, even as in-branch banking remains a vital method for conducting complex transactions and establishing close relationships with clients.

Robotics and AI

Enforced social distancing has highlighted important opportunities for further adoption of robotics and AI in the workplace. Technology is increasingly used to complement labour. At Amazon, robots now move packages between workers, increasing productivity. And, in the retail sector, the use of self-serve kiosks is not new, but the desire to limit human contact could shift consumer preferences toward shopping and eating at venues offering these features.

COVID-19 will also have implications for the use of technology and robotics in public health. Technology has the potential to significantly reduce contact between patients and medical practitioners, which has been an important mode of transmission during the current outbreak. Technologies that enable telemedicine and automate patient monitoring, sample collection, and testing could go a long way toward keeping front-line health care practitioners safe. Remote technologies would also enable distant medical personnel to assist those in infection hotspots, which would improve the ability of the health care system to respond during the early stages of an outbreak.

Robotic technologies could also be deployed as part of efforts to monitor and contain future outbreaks. Automated systems could be used to monitor individuals’ body temperatures in public areas and at border crossings, giving authorities valuable real-time information about the spread of infection. Robotic systems could also be well-suited to sterilizing public areas and hospitals, which would help to reduce the spread via surface contact without putting additional personnel at risk.

Commercial and Residential Real Estate

The commercial real estate sector could be reshaped by some of the aforementioned trends, creating challenges in some segments, but opportunities in others. In the office segment, more widespread adoption of remote working, even on a rotating basis, will open up more vacancies. While this represents a cost-cutting opportunity for some firms, landlords and office-oriented REITs could see rents pressured. In major markets where longer-term economic shifts have driven demand for such real estate, the pressure might be less noticeable as space is absorbed. But, in markets already struggling—Calgary’s vacancy rate is 24%—this will pose an additional challenge.

On the flip side, online shopping will continue to drive demand for industrial and warehouse space. Cap rates in the Toronto industrial sector had compressed to record-low levels before the shock, according to CBRE, and sat below retail cap rates by the widest margin ever. The latter will continue to be pressured upward. As an illustration, employment in wholesale trade, transportation and warehousing has grown at twice the rate of that in traditional retail over the past decade in Canada.

In residential real estate, rural locations could draw increased interest for a few reasons. First, the move toward remote work could open up an affordability valve by allowing households to settle beyond commuter-friendly (and increasingly expensive) locations. Also, densification has been the norm in many regions over the past decade (partly policy-driven), but social distancing runs counter to that trend. The current experience could alter preferences, placing more value on large lots and rural settings, and could even bolster investment demand for workable farmland.

Real-time data

The evolution of the information age has created a vast amount of data on the behaviours and activities of people, places and things. Despite a treasure trove of potential information, there’s precious little available on a real-time basis in Canada. In fact, while Statistics Canada has an excellent reputation among statistical agencies, the Canadian data are often viewed as “old news” by the time they are released. Most activity figures are released between one and two months after the end of the reporting period. That has left policymakers and economists with little information to assess the damage from COVID and the related shutdown of sectors of the economy. The current crisis clearly shows the potential value of real-time data… from how the pandemic is progressing, the potential for contact tracing, the first order impact on the economy, etc.

One example of change is at Statistics Canada, where the unprecedented situation has prompted the agency to create a new data point: a Nowcast of March and first quarter real GDP. Those figures were released April 15, but would usually be seen for the first time at the end of May. While the Nowcast has a sizeable margin of error and no underlying quantitative details, the more timely release provides a better understanding of how deep the COVID-driven recession is going to be. We could see other reports released on a timelier basis. Firms that can harness and analyze these “big data” will likely have increased opportunities in a post-pandemic world, where real-time information has an even greater value.

E-learning

With global learning institutions essentially shut down, faculties have been forced to move online, kick-starting an unprecedented educational “test”. The change could provide greater access and convenience for students at lower costs for governments and private schools. There are plenty of opportunities. First, learning management system (LMS) software is a $182 bln industry according to reportlinker.com and is only poised to catapult from here. Businesses, too, will increasingly turn to LMS to offer employee training and skills improvement programs. Second, mobile learning software enables learners to access digital content on the go. Game-like language learning apps are likely to be at the forefront of this realm having spent years improving the personalized and gamified experience of self-paced study. Lastly, analytics software will become more vital and prevalent as the need to measure learning effectiveness increases. Although the traditional classroom model won’t disappear anytime soon, blended learning approaches that encompass e-learning should become the new norm.

Tourism and travel

This is a sector that clearly faces a long work-out and potentially severe adjustments. Consumer behaviour and psychology are extremely tough to model, but note that U.S. air travel took four years to return to pre-9/11 levels after that traumatic event. While some individuals are likely willing to quickly return to prior behaviour, for many others this will take years. Moreover, we can’t know when some or all of the cross-border travel restrictions will be eased. The potential result of this could be more local, domestic travel—and more driving vacations, especially with reduced gas prices, fuelling demand for related products and services. Beneficiaries could include motels and eating spots in smaller locations, service centres, and even RV dealers and manufacturers (normally highly cyclical industries).

AI Vehicles

The need for distancing amid the pandemic may accelerate the demand and urgency for self-driving delivery vehicles. The demand for autonomous vehicles by businesses, and acceptance by consumers, will likely surge once life returns to normal. The Mayo Clinic has been using self-driving shuttles to move COVID-19 tests around their Jacksonville campus. The ability to limit human exposure to hazardous material and free up staff to focus on more important tasks shows the potential value of autonomous vehicle adoption.

The rising use of delivery services for food and groceries over the past month has underscored the importance of limiting human-to-human contact. Rather than gig economy workers having to worry about their own health and safety (and their customers'), food and household supplies could show up at your door via drone. The need for wider deployment could put pressure on one major hurdle to adoption—regulation. In another space, Rwanda has been using drones to deliver medicine to rural parts of the country since 2016.

Preparedness by Businesses and Consumers

As business closures and stay-at-home orders proliferated alongside the spread of COVID-19, the panic buying that emptied store shelves and the shortages of personal protective equipment that put healthcare workers and others at risk became harsh reminders of the importance of preparedness for governments, businesses and households. And, it’s not just about preparing for the next pandemic. Before the faces of exasperated healthcare workers flooded the media, there were the faces of exasperated firefighters battling Australian bushfires, which also reminded about the need for preparedness owing to extreme weather events caused by climate change. We judge that outlays and activities related to preparedness will become a permanent fixture on the economic landscape.

For households, this involves establishing, replenishing and maintaining emergency pantries and precautionary savings. Emergency pantries would include non-perishable food and other essential household items, and, without increased household budgets, these purchases would likely supplant outlays on non-essential goods and services.

The rule of thumb about maintaining emergency savings to cover at least three months’ worth of living expenses could increasingly become more common. However, in an environment of extremely low interest rates, consumers will be looking for higher-yielding, but still-safe options such as money market funds that invest only in short-term government securities or repos fully collateralized by government securities. As household funds are diverted to saving, this could compound with outlays on emergency pantries to act as a more persistent drag on non-essential outlays.

The household saving rate was 3.0% in 2019 Q4 and had been drifting up from a low of 1.8% a year earlier. While not an ideal measure, the saving rate can reveal trends in precautionary savings, and that trend was low in Canada prior to the crisis and was on a secular downtrend since the early 1980s. At the very least, the crisis and sudden income losses may reinforce the need for precautionary savings among households. The long-run median savings rate since 1961 has been 5.5%, and that could be where we converge on in the years ahead.

Bottom Line: The crisis in some sense has brought the future into the present, rapidly and sometimes harshly accelerating changes that were already in train. There is no doubt that some sectors face long-term challenges as a result of the shutdowns and distancing measures, as well as some potentially fundamental changes in consumer behaviour and psychology. But at the same time, in classic creative destruction fashion, there will be some sectors that strengthen and step into the gap. The main message is that economies are resilient, and people and businesses can be incredibly resourceful in the face of challenges—don’t underestimate the ability to recover from this tough period.