Brief
Bain Macro Trends Group analysis of the global Covid-19 outbreak suggest that businesses should activate second-level contingency procedures that include separating essential operations and services, focusing on high-priority customers and clients, and implementing operational and financial preparations consistent with a two-to-three-quarter recession.
The Situational Threat Report (SITREP) Index is a composite assessment based on all available information about epidemiological, economic and social conditions tied to the outbreak (read “About the SITREP Index” below). On April 13, Bain raised the SITREP Index to Level 7.
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The latest on the outbreak
As of June 9, 2020, there were over 7 million confirmed cases of Covid-19 around the world and more than 400,000 fatalities. The US has 1.7 million cases and has recorded over 110,000 deaths.
National and local governments have begun reopening their economies, but the economic toll of the Covid-19 pandemic has been profound. US GDP fell at an annual rate of 5% in the first quarter of 2020, while the eurozone economy contracted by 14.4%. Over 42 million Americans have filed unemployment claims since the crisis began, and the government this week said the US officially entered a recession in February. The sizeable economic contractions in the first quarter of 2020 reinforce our view that heavy disease-mitigation temporarily reduced economic activity by 40% to 50%, producing damage on par with (if not slightly greater than) the Great Recession.
Recent US employment data, however, is more encouraging. The country’s unemployment rate fell to 13.3% in May from 14.7% in April, surprising economists who had projected the jobless rate would increase to 20%. While the official employment numbers should be interpreted with caution, such a positive report so early in the recovery supports our base-case view that the depth of this recession will be roughly on par with that of the Great Recession.
Fiscal and monetary policy makers across the world have taken unprecedented steps to stabilize the global financial system and avert economic catastrophe, yet fiscal policy still appears insufficient, in both size and scope, to prevent a severe recession. Federal Reserve Chairman Jerome Powell in a recent interview described additional fiscal stimulus spending as costly but potentially necessary; however, US lawmakers are still debating whether additional fiscal relief is necessary. In Europe, EU member countries have been unable to agree on the specifics of a relief package, a failure that could jeopardize the stability of the bloc. Meanwhile, a dispute has broken out between Germany and the EU over a recent ruling by Germany’s federal constitutional court that questions the European Central Bank’s policy-making authority. The issue could further hamper the EU’s ability to counter the economic shock of disease-mitigation policies.
Tensions between China and the US have mounted rapidly in recent weeks. President Trump announced the US will revoke some of Hong Kong’s special trade privileges after the Chinese government unilaterally imposed new security laws in Hong Kong in May, and Secretary of State Mike Pompeo has informed Congress that Hong Kong could no longer be considered "autonomous" from China. A bipartisan group of US politicians has introduced legislation that would sanction Chinese government officials that enforce the new laws. China’s deteriorating relationship with the US could pose a threat to global trade and supply chains. A reexamination of the current model was already underway as a result of the changing balance of global labor costs and innovations in automation technology. A new geopolitical shift could accelerate this trend, creating another wave of disruptions related to the pandemic
Rationale for raising the index to level 7
On April 13, we raised the Coronavirus Situational Threat Report (SITREP) Index from level 6 to 7 in light of the extension of heavy disease-mitigation measures in many economies and our assessment that governments’ fiscal policy responses will only modestly offset the economic damage resulting from the pandemic. (This level implies that businesses should activate second-level contingency planning.) If economic conditions worsen further—for example, due to unsuccessful reopenings and the resulting extension of, or return to, heavy mitigation efforts—we may raise the index again. However, the current mix of epidemiological data and policy actions suggests such an outcome is less likely. As a result, we do not believe another increase in the index is warranted at this time.
Rationale for raising the index to level 6
We raised the index from level 5 to 6 on March 12, 2020.
A rapid increase in the number of businesses in Western Europe and the United States announcing various measures to combat the spread of coronavirus was an especially prominent factor in our decision to raise the level at that time. In particular, many large employers moved to partial or full work-from-home policies. Countless prominent public events were canceled throughout the US and Western Europe due to a combination of governing authority declarations and private business decisions.
The other critical factor in our decision was the apparent insensitivity of the US financial markets to sizable emergency Federal Reserve interventions. Two weeks earlier, it seemed likely that breaks would appear in the financial system, but they were not yet present. The week of March 12, these breaks were present, but still nascent.
Additional data from our Bain/Dynata survey of US households indicated that almost one-in-five Americans took at least one concrete action the prior week, such as avoiding public spaces like restaurants and theaters, due to their concerns about the coronavirus. Anecdotal reports of changing public behavior have spiked, and a midweek snapshot of real-time polling suggested the level of behavior change by concerned individuals was increasing.
Finally, the quickening pace of announcements that prominent public figures had been exposed to or may be infected with coronavirus—including possible exposures among members of the US Congress and the possible infection of Prime Minister Justin Trudeau of Canada and Health Minister Nadine Dorries of the UK—were likely mobilizing portions of the population that had previously viewed the coronavirus pandemic with more circumspection. Particularly for democratic countries, this upward inflection in public perception about the urgency of the coronavirus pandemic was a critical development on the path to a more intense phase of the crisis.
Rationale for raising the index to level 5
We raised the index from 4 to 5 on February 25, 2020.
A key milestone was a notable inflection in the official guidance from the Centers for Disease Control indicating rising certainty that Covid-19 would become a large-scale epidemic in the United States and result in serious disruptions to daily life. The CDC’s guidance further indicates that the epidemic was progressing to the point at which the need for public preparations now outweighs the risk of creating social panic. At that time, there were no reports of store stockouts or other indications of panic, suggesting that the social environment in the US was stable.
The pattern of increasing “first reports” from more countries—including Kuwait, Bahrain, Algeria, Brazil, Austria, Croatia and Switzerland—indicated that the virus was widely circulating across the globe. In light of the virus’s unusually long incubation period and sometimes mild symptoms (which make it difficult to identify all cases), the large number of confirmed cases indicated that sustained transmission was already occurring in multiple countries.
The significant growth in the number of confirmed cases in South Korea was further confirmation that rapid spread and sustained transmission were occurring outside of China. It also confirmed that there weren’t unique conditions—conditions that might not be present in a more developed country like South Korea—in China that materially exacerbated the spread of the virus (such as the unprecedented quarantine procedures).
About the SITREP Index
The Coronavirus SITREP Index isn’t intended to replace or modify any official government guidance or directives regarding the coronavirus. The index is intended to assist business leaders in planning and coordinating a gradient of business-contingency policies in response to a rapidly evolving situation.
Our SITREP Index, which ranges from 0 to 10, is a composite assessment based on quantitative and qualitative information across three classes of data.
- Scientific/epidemiological: information about the virulence and transmissivity characteristics of the COVID-19 “coronavirus” that provides objective data about how the virus may spread
- Economic: information about the direct and indirect effects of the epidemic on consumer and business behavior, including the potential for supply chain disruptions
- Social: information about government actions and public reactions, including social distancing and quarantines
We’re combining official data with our own modeling to generate a holistic appraisal. This modeling relies on our experience with data triangulation, which is especially relevant today in light of the diversity and irregularity of the data sources surrounding this rapidly changing situation.
When official data appears to require directional adjustments to account for inadequacies or limitations in data collection, we rely on triangulation across multiple data sources and modeling to generate an adjusted assessment.
To assess economic and social conditions, we’re relying on a combination of high-frequency anecdotal reports and more conventional macroeconomic data. We’re also monitoring social media and other unconventional data sources, discounting appropriately based on relative assessments of credibility and reliability.
Based on our real-time monitoring of the progression of the epidemic, the Coronavirus SITREP Index is adjusted to take into account a continuum of milestone events that reflect the increasing severity of the epidemic’s effects on the business operating environment.
For example, the extension of the Hubei/Wuhan-area quarantine past the Lunar New Year holiday week warranted raising the index due to the likelihood of supply chain disruptions not normally associated with the seasonal holiday.
Also, the sustained community transmission in multiple nations—including Italy, South Korea and Iran—warranted increasing the index because it demonstrated that containment efforts within China weren’t completely successful, raising the eventual likelihood of global-scale impact.
The index is scaled to facilitate the calibration of business-contingency policies along a stepped continuum—from normal operations (level 0) to severe global recession with global-scale operational disruptions (level 10).
Adjustments to the scale are based on current or imminent conditions. When appropriate, based on changes in factors like viral spread and economic activity, a projected trajectory of index increases is also added to support forward-looking preparations.
Coronavirus
The global Covid-19 pandemic has extracted a terrible human toll and spurred sweeping changes in the world economy. Across industries, executives have begun reassessing their strategies and repositioning their companies to thrive now and in the world beyond coronavirus.
Karen Harris is managing director of Bain & Company's Macro Trends Group and is based in the firm's New York office.
First published in Июнь 2020