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Tag: economic recovery

Many U.S. CEOs remain confident despite challenging environment

In the midst of the COVID-19 pandemic, many U.S. CEOs remain confident in the growth prospects of the domestic economy and their companies and are accelerating investments in digital transformation, according to a new study by KPMG LLP, the U.S. audit, tax, and advisory firm.

The 2020 KPMG CEO Outlook features insights from 315 CEOs at large companies globally, including 100 in the United States, who were surveyed in July and August about the business landscape over the next three years. Key findings include:

  • Forty-three percent are “more confident” in the growth prospects of the domestic economy and their company (60%) compared with the beginning of the year, while 37% said they were “more confident” in the growth prospects of the global economy.
  • Low to moderate growth is expected. Thirty-nine percent predict 2.5-5% growth, 33% expect less than 2.5% growth and 14% predict no growth.
  • Environmental/climate change risk (21%), talent risk (20%), a return to territorialism (18%), supply chain risk (15%), and cyber security risk (12%) were identified as the greatest threats to their organizations’ growth aside from global health security/pandemic risk.

“U.S. CEOs are resilient and remain optimistic as they continue to rise to meet the challenges and opportunities resulting from the pandemic and ongoing economic uncertainty,” said Paul Knopp, KPMG U.S. Chair and CEO. “They are accelerating the digital transformation of their businesses, but also see a multitude of risks apart from the pandemic—with talent risk becoming front and center in the current environment.”

Digital investments accelerating

The majority of CEOs noted the COVID-19 pandemic has accelerated their digital investments and progress across numerous dimensions by at least a matter of months. These areas include:

  • The digitization of operations and the creation of a next-generation operating model (74%)
  • The creation of new digital business models and revenue streams (70%)
  • The creation of a seamless digital customer experience (73%)
  • The creation of a new workforce model, with human workers augmented by automation and artificial intelligence (66%).

CEOs cited difficulty making quick technology-related decisions (31%) and a lack of insight into future operational scenarios such as new ways of working (22%) as the greatest challenges associated with accelerating digital transformation within their organization.

As they respond to COVID-19 and prepare for the post-pandemic reality, 74% said they were prioritizing investments in new technology and digitization over developing their workforce’s skills and capabilities (26%).

Changing working world

As a result of the pandemic, CEOs see the world of work changing in numerous ways.

  • Sixty-eight percent said they will downsize their office space.
  • Seventy-six percent said they will continue to build on their use of digital collaboration and communication tools.
  • Seventy-eight percent said remote working has resulted in significant changes to company policies in order to nurture their organization’s culture.
  • Seventy-two percent said that working remotely has widened their potential talent pool.

Trust and leadership

  • Seventy-seven percent said they need to re-evaluate their corporate purpose as a result of COVID-19 to better address the needs of their stakeholders.
  • Seventy-seven percent said their communications with employees have improved during the crisis.
  • Eighty-three percent want to lock in the sustainability and climate change gains they have made as a result of the crisis.
  • Fifty-eight percent said their response to the pandemic has shifted their focus towards the social component of their environmental, social, and governance (ESG) program.
  • Sixty-seven percent said they already had—or planned to—publicly declare new measures this year to combat racial discrimination against Black employees.

“As much as COVID-19 changed how people work and how organizations invest in technology, companies are re-assessing their values and purpose,” Knopp said. “CEOs also are placing a greater emphasis on employee engagement and corporate culture in this new working reality.

What will economic recovery from COVID-19 look like?

A recession is upon us due to the public health crisis causing a global societal shock. The COVID-19 virus has created many unknowns, but as we work through the crisis, there are some things we do know or have a high degree of confidence in, such as spiking initial unemployment claims as well as monetary and fiscal stimulus measures. In addition, we believe much of the upcoming economic data will be shockingly bad.

The narrative now changes to what the economic recovery may look like, and there are two primary drivers of what comes next. The first is epidemiological, meaning the progression of the global pandemic. The second driver is sociological: the response of consumers, businesses and governments.

Economic recovery scenarios: Alphabet soup

The U.S. has experienced 10 recessions since 1950. Each historical recession/recovery cycle had unique components, such as inflation or oil shocks, yet each cycle had common characteristics such as monetary and fiscal stimulus. Historical recessions/recoveries cycles have taken several patterns:

  • V-shaped: Characteristics of this recovery include sharp declines in GDP with spiking unemployment. In the current environment, a V-shaped recovery would see immediate recovery in the third quarter, the COVID-19 virus solved, and the economy recovering lost output by end of 2020.
  • U-shaped: This type of recovery features sharp declines in GDP with spiking unemployment. In today’s scenario, this recovery would see stabilization in second half of 2020, the COVID-19 virus controlled, and material recovery in late 2020 and early 2021.
  • W-shaped: Sharp declines in GDP with spiking unemployment are calling cards for this type of recovery. A W-shaped recovery from our current situation would see the COVID-19 virus appearing to be controlled, the economy re-opening, COVID-19 cases re-emerging, and the economy once again shutting down.
  • L-shaped: This recovery involves sharp declines in GDP with spiking unemployment, the persistence of the virus, continued shelter-in-place orders, inadequate stimulus, and economic stagnation.

Economic recovery: Forecast

We are suggesting that the recovery will look like something between a “U” and an “L.”

We don’t think the recovery will be “U” shaped due to our assumption that a COVID-19 vaccine or treatment won’t be available until late 2020 or early 2021. In addition, the economic recovery will be modest due to high unemployment.

We also don’t think the recovery will be “L” shaped either. Our assumption is the economy will open in a few weeks, the virus will become more controlled, and adequate stimulus measures will be put into place.

Perhaps an upward sloping “L” shape, or swoosh, is the best descriptor of what we expect. U.S. GDP experienced a waterfall event as the country shut down and consumption ground to a halt. We anticipate that economic activity will slowly return to a sense of normalcy as the curve of new COVID-19 cases flattens and stimulus provides an economic backstop. We would expect modest growth continuing into 2021.

The contraction in U.S. second quarter real GDP will be unprecedented. The U.S. soft- closed on or about March 16 and vast amounts of stimulus soon followed. Since then, the available data is fluid and changing rapidly, making it difficult to interpret. That said, we expect GDP to contract by 26% in the second quarter. The Bloomberg consensus, which UMB is part of, forecasts a second quarter contraction of 25%. To demonstrate the complexity of forecasting in this environment, the range of second quarter GDP among the 70 Bloomberg participants is 0.4 to -65%, indicating that there are still a lot of unknowns.

The labor market has rapidly changed over the past two months. In approximately 30 days, 22 million Americans lost their jobs and filed for unemployment benefits. From July 2009 to February 2020, the U.S. created 22 million new jobs. The unemployment rate was 3.5% in February, the lowest since 1969. By the end of April, we expect unemployment to be approximately 25%, a record high. One positive note, more than half of the unemployed reported being temporarily laid off, suggesting that many could return to work quickly if conditions improve.

Game changers

One school of thought is that things took an abrupt turn for the worse, so perhaps things could take an abrupt turn for the best, creating a “V” shaped recovery. For this to happen, we think there are a few virus-related things that need to develop. As the following develop, our economic forecast will change as well:

  • Vaccine,
  • Treatment,
  • Widespread testing, and
  • Hospital capacity.

Risks: the “W”

A significant risk is the “W” recovery. In this scenario, spending collapses during the period of strict social distancing and rises when the economy reopens, but not to the pre-crisis level because of the shock to confidence, unemployment and other factors. There may be a brief overshooting to make up for some of the underspending during the lockdown, but if the confidence shock is long-lasting, the economy may start to slow again.

Another concern relates to the ability to open the economy and contain the virus. The risk is that this experiment fails, perhaps due to noncompliance and inadequate testing or tracking of hot spots, and another broad shutdown may be required. China, Italy, South Korea and Japan are all worth watching for clues.

A collapse in corporate earnings will place considerable strain on the capacity to service debt. There will be an unprecedented surge in corporate rating downgrades. China’s experience suggests that job losses and consumer caution will prevent demand from fully bouncing back to alleviate pressures on corporate debtors. When global GDP contracted by 0.5% in 2009, pre-tax earnings of global non-financial corporations plummeted by 45%. We’re expecting a 4.5% decline in global GDP this year, so there’s a good chance that earnings will fare worse than they did in 2009.

Some sectors will remain very vulnerable. Hospitality, leisure and some retail may never be the same. The service industry will take an obvious hit. But due to our inter-connected global economy, manufacturing is also in jeopardy. The 5.4% month-over-month plunge in industrial production in March, the sharpest monthly fall since 1946, highlights that while current coronavirus containment measures are primarily slamming the brakes on service sector activity, the manufacturing sector is also set for a significant downturn.

Conclusion

All the economic data suggests that a recession is upon us and the National Bureau of Economic Research, the official recession declarers, will likely tell us it started in March. We do anticipate that the recession will be short-lived, and the recovery will be slow and steady, taking the shape of an upward sloping “L”. Due to pent-up demand and abundant stimulus, U.S. GDP may see an impressive rebound in a single quarter. However, on a sustainable basis, we forecast that the recovery will be slow and steady into 2021. Let’s not forget that pre-crisis, potential GDP was approximately 2%, driven by the labor force growth rate and productivity gains. That hasn’t changed.