The New Landscape

Pandemic gives way to a two-tiered economic recovery; some will get healed while others are destined to struggle
Infographic Copy 2
Illustration by Lindsey Masterson

The following was excerpted from a report written by McKinsey Global Institute partners Susan Lund, Anu Madgavkar, Jan Mischke and Jeana Remes. MGI’s mission is to help leaders in the commercial, public and social sectors develop a deeper understanding of the evolution of the global economy and to provide a fact base that contributes to decision-making on critical management and policy issues.

Actions taken today — from investing in human capital to enabling a surge of entrepreneurship to diffusing technology to companies of all sizes — could create a virtuous cycle of job growth, rising consumption and productivity growth. Lessons from past recessions reveal that this is not only possible but routinely occurred in many post-war recessions. Failure to act is likely to deliver a tepid,
two-speed recovery that we saw after the 2008 financial crisis.

The COVID-19 virus interrupted, accelerated or reversed longstanding consumer and business habits.

Every activity and function that could move online did, fueling a mass digital migration. Companies sent their employees home and eliminated business travel, and many now plan to continue with some hybrid form of remote work and virtual meetings. Consumers went online to fulfill needs ranging from buying groceries and taking school classes to exercise and doctor appointments. Businesses also turned to digital tools in new ways. Auto dealerships used email, text messaging, Zoom and Facetime to see cars without any contact with customers. Companies turned to automation and AI to cope with surges in demand and the need to reduce workplace density.

Retailers like Amazon, Walmart and Target enlisted industrial robots to pick, sort and track merchandise in warehouses to manage surging e-commerce demand. AI-powered chatbots were used to reduce customer contact. Robotic process automation helped financial service firms cope with a surge in small business loan applications and assisted airlines in issuing travel refunds.

Businesses engaged in a burst of innovation and speedy decision-making in response to the deepest economic shock since World War II. Companies digitized many activities at rates 20 to 25 times faster than they had previously thought possible, according to a McKinsey survey. One large retailer developed a curbside delivery business in two days; its pre-pandemic plan called for an 18-month rollout.

Some of these changes delivered more convenience and greater efficiency and so are likely to endure well after the pandemic has receded.

Retail got a jolt
E-commerce surged during the pandemic, increasing its share of total retail sales by two to five times its pre-pandemic rate across eight countries representing 45 percent of the world’s population and more than 60 percent of global GDP — China, France, Germany, India, Japan, Spain, the United Kingdom and the United States.

Many of the consumers driving that growth were new to online transactions. For instance, first-time online grocery shoppers accounted for 30 to 50 percent of total U.S. consumers shopping online in July 2020, driven largely by baby boomers nudged by the pandemic to make a digital transaction they otherwise might not have needed to make. Many “home-nesting” consumers invested to enhance their new homebound lifestyle. Other virtual transactions took off. Telemedicine had languished until COVID-19 came along and then boomed.

Recovery potential
Bold actions including investment in automation, if taken by companies, could produce a 1 percentage point increase in annual productivity growth to 2024 — if these innovations spread widely among companies of all sizes and demand recovers and stays strong. This would more than double the rate of productivity growth experienced after the 2008 global financial crisis in the United States and six other Western countries. If realized, this would add an estimated $3,500 per capita in the United States to GDP in 2024.

The largest potential incremental rise in productivity growth between 2019 and 2024 could occur in the health care, construction, information and communications technology, retail and pharmaceutical sectors. However, accelerated automation risks speeding up necessary reskilling and worker transitions and could undermine employment, median incomes and therefore demand. Of the productivity potential cited here, 60 percent comes from firms seeking to reduce costs — including jobs — rather than creating more top-line value.

Winners and losers
Shifts in business operations caused by the pandemic could spur faster growth — but also raise challenges for the most vulnerable workers.

COVID-19 put a deep dent in consumption in 2020, as spending declined between 11 and 26 percent in the initial months of the pandemic in the United States, Western Europe and China. Consumers sharply cut back on travel, entertainment, restaurant dining and other in-person services. Many low-income service workers were furloughed or lost their jobs and were supported by unprecedented government stimulus packages that more than covered their lost incomes and helped mitigate the fallout.

Indeed, the big stimulus amounted to a reversal of two decades of institutional pullback, reviving the social contract. Meanwhile, high-income households with members who could work remotely saw their savings rise as opportunities to spend on travel, entertainment, dining and other forms of leisure dried up. Savings rates spiked 10 to 20 percent in the United States and Western Europe, leaving many households in a strong position to spend once the pandemic is brought to heel.

While consumer spending as a whole is set to rebound, the recovery is likely to be uneven, especially in the United States, as higher-income households emerge largely unscathed financially while lower-income households have lost jobs or face income insecurity.

Categories: Economic Development