What Happens After Covid Pandemic Ends?

Economists do not agree on what will happen to economic growth globally once the Covid-19 pandemic ends. What seems clear is that it matters when it ends.

Though some early on might have believed a recession is not inevitable, that seems a dashed hope.

Almost everyone seems to agree that a couple of quarters of reduced revenue is inevitable, with full-year gross domestic product down 12 percent to 13 percent. 

When asked about the potential impacts on revenue and, or, profit this year, 58 percent of chief financial officers surveyed by PwC in the first week of March 2020 expect a decrease, while 40 percent say it’s too difficult to assess at the moment. 

A majority of respondents (90 percent) believe their business would return to normal within three months if the coronavirus were to end immediately.

Global gross domestic product could shrink from $2 trillion to $9 trillion from the Covid-19 pandemic, roughly one percent to two percent from pre-pandemic levels, depending on the severity of the pandemic, a study by Brookings indicates. Some believe economic growth has a chance to grow in the second half of the year.

Some believe that might be optimistic. Other estimates suggest seven percent drop in U.S. GDP in 2020 alone, representing a recession as bad or worse than that 2007/9 economic contraction. But at least one study of the economic impact of the global influenza pandemic of 1918 suggests growth might not suffer for very long, and could in fact see economic growth accelerate after a couple of years. 

“A recession is now all but certain, according to a Wall Street Journal survey of 34 economists, which projects a downturn that would last months at least, and would in some ways rival—and possibly even surpass—the severity of the 2007-09 slump,” according to the Wall Street Journal. 

Much could eventually hinge on how long “social distancing” is kept in place. A couple of weeks will not be structurally damaging. But months of such policies will cause significant economic distress, high unemployment and many smaller business bankruptcies. 

A study by the United Nations Conference on Trade and Development looking at the impact of the 2008 great recession found that global gross domestic product growth took about four years to return to 2007 levels. 

source: UNCTAD

If the aftermath of the Covid-19 pandemic has economic effects similar to the sharp global recession of 2008, it might well take seven to eight years for jobs, gross domestic product or household net worth to return to 2007 levels. 

Jobs did not recover to the 2007 level until seven years later, in 2014. GDP per person did not recover to 2007 levels until 2013. Household net worth took about eight years to recover to 2007 levels. 

source: Federal Reserve Bank

Looking only at gross domestic product, the 2008 recession caused a dip in gross domestic product that recovered to 2007 levels after two years. 

source: Federal Reserve Bank

U.S. unemployment did not return to 2007 levels for a decade. 

source: Bureau of Labor Statistics

“The Great Recession created an unusually large and long-lasting gap between actual and potential GDP,” says the Congressional Budget Office. The gap did not close until 2017, a decade later, according to CBO’s August 2018 Economic and Budget Outlook.

source: Congressional Budget Office

source: Federal Reserve Bank

Nobody yet can predict whether long-lasting changes in business and consumer behavior will be permanent after the Covid pandemic passes. Supply chains already were changing, in advance of the pandemic, for example, so that trend virtually certainly will remain intact. 

For suppliers in the connectivity business, some speculate there could be longer-term moves by businesses in the direction of remote work that are permanent. It might be easy to predict that more personal and business activities will be conducted virtually, online and remotely, for example. That might be mildly helpful for connectivity providers, though the trend has been in place for many decades. 

Related trends such as use of videoconferencing, telemedicine and cocooning might arguably also remain bigger changes that have connectivity provider implications. More work-from-home might get a boost as well. 

Some believe there will be a permanent reduction in business travel, for example. 

But consumer behavior in a crisis often does not actually become permanent. How many of us actually believe the present shift to buying of “essentials” remains intact after the crisis passes? Who doubts that consumption of “non-essential” or aspirational products will not return to past levels? 

source: Bloomberg

All that happens against a productivity and economic growth background that might explain behavior more than episodic recessions or expansions, though. The U.S. Bureau of Labor Statistics, in 2014, predicted that “the 2007–2009 recession and other factors will have an adverse effect on the U.S. economic outlook through 2022. 

One poll of consumer spending suggests spending levels remained depressed after the 2008 recession for at least seven years, never reaching pre-recession levels during that period. 

In other words, the impact on growth, jobs and spending from 2008 would last 13 years. 

“The aging of the population, lack of business investment during the recession, and high long-term unemployment are expected to place constraints on potential GDP growth, BLS said in 2014. “As such, U.S. GDP is not expected to attain the higher growth rates that are typically seen following recessions.”

A “new normal” of slower growth was predicted. Those predictions turned out to be wrong on the low side. 

That thinking is predicated on changes in consumer behavior some say remained permanently altered in the wake of the great recession of 2008. Certainly consumer spending appeared more restrained than many expected six years after the recession. 

Some argue that changed consumer buying preferences in the immediate wake of the 2008 global recession would become more-established behavior longer term. One such trend was consumer willingness to experiment with lower-priced brands. 

Still, it is hard to separate other secular trends from the specific changes wrought by the disruption. Customers in 2020 are more likely to buy organic products or  fair-trade goods, for example. But those trends were in place even before the 2008 global recession, and tends to run counter to the “lower-priced goods” trend some say that recession introduced. 

But a decade after 2008, some would note that a search for value remains intact. What is not clear is “why?” A counter argument could be made that the general experience with online shopping has accustomed consumers to lower prices, generally, and that this behavior is not a lasting result of the 2008 recession.

Also, millennials facing job market toughness might have developed receptiveness for value for income-related reasons. 

Some changes might have happened with savings rates, though that also might be explained, in part, by millennial job issues. 

The point is that it is very hazardous to predict how consumer or business behavior might change over a 10-year period, based on reaction to a recession or biological shock. We could well see a several-year period where behavior seemingly has altered, only to see the effects disappear after that. 

It seems safe to say that larger trends such as the application of cloud computing, artificial intelligence, internet of things and edge computing will continue. Some might call that “digital transformation.” 

What remains to be seen is whether shifts to remote work, work from home and some other trends become permanent features of business behavior at much-higher levels than was the base case before the Covid pandemic. 

History suggests we might not know for a half decade or so.

Are Covid Remote Work Trends Permanent?

Nobody yet can predict whether long-lasting changes in business and consumer behavior will be permanent after the Covid pandemic passes. Supply chains already were changing, in advance of the pandemic, for example, so that trend virtually certainly will remain intact. 

For suppliers in the connectivity business, some speculate there could be longer-term moves by businesses in the direction of remote work that are permanent. It might be easy to predict that more personal and business activities will be conducted virtually, online and remotely, for example. That might be mildly helpful for connectivity providers, though the trend has been in place for many decades. 

Related trends such as use of videoconferencing, telemedicine and cocooning might arguably also remain bigger changes that have connectivity provider implications. More work-from-home might get a boost as well. 

But consumer behavior in a crisis often does not actually become permanent. How many of us actually believe the present shift to buying of “essentials” remains intact after the crisis passes? Who doubts that consumption of “non-essential” or aspirational products will not return to past levels? 

source: Bloomberg

All that happens against a productivity and economic growth background that might explain behavior more than episodic recessions or expansions, though. The U.S. Bureau of Labor Statistics, in 2014, predicted that “the 2007–2009 recession and other factors will have an adverse effect on the U.S. economic outlook through 2022. 

One poll of consumer spending suggests spending levels remained depressed after the 2008 recession for at least seven years, never reaching pre-recession levels during that period. 

In other words, the impact on growth, jobs and spending from 2008 would last 13 years. 

“The aging of the population, lack of business investment during the recession, and high long-term unemployment are expected to place constraints on potential GDP growth, BLS said in 2014. “As such, U.S. GDP is not expected to attain the higher growth rates that are typically seen following recessions.”

A “new normal” of slower growth was predicted. Those predictions turned out to be wrong on the low side. 

That thinking is predicated on changes in consumer behavior some say remained permanently altered in the wake of the great recession of 2008. Certainly consumer spending appeared more restrained than many expected six years after the recession. 

Some argue that changed consumer buying preferences in the immediate wake of the 2008 global recession would become more-established behavior longer term. One such trend was consumer willingness to experiment with lower-priced brands. 

Still, it is hard to separate other secular trends from the specific changes wrought by the disruption. Customers in 2020 are more likely to buy organic products or  fair-trade goods, for example. But those trends were in place even before the 2008 global recession, and tends to run counter to the “lower-priced goods” trend some say that recession introduced. 

But a decade after 2008, some would note that a search for value remains intact. What is not clear is “why?” A counter argument could be made that the general experience with online shopping has accustomed consumers to lower prices, generally, and that this behavior is not a lasting result of the 2008 recession.

Also, millennials facing job market toughness might have developed receptiveness for value for income-related reasons. 

Some changes might have happened with savings rates, though that also might be explained, in part, by millennial job issues. 

The point is that it is very hazardous to predict how consumer or business behavior might change over a 10-year period, based on reaction to a recession or biological shock. We could well see a several-year period where behavior seemingly has altered, only to see the effects disappear after that. 

It seems safe to say that larger trends such as the application of cloud computing, artificial intelligence, internet of things and edge computing will continue. Some might call that “digital transformation.” 

What remains to be seen is whether shifts to remote work, work from home and some other trends become permanent features of business behavior at much-higher levels than was the base case before the Covid pandemic. 

History suggests we might not know for a half decade or so.

CIOs Sharptly Revise Expectations for IT Spending Over a 5-Day Period in March

Connectivity services tend to suffer mildly, if at all, in recessions. We are more likely to see zero growth rates than anything else. But even that assumption relies on assumptions that are as "novel" as COVID-19.

Economies tend to go into recession for reasons related to lower demand. In this case a biological threat has lead to swift and voluntary suppression of demand that is likely to induce a recession--a sharp one at that--as a deliberate byproduct of health policy.

For connectivity providers, the other unusual element is that social distancing policies which keep people at home, and away from work and school, increase the value of communications services of all types.

So we are in highly unusual times, where past rules of thumb might not have much predictive value, either for short-term or longer-term consumer behavior. Worst case, based on past experience, connectivity providers could see slightly negative revenue growth, or simply growth rates of zero.

That is not pleasant, but is nothing like the hits other industry segments are likely to experience as a result of the shutdown of large parts of the global economy. The bigger questions concern what happens as we come out the other side of the health crisis. "When" is one issue, but the other big questions relate to "how" the recovery occurs.

It would be rational to expect a "U"-shaped recovery. But some will argue for a "V-shaped" rebound, simply because the normal demand drivers arguably remain intact, and the demand suppression comes from health policy. Some might argue a recession caused by a demand shock of this type is not the typical case, and therefore the recovery might also be atypical.

The swiftness of the shock is hard to ignore, though. Few, if any of us, ever have experienced such a sudden deceleration of global economic activity as being imposed by the Covid-19 pandemic.

According to Enterprise Technology Research, in the span of five days, enterprise chief information offices revised expectations about information technology spending growth form two percent annually to less than zero. 

source: Enterprise Technology Research

That is sudden, indeed. 

Small Business IT Spending Likely to Dip in 2020

Every now and then observers are virtually compelled to talk about the potential impact of a recession on information technology revenue. With the global Covid-19 pandemic, some are starting to consider that angle again. Lost revenue is the key variable. 

“On average, we expect that the global SMB revenue will decline by six to eight percent in 2020,” say researchers at Analysys Mason. Businesses that are directly affected by lockdowns and social distancing will show negative spending growth. 

One would normally expect some spending declines in a recession, and without referring to the textbook definition, when much of any country’s economy is simple shut down for months, that will depress economic activity--temporarily--to levels we would otherwise consider a recession. 

If normalcy returns by the end of 2020, total IT spending will decline by 1.2 percent from US$122 billion in 2019 to US$120 billion in 2020 for smaller companies (under 10 employees) and those in the most-highly affected group of verticals (hospitality, retail, transport and various services). 

Worst case, spending will decline to US$119 billion in 2020 for this group of companies.

The rest of the market, though, will retain some growth in either scenario.

Much hinges on how fast the world recovers from the worst effects of the virus outbreaks. 

In one scenario, the firm assumes the market returns to normal by the fourth quarter of 2020.  In the second scenario, the market returns to normal by the second quarter of 2021. 

source: Analysys Mason

Lodging, food service, airlines, cruise operators, entertainment and recreation firms will likely be most affected. Communications suppliers, media, business services and technology suppliers are likely to be least affected. 

source: Analysys Mason

All that noted, this is a cyclical dip that will not alter the long-term trend of spending growth.

Transit Pricing Illustrates "Near Zero Pricing" Conundrum

One of the few core assumptions I always have used in my analytical work concerning the connectivity business is near zero pricing is a foundational trend for all connectivity products, as it tends to be also for computing products. Consider internet transit pricing, for example 

Back in 2014, Cloudflare estimated the cost of wide area network bandwidth as being lowest in Europe, in large part because so much internet traffic used peering rather than transit. 

source: Cloudflare

Two years later, in 2016, costs had dropped. The Middle East has the lowest WAN costs, and costs in other reasons had dropped significantly. Where Australia’s costs were as much as 20 times higher than Europe’s costs, two years later the Australian costs were six times higher than Europe’s costs. 

source: Cloudflare

None of you would be surprised if transit prices continued to fall. Transit to Sydney, for example, had declined to about $5 per Mbps, where back in 2014 prices had been about $100 per Mbps. 

source: TeleGeography

Perhaps for every problem there actually is a solution, though perhaps sometimes the answer is not what we might prefer, expect or want. Back around 1995, I ran into one of those problems.

The context was voice pricing trends. To make a long story short, the problem was a confluence of trends that all seemed to suggest voice revenues were headed south. The process of deregulation and privatization of former monopoly networks was one such early trend.

But in addition to competition, technology trends all suggested prices would drop. Among those trends: optical fiber, microwave transmission, Internet Protocol, client-server architectures, Moore’s Law and declining microprocessor and storage costs. I cannot recall whether I believed at the time that mobile communications would put pressure on voice pricing as well.

The phrase near zero pricing came to mind. The imponderable, at the time, was what would become of telecom service providers if their core product--voice--actually reached a point where retail prices were very low, very close to “zero.”

The concept would reappear about 1999 and 2000, when the phrase “bandwidth wants to be free” was bandied about. The key concept is that prices do not actually have to drop to actual zero; prices simply have to drop to “nearly zero.” If that happens, the revenue model for nearly every business has to shift. 

What was once a revenue driver becomes something more accurately described as a “feature.” The whole point is that technology makes “near zero pricing” in any number of contexts a foundation for business strategy. The key point is not that prices actually hit zero, only that they drop so precipitously that access to computing and memory no longer are constraints to what can be done.

But that’s a problem for incumbent providers who have built substantial businesses on scarcity, either scarcity of bandwidth, processing or memory. And that was the conundrum when asking what impact near zero pricing would have for telcos.

So far, the industry has dodged a bullet by creating new core revenue drivers to supplant voice services that no longer can support the industry’s business models. Mobility and internet access are key cases in point. But prices for bandwidth show the same drift to near zero that we originally saw in long distance and voice pricing. 

Marginal cost pricing is an important principle in many markets, including growing parts of the telecom business. 

Products that are "services," and perishable, are particularly important settings for such pricing. Airline seats and hotel room stays provide clear examples. Seats or rooms not sold are highly "perishable." They cannot ever be sold as a flight leaves or a day passes. So it is rational for an airline to price seats at whatever price it can get shortly before a flight departs. Or at least, that used to be the case.

These days, airlines are more likely to attempt to raise “just before departure” revenue in other ways, such as selling upgrades to roomier seats. 

Whether marginal cost pricing is “good” for traditional telecom services suppliers is a good question, as the marginal cost of supplying one more megabyte of Internet access, voice or text messaging might well be very close to zero.

Such “near zero pricing” is pretty much what we see with major VoIP services such as Skype but also increasingly for bandwidth products in general.  Whether the traditional telecom business can survive such pricing is a big question.

“Forward pricing” is related to marginal cost pricing, where suppliers price at the incremental cost of producing the next unit (marginal cost) or at some future cost when scale is obtained (forward pricing). 

In some part, the value of becoming a platform is precisely a solution for “pipe” sales in many industries. Platforms are alternative business models. They are not necessarily built on selling a particular product, much less products whose prices tend to trend inexorably towards zero.

EU Commissioner Worries about Netflix Impact on Traffic

It is not yet clear whether people staying home from work and school will break the internet, in the sense of causing meaningful congestion, slower speeds and higher application latency. That does not yet seem to be an issue, but at least some voice in Europe believe European Community networks might not be as resilient as networks elsewhere. 

European Union Commissioner Thiery Breton, for example, is urging people to switch to standard definition quality when streaming Netflix. That noted, Cloudflare reports no negative impact on experience, though usage is up in most markets. 

Networks in Spain, though, report large increases in traffic of between 40 percent to 50 percent. 

That noted, higher-speed consumer connections (above 100 Mbps) are most prevalent in North America, compared to Europe, Africa and Latin America. Asia speeds are not too far from North America levels. 

Region	Greater Than 100 Mbps
	2018	2019	2020	2021	2022	2023
Global	11%	20%	24%	29%	34%	39%
Asia Pacific	14%	20%	26%	33%	42%	53%
Latin America	1%	1%	1%	1%	2%	2%
North America	16%	23%	31%	37%	40%	46%
Western Europe	10%	13%	15%	17%	19%	22%
Central and Eastern Europe	3%	3%	4%	4%	5%	6%
Middle East and Africa	0%	1%	1%	1%	1%	2%

source: Cisco

That might be the source of concern expressed by Commissioner Breton. European networks might be challenged and less resilient in the face of unexpected demand shifts.