The dramatic closure of businesses and postponement of daily life throughout the world as a result of COVID-19 is in full effect. While regions in New York State start to re-open, many businesses ask, “what will the economic world look like after the infection rate slows and social distancing ends?”
No one can predict the future, but businesses can prepare now for some of the well-known effects of economic crises both short and long term.
Consumer spending has already declined drastically, and it’s unknown how much it will recover when the economy reopens.
It’s important to recognize how strong the economy was leading up to the COVID-19 crisis. The unemployment rate was lower than it had been in more than 40 years, wages were growing across the board, and consumer spending was at an all-time high.
The economic prosperity that the U.S. experienced at the time didn’t happen overnight, it grew gradually, recovering from the 2008 financial crisis over 12 years ago, so a return to these levels is likely to take quite a long time.
When the economy reopens, people will be eager to get back out, but may not spend as much as they did before. Fashion, food, and other retail businesses will need to rethink their pricing and determine how much of a reduction in prices they can handle. Take this time to calculate how much of a cut your business could handle in order to prepare.
Another part of the economy that will be important in the recovery is investment. Even before COVID-19, business investment had been on the decline, as a component of non-residential investment which has fallen by an average of two percent per quarter since Q2 2019.
Businesses had already been spending less on building out their spaces and expanding their businesses, and as a result of this crisis these activities are naturally on hold. Entrepreneurs that are affected by slowing business investment are those in the construction, design, and consulting industries.
Without clients making investments in expanding your business, you may find new business opportunities to be fewer and further between. Getting business investment back on track will likely be slower than the recovery in consumer spending.
To be confident in expanding your business, you must clearly see an opportunity in your end customers. The ongoing shutdown means that most companies are operating in the red, and depleting their company’s equity reserves. This could make access to capital that you might need in order to make business investments harder. If you’re planning to apply for a loan, start getting ready now and make sure that you’re working with a reputable lender.
The gap between premium and mass market
Because of the widening gap between the wealthy and the working classes, there will be a big gap between the opportunities for premium and mass market products during the recovery.
Luxury priced goods will mostly retain their demand during the recovery, but goods that target the working class will have their demand more closely tied to their pricing. This means that selling mass-market products and services will be more competitive, with lower prices across the board and lower margins.
If your business is a player in this space, you’ll need to put in more work to convince customers that your brand benefits are valuable enough to justify any pricing that is above market average. Take some time to research strategies on how to best reach your target audience, and message your offerings effectively.
This is the one sector of the economy where there’s some sense of control. Government spending directly contributes to just over one-third of the U.S. economy. That translates into salaries and wages for people employed in myriad of construction companies, manufacturers, and service providers that sell to the U.S. and state governments.
The CARES Act and state and local actions during this crisis have largely focused on getting cash into the hands of workers so consumer spending can be rebooted, but a broader response is likely to include long-overdue investments in infrastructure, education, and healthcare.
The spending tied to these programs would vastly buoy the fortunes of companies that contract with the government, and their employees. Historically, this type of government spending has always been put into place after a crisis; but ultimately it is up to the politicians in power at the time.
Reduced exports and imports
Since the COVID-19 crisis is affecting every country, it has hampered global trade. Simply put, with countries shutdown, their ability to manufacture goods that are imported into the U.S. is diminished. While these countries will re-open just like the U.S., new barriers to trade now exist that haven’t been an issue in decades.
The international trade of goods is now slower and more expensive. This is due to measures being put in place to cautiously check shipments to ensure they aren’t contaminated with the virus. At the same time, the diminished production capacity of the U.S. also hampers its ability to find new markets and expand its export of services (as one of the biggest service exporters in the world).
These two factors are likely to hurt businesses that are engaged in global trade for some time, and delay their recovery. At the same time, businesses that sell goods and services that compete with imports might benefit in the short term, as their global counterparts struggle to deliver to the U.S. market.
Pursuit can help
Though this next phase will present new challenges, you’ll find a reliable resource in Pursuit. Whether you need education and guidance or access to capital, get in touch with us to learn more about how we can work together.