Economic impact of Covid-19 – consequences of the pandemic (part 2)
Interview with George Brown and Dana Willmer
The consequences of the pandemic are felt in almost every industry and the software sector is no exception to that. We spoke with Dana Willmer and George Brown, co-founders of the consulting agency “Partner Economics”, about the current recession and their study on the economic impact of Covid-19 on Microsoft partners. This is the second part of the interview. Main topics are:
Economic impact of Covid-19 – consequences of the pandemic (part 1)
In the first part of the interview, Dana and George present the study participants and talk about their evaluation of the current recession. You learn more about the financial impact of the pandemic and differences between companies and sectors. Moreover, we discuss the trends that have been reinforced by the pandemic.
«I am surprised at the economic activity we have sustained through the pandemic»
In the first part of the interview, we already spoke about the financial consequences of the pandemic. Who are the winners of the crisis?
George: Clearly Amazon and Walmart are among the big winners here. Their revenue and profitability are up. All the online communication platforms got huge wins they did not expect. Microsoft has done very well on the pandemic because of the modernization. Also, people who converted their business to mask-making or personal protective equipment have been able to take advantage of it, structurally. So there have been some big winners and some small winners.
One of the things I have noticed most dramatically is the amount of small shops coming available for lease. I do not think they will be filled any time soon. When the help of the state ends, we will have more problems. For example, governments cannot fund the airlines forever. I understand we have to keep our aviation infrastructure functional. Otherwise, that will really impact trade going forward. But do we need as many airlines as we have had in the past and keep them all financially supported? I doubt it.
However, I am surprised at the economic activity we have sustained through the pandemic. There is also the psychological need. I do not know about you but if I have not gone shopping for a while, I find myself in need of retail therapy (laughs). From a recession point of view, that has saved us from a really dark depression.
What do you think, Dana?
Dana: The need for retail therapy is certainly something everyone feels. But you just buy things differently, you do not go down to the store, you go online and buy it there. So clearly anybody who has moved to an e-commerce platform and has a recognizable branding is doing well. If you are relying on physical locations at a retail level to drive new sales, you are doing poorly.
On the other side of the spectrum, there are certain industries that are really core, for example food production and distribution or financial and public sector services. Those organizations are not under the same kind of financial pressure than other businesses are as result of Covid. There is a big interest on their part to take advantage of Covid to streamline their core business processes, to automate what they can, to make their business processes more remote-friendly and more secure.
«Before this pandemic, there was a tendency to not believe that people could work remotely and be productive. I think we just erased that myth»
What are the consequences of the pandemic on the long run?
George: On the positive side, governments will react better in the future. This has been a wake-up call for the world. I think that Covid is not our first pandemic, we will have more of that as our population increases and we continue to destroy our natural environment. However, I do not think we will see countries running out of personal equipment for doctors again. That was absurd. People will demand that we do not have this situation again.
Dana: Certainly, all the infrastructure supporting the remote workforce will be a positive consequence of the pandemic. Before this pandemic, there was a tendency to not believe that people could work remotely and be productive. I think we just erased that myth. Of course, we are longing to get together again in person, and I am sure that, as soon as we can, there will be conferences. But I do not think that there will ever be the need for office space that there was before the pandemic.
Which brings us to the negative consequences of the pandemic…
Dana: The biggest negative consequence that I see has to do with the printing of money at a government level. In the short term, that is absolutely necessary, you have to get people through the crisis. However, in the Western world, especially in the US, we are already at high levels of debt relative to the underlying economic productivity. In the end, all that spending has to stop. But when it does stop, it will resolve in some combination of increased inflation and increased taxes.
George: I think we will have increased taxes globally. But when you increase taxes, you reduce the discretionary spending which elongates or stretches out the recession. The government will have to watch when they introduce the higher taxes because that will slow the economy again. So, one of the consequences of the pandemic is that we have to pay back all the money the government printed. It is a common misunderstanding that, when the government prints money, we do not have to pay it back. In Canada, we came in with debt around 10 or 20 billion, now we are at 140 billion this year. That is a big number to pay back when you have 37 million people.
Could you elaborate on this aspect?
Dana: As increased taxation starts to take a bite out of what individuals can spend, that will also impact consumer spending. If you look at the Western industrialized world, the consumer spending is anywhere from a half to three quarters of the overall economy. So, the more you take from people in the form of taxes, whether it is inflation, which is just another form of tax, or whether it is hidden taxes, however you tax people, it will just leave them with less money to spend. So, there will be a drag on economic growth going forward in the Western industrialized world for sure.
George: It will take ten or 15 plus years to pay it all back and that will weaken us. Now, if you think about Spain, they had not yet fully recovered from the recession in 2008 in terms of unemployment rates and productivity. Even in 2019, their unemployment rate was at 20 %. It could take them 20 years to work themselves out of this situation – if they do not have another recession.
It is a complicated formula for the central bankers because, in order to pay back the debt, you want to have some inflation, so you are paying it back with lower dollars in the future. And the European Union will have some unique consequences, of course, because you have countries in there that are less stable economically. So, it will be a long workout. On the positive side, we have smart people trying to help us work it out. But it will not be easy.
The recovery from Covid-19 will probably be k-shaped. It depends on the industry, how fast and strong companies recover (figure adapted from Dana Willmer und George Brown).
«We are in for a little bit more of a bumpy ride»
What will the recovery look like?
Dana: We believe that it will be a K-shaped recovery. Some parts of the economy, anything that has to do with medical equipment or remote workplace for example, are already booming. Some white-collar professionals and businesses that are core to the economy will recover relatively quickly.
Businesses that are highly cash-flow dependent or highly leveraged will never come back. And there will be sectors of the economy like travel and tourism that will come back eventually, but it will take a whole lot longer. It will depend on what part of the economy you are in in terms of how long the recession will last and how strong the recovery will be when it does arrive.
George: Travel will not come back as fast as people think. A lot of the places we travel to are third world countries and they will be last in line for vaccination. Another thing I am watching really closely is charitable giving. A whole part of our population depends on this little segment and it has been really hammered in the recession because people do not have any extra money to give.
We are in for one more large bout of turbulence where we have a little bit more volatility in the market. I do not think the market has priced in everything that has to do with this whole recession yet. We are in for a little bit more of a bumpy ride, we are not at the bottom yet. The market is reacting positively to the vaccine, but we have not seen the impact of what will happen when all the government money stops flowing in the market. Then we will see some things drop out, we will have some volatility.
Which result of your study on the economic impact of Covid-19 surprised you the most?
Dana: For me, it was around new hires. About a quarter of the study respondents said that they had layoffs since March. This was to be expected, it is really just housekeeping that you do in any kind of recession. However, there also were a lot of study respondents that actually hired new staff back. We did not get into a lot of detail there, but it stands to reason that that will have to do with their increased demand for anything remote workplace oriented. So, people are actually staffing up even as they are laying off. There is a change in the workforce, in the skills that people are taking on.
George: The hiring part surprised me, too. Also, the depth of some of the reductions in revenue surprised me. It affected almost all types of traditional partners doing on-premises or hosted type upgrade work which everybody has always thought in our ecosystem was really where the sweet spot was. But in this pandemic, it just screeched to a halt. It does not surprise me that customers stop buying it, what surprises me is the depth to that some of the revenue fell.
What would you recommend companies in these challenging times?
George: What I am asking everybody is: when was the last time, as a company, you looked at what could kill you? You should always be looking at the changes in market dynamics that could really impair your business and think through that. Most companies do not think about that question or do not dedicate enough time to it. Thinking about what could really surprise and hurt us, is one part of the equation.
The other part is imagining which opportunities are different today than they were last year. I am always surprised that the management teams do not invest two or three days off-site every quarter just to think about those two really important questions. After all, they have the responsibility for all of the staff members to do that.
If we had imagined what surprises could really hurt us, we probably would have thought about the pandemic already. Certainly, Bill Gates has been talking about it for ten years. It is not as if it has not been public. But people get blinded by what they can see short-term in front of them, and they do not think about the other possible things coming in from the side that might really impact them, things that are not in their direct vision.
What about you, Dana?
Dana: I would add that, at a partner level, if you have not transitioned your business towards the cloud and the reality of remote working, you really need to seriously commit and do that now. In doing so, you need to contemplate the impact that transitioning the business to a cloud model will have in financial terms, particularly what will happen to cashflow, operating profitability and how much you need in the way of capital in the business.
Thank you, Dana and George, for these interesting insights into your research. We are looking forward to hearing about your next studies.
Bella Diekmann works for the editorial office of agiles. She studied Spanish and French and has a PhD in linguistics. Besides her passion for languages, she is very interested in current IT topics. Blogging for agiles allows her to combine her love of writing with her interest in computer science and informatics.