The Shape of Economic Recovery, According to CEOs
Is the glass half full, or half empty?
Whenever the economy is put through the ringer, levels of optimism and pessimism about its potential recovery can vary greatly. The current state mid-pandemic is no exception.
This graphic first details the various shapes that economic recovery can take, and what they mean. We then dive into which of the four scenarios are perceived the most likely to occur, based on predictions made by CEOs from around the world.
The ABCs of Economic Recovery
Economic recovery comes in four distinct shapes—L, U, W, and V. Here’s what each of these are characterized by, and how long they typically last.
This scenario exhibits a sharp decline in the economy, followed by a slow recovery period. It’s often punctuated by persistent unemployment, taking several years to recoup back to previous levels.
Also referred to as the “Nike Swoosh” recovery, in this scenario the economy stagnates for a few quarters and up to two years, before experiencing a relatively healthy rise back to its previous peak.
This scenario offers a tempting promise of recovery, dips back into a sharp decline, and then finally enters the full recovery period of up to two years. This is also known as a “double-dip recession“, similar to what was seen in the early 1980s.
In this best-case scenario, the sharp decline in the economy is quickly and immediately followed by a rapid recovery back to its previous peak in less than a year, bolstered especially by economic measures and strong consumer spending.
Another scenario not covered here is the Z-shape, defined by a boom after pent-up demand. However, it doesn’t quite make the cut for the present pandemic situation, as it’s considered even more optimistic than a V-shaped recovery.
Depending on who you ask, the sentiments about a post-pandemic recovery differ greatly. So which of these potential scenarios are we really dealing with?
How CEOs Think The Economy Could Recover
The think tank The Conference Board surveyed over 600 CEOs worldwide, to uncover how they feel about the likelihood of each recovery shape playing out in the near future.
The average CEO felt that economic recovery will follow a U-shaped trajectory (42%), eventually exhibiting a slow recovery coming out of Q3 of 2020—a moderately optimistic view.
However, geography seems to play a part in these CEO estimates of how rapidly things might revert back to “normal”. Over half of European CEOs (55%) project a U-shaped recovery, which is significantly higher than the global average. This could be because recent COVID-19 hotspots have mostly shifted to other areas outside of the continent, such as the U.S., India, and Brazil.
Here’s how responses vary by region:
|Gulf Region (N=16)||57%||26%||17%||–
In the U.S. and Japan, 23% of CEOs expect a second contraction to occur, meaning that economic activity could undergo a W-shape recovery. Both countries have experienced quite the hit, but there are stark differences in their resultant unemployment rates—15% at its peak in the U.S., but a mere 2.6% in Japan.
In China, 21% of CEOs—or one in five—anticipate a quick, V-shaped recovery. This is the most optimistic outlook of any region, and with good reason. Although economic growth contracted by 6.8% in the first quarter, China has bounced back to a 3.2% growth rate in the second quarter.
Finally, Gulf Region CEOs feel the most pessimistic about potential economic recovery. In the face of an oil shock, 57% predict the economy will see an L-shaped recovery that could result in depression-style stagnation in years to come.
The Economic Recovery, According to Risk Analysts
At the end of the day, CEO opinions are all over the map on the potential shape of the economic recovery—and this variance likely stems from geography, cultural biases, and of course the status of their own individual countries and industries.
Despite this, portions of all cohorts saw some possibility of an extended and drawn-out recovery. Earlier in the year, risk analysts surveyed by the World Economic Forum had similar thoughts, projecting a prolonged recession as the top risk of the post-COVID fallout.
It remains to be seen whether this will ultimately indeed be the trajectory we’re in store for.
As the pandemic continues to cause global economic disparity, experts scramble to forecast economic recovery. While no one can predict with precision what lies ahead for the economy, CFOs’ expectations and actions can be a helpful barometer. On a recent Resilient Podcast episode, Mike Kearney, Deloitte Risk & Financial Advisory CMO, and I discussed CFOs’ expectations for the economy, how they are handling hiring and retention, and how they can position their companies for growth. Here are the top takeaways.
1. CFOs Remain on the Defensive
CFOs’ economic expectations have plummeted. Our Q2 CFO Signals Survey marked the lowest readings on business expectation metrics since the first survey 41 quarters ago. Just 1% of CFOs rated conditions in North America as good, compared with 80% in the first quarter. A separate poll of 118 Fortune 500 CFOs conducted at the end of June echoed the sentiments of our Q2 Signals Survey and found that most respondents expect slow to moderate recovery. Over half expect they will not reach pre-crisis operating levels until 2021 and with 17% expecting 2022 or later.
Right now, a foremost priority for resilient CFOs is to ensure enough cash and liquidity for their company to operate. The focus on cost reduction outweighed revenue growth for the first time in the history of the Signals survey. As such, CFOs are doubling down on investing cash rather than returning it to shareholders, staying in existing geographies rather than moving to new ones, and focusing on organic growth as opposed to inorganic growth like mergers and acquisitions.
2. Navigating New Frontiers
Rest assured that the news isn’t all bad. The Q2 Signals Survey did find that 585 of CFOs see the North American economy rebounding a year from now. Notably, when asked whether they felt their company was in response or recovery mode, or already in a position to thrive, only about a quarter of CFOs said they were still responding to the pandemic. In fact, 37% of CFOs believe their companies are already in “thrive” mode. In the meantime, CFOs are reimagining company configurations, diversifying supply chains, and accelerating automation.
One obvious example of how CFOs are taking a resilient approach to navigate uncertainties is the widespread adoption of virtual work.
According to the Q2 Signals Survey, while just under half say they will resume on-site work as soon as governments allow it, about 70% of CFOs say those who can continue to work remotely will have the option of doing so. This will likely become a critical component to retaining top talent—a longtime concern for CFOs—particularly in a challenging economy. Resilient CFOs will continue to shift underlying business processes to accommodate routine remote work, including investing in new technologies for an efficient and effective virtual workforce, moving platforms to the cloud, and even adjusting internal control mechanisms to allow for off-site collaboration, budgeting, and financial planning.
3. The Role the CFO Can Play
Over the past decade or so, CFOs have evolved to become business strategists, but never has their role as stewards been more important as they grapple with how to navigate a business landscape that changes by the hour. In the coming months, CFOs should consider focusing on:
- Revisiting their financing and liquidity strategies, centralizing cash release decisions with the treasurer, and leveraging tax planning to reduce cash outlays and preserve budget. Deliver a balance sheet with headroom, flexibility, and liquidity to take advantage of once-in-a-lifetime market opportunities that could present themselves.
- Exploring different recovery scenarios, keeping an eye on important risk metrics that may signal a time to innovate. Evolve business models, processes, and technologies to maximize current performance and position companies to be able to seize new opportunities.
- Keeping top talent by embracing a company’s best people, whether it is offering work-from-home capabilities, or nurturing followership through trust. Organizations that can retain their top people may be best positioned in recovery.
During recovery, a critical benchmark to track will be CFOs’ risk appetite. In the Q2 Signals Survey, the proportion of CFOs saying it is a good time to be taking greater risk plummeted to 27%. An upward tick of this finding may signal a greater focus on revenue growth, a willingness to expand into new markets, and an appetite for deal-making. Until then, by taking a resilient approach in the coming months, CFOs can position their companies for strong performance, future growth, and market-moving success as the economy starts to recover.
- White House coronavirus advisor Dr. Anthony Fauci that the chances of scientists creating a highly effective vaccine — one that provides 98% or more guaranteed protection — for the virus are slim.
- Scientists are hoping for a coronavirus vaccine that is at least 75% effective, but 50% or 60% effective would be acceptable, too, he said.
- The FDA has said it would authorize a coronavirus vaccine so long as it is safe and at least 50% effective.
White House coronavirus advisor Dr. Anthony Fauci said Friday that the chances of scientists creating a highly effective vaccine — one that provides 98% or more guaranteed protection — for the virus are slim.
Scientists are hoping for a coronavirus vaccine that is at least 75% effective, but 50% or 60% effective would be acceptable, too, Fauci, director of the National Institute of Allergy and Infectious Diseases, said during a Q&A with the Brown University School of Public Health. “The chances of it being 98% effective is not great, which means you must never abandon the public health approach.”
“You’ve got to think of the vaccine as a tool to be able to get the pandemic to no longer be a pandemic, but to be something that’s well controlled,” he said.
The Food and Drug Administration has said it would authorize a coronavirus vaccine so long as it is safe and at least 50% effective. Dr. Stephen Hahn, the FDA’s commissioner, said last month that the vaccine or vaccines that end up getting authorized will prove to be more than 50% effective, but it’s possible the U.S. could end up with a vaccine that, on average, reduces a person’s risk of a Covid-19 infection by just 50%.
“We really felt strongly that that had to be the floor,” Hahn said on July 30, adding that it’s “been batted around among medical groups.”
“But for the most part, I think, infectious disease experts have agreed that that’s a reasonable floor, of course hoping that the actual effectiveness will be higher.”
A 50% effective vaccine would be roughly on par with those for influenza, but below the effectiveness of one dose of a measles vaccination, which is about 93% effective, according to the Centers for Disease Control and Prevention.
Public health officials and scientists expect to know whether at least one of the numerous potential Covid-19 vaccines in development worldwide is safe and effective by the end of December or early next year, though there is never a guarantee. Drug companies Pfizer and Moderna both began late-stage trials for their potential vaccines last week and both expect to enroll about 30,000 participants.
Fauci has previously said he worries about the “durability” of a coronavirus vaccine, saying if Covid-19 acts like other coronaviruses, it may not provide long-term protection.
Health officials say there is no returning to “normal” until there is a vaccine. Fauci’s comment came a day after the World Health Organization cautioned about the development of vaccines, reiterating that there may never be a “silver bullet” for the virus, which continues to rapidly spread worldwide. The phase three trials underway do not necessarily mean that a vaccine is almost ready to be deployed to the public, the agency said.
“Phase three doesn’t mean nearly there,” Mike Ryan, executive director of the WHO’s emergencies health program, said during a virtual panel discussion with “NBC Nightly News” Anchor Lester Holt hosted by the Aspen Security Forum. “Phase three means this is the first time this vaccine has been put into the general population into otherwise healthy individuals to see if the vaccine will protect them against natural infection.”
While there is hope scientists will find a safe and effective vaccine, there is never a guarantee, WHO Director-General Tedros Adhanom Ghebreyesus said.
“We cannot say we have vaccines. We may or may not,” he said.
On Friday, Fauci reiterated that he is “cautiously optimistic” scientists will find a safe and effective vaccine. He also reiterated that the coronavirus may never be eliminated, but world leaders can work together to bring the virus down to “low levels.”
Some of Fauci’s comments have been at odds with President Donald Trump, who has repeatedly said the virus would “disappear.”
Trump, who is seeking reelection, said Thursday that it’s possible the United States could have a safe and effective vaccine for the coronavirus before the upcoming presidential election on Nov. 3.
New clinical trial data from two experimental coronavirus vaccines — one from Oxford University and AstraZeneca in the U.K., and the other from CanSino Biologics in China — are providing cautious optimism in the race to combat the pandemic, Axios’ Bob Herman reports.
The big picture: Science has never moved this fast to develop a vaccine. And researchers are still several months away from a clearer idea of whether the leading candidates help people generate robust immune responses to this virus.
Driving the news: The Oxford and CanSino vaccines didn’t lead to any severe adverse reactions or hospitalizations, according to the results released yesterday.
- Safety — not efficacy — was the main thing these studies were supposed to be testing. And they performed well enough to move on to further trials.
- Competing candidates from Moderna and Pfizer/BioNTech have also performed well in safety trials.
Yes, but: Future trials will be the ones that tell us whether any of these potential vaccines actually trigger patients’ immune systems to respond to the virus.
- In the results released yesterday, Oxford researchers gave their vaccine to 543 people but only tested 35 for “neutralizing antibodies.” A separate, nonrandomized group of 10 people got a booster dose of the Oxford vaccine a month after the initial dose.
- Preliminary antibody responses from CanSino’s vaccine were “disappointing” to several experts.
The bottom line: There are 23 coronavirus vaccines in clinical testing right now, according to the World Health Organization.
- We now have data on the first four, but the studies mostly are confirming that the vaccines aren’t severely harmful and that large-scale studies are warranted — not that they definitely work yet.
- “It is good and hopeful news indeed, but we’ll only know when the large trials are done,” tweeted Robert Califf, a former FDA commissioner under President Obama.
Median financial ratios for nonprofit hospitals and health systems improved before the COVID-19 pandemic, which will provide some financial cushion to withstand financial pressures, according to a report from Fitch Ratings.
The medians for 2019, based on 2018 data, showed the nonprofit hospital and health system sector stabilized after a period of operational softness. The medians for 2020, based on 2019 audited data, are expected to show improvement in operating margins driven by higher revenues, cost reductions and increased cash flow, Fitch said.
“We expect the 2020 medians will represent peak performance levels until the sector is able to recover from the effects of the pandemic on operations,” Fitch said.
The credit rating agency said the nonprofit healthcare sector is unlikely to stabilize until a COVID-19 vaccine is widely available.
“The sector has shown considerable resiliency over the years, weathering significant events such as the Great Recession and legislative changes to funding,” Fitch said. “However, the coronavirus presents entirely new and fundamental challenges for the sector in the short term in the form of volume and revenue disruption, and over the medium to longer term with expected deterioration of individual provider payor mixes and possible changes in the behavior of healthcare consumers.”