Wave two of the coronavirus is washing into the West in a big way. Plunging Chinese output is now showing up in the numbers, and markets are reacting. It dinged oil demand, sparking last week’s 40% collapse of oil prices. Markets recoiled rapidly around the world, staging a second severe swoon following the White House announcement on restricted European travel to and from the United States. Canada and the US are going into varied stages of lockdown, sparking a number of different questions about the more direct economic impacts on us. From this vantage point, can we foresee possible impacts on business investment?
Sadly, it wasn’t exactly roaring ahead before coronavirus. Trade policy uncertainty over the past three years was actually intensifying last year given the Brexit impasse, the escalation of US-China trade tensions and tariffs, and lingering uncertainty about North American trade. Businesses adopted a wait-and-see mode, awaiting greater uncertainty about the ultimate rules of engagement. Moreover, they were increasingly having to develop contingency plans for a variety of possible outcomes, notably in Europe, but also in Southeast Asia and North America. And their hesitation was actually beginning to weigh on growth, given looming capacity pressures.
Coronavirus has further compromised business investment. First, the shock to global growth has reduced the need for immediate investment; projects on the verge of implementation, and/or plans for future expansion have been interrupted in a big way. Firms everywhere suddenly have lots of spare capacity—new investment is the least of their current concerns. Second, even if they were inclined to proceed, funds are now tighter. With stock markets plunging, it is harder to do equity financing. Moreover, the fear factor is likely to weigh on bank lending, and at the same time probably has corporations protecting their own available funds more carefully.
A third consideration is the reality of modern business interruption. If firms everywhere were to invest, it would most likely be to remediate lost external supply chain capacity. However most of the supply chain relationships have been finely tuned over years, and are not easy to replace in an instant. The reality for most businesses is that between suppliers, logistics, quality considerations and the science that binds them all together, there has been very little redundancy in the global system, meaning that instant remediation or opportunistic moves to capitalize on the misfortunes of others are literally non-existent.
A final consideration is that investment is, of all economic aggregates, the slowest to act. Unless it is shovel-ready, it takes anywhere from six months to multiple years to deliver on an investment project, a timeframe that is longer than the virus situation is expected to last. And for those that are ready to go, even they might be gridlocked by the current situation. This dynamic has lots to do with why the initial negative economic shock is so deep, and why all the established relationships are re-ignited as the economy comes roaring back. Pent-up demand that accumulates in the tough months is generally made up for in the ensuing months by the same firms and business relationships.
If there are any ultimate new opportunities, they usually arise from the learnings of the crisis time. Those who want to create production redundancies as a shield against future crises usually pursue those in the immediate aftermath of the most recent crisis. Past crises, like the 2011 tsunami in Japan, revealed huge locational supply chain vulnerabilities in sectors as consequential as autos, heavy equipment and electronics. What followed was a serious consideration of near-shoring or reshoring all or part of supply chain components that were particularly sensitive. Often, these are higher-cost options. But crisis also typically spurs unusually creative thinking, giving rise to different ways of doing things. These creative juices create a window for those with novel digital, AI or robotic solutions that for example may well be as viable as labour-intensive approaches that have been offshored. Knowing this, high-tech firms already appear to be exploring the appetite for out-of-the-box risk-mitigating solutions.
