ReUnited Kingdoms #8: Settling in for the long haul?

Shifting the emphasis to the future

As lockdown restrictions continue to ease, as some businesses reopen and as we collectively start to think about the future, our “ReUnited Kingdoms” content series has been exploring various aspects of life beyond lockdown. In this piece we look at the coming economic storm.

A health crisis with a profound economic aftershock

COVID-19 is, first and foremost, the most pressing health crisis in living memory. At time of writing there have been some 8.9 million cases and 468,000 confirmed deaths globally. In addition, though, COVID will also become, and indeed is already becoming a profound economic crisis. According to the Institute for Fiscal Studies, it is clear that the COVID-19 outbreak and the public health response to it will dramatically reduce economic activity during Q2 of 2020 and most likely long after.

So, how bad is it going to be?

Britain’s economy is likely to suffer the worst damage from the COVID-19 crisis of any country in the developed world, according to a report by the Organisation for Economic Cooperation and Development.

They are currently projecting an 11.5% dip in UK GDP (year on year). This is similar to the levels forecast for other major Western European markets (France -11.4%, Italy -11.3% and Spain -11.1%). Germany will suffer too, though nowhere near as much with a 6.6% contraction).

Behind the GDP numbers lie other likely economic pain points:

  • Total government debt has surged to £1.95trn, exceeding the size of the economy for the first time in more than 50 years.
  • Consumer spending could fall by 9.5% in 2020 and recover modestly by 1.3% next year.
  • We could see investment falling by 12.6% during 2020.
  • The unemployment rate may average 8.6% this year and 11% in 2021.
  • The weak economy is likely to keep inflation low, at just 1% this year and 0.8% next year.
  • Commentators believe that interest rates are likely to stay at their lowest level of 0.1%.

By way of comparison, our closest point of reference is the profound economic downturn of 2008/9. According to the ONS (The 2008 recession 10 years on), the UK economy:

  • Shrank by more than 6% between the first quarter of 2008 and the second quarter of 2009.
  • Took five years to get back to the size it was before the recession.
  • Is now, some twelve years on, 11% bigger than it was before the recession.
  • At that time, unemployment reached its highest rate since 1995. The quarterly unemployment rate reached 8.4%, the highest rate since 1995.

In other words, the impact of COVID may be far more significant than the 2008/9 economic downturn.

The pain may last until the end of 2023

Firstly, we need to recognise that all markets will vary when it comes to how they will progress from this point on. Moreover, analysis has uncovered a straight-line correlation between the severity of the economic downturn that will be experienced (as measured by the change in the employment rate) and the severity of the outbreak (as measured by the number of confirmed infections per million inhabitants).

What is also evident is that even the best economic experts have no real clue about the duration of the pain we will experience.  Using the US as a barometer, Moody’s has laid out a number of potential economic scenarios, based on when they expect the economy to get back to where it was just before COVID struck (as measured by GDP returning to growth relative to start of outbreak).

In their view, the most likely situation is that it takes until the end of 2021 before this situation occurs. However, they do recognise that it could be as soon as Q3 2020 (this is their Scenario 0, which has just a 4% chance of occurring), or as late as Q4 2023 (this is their Scenario 4, which also has just a 4% chance of occurring).

“This recession probably will be much sharper and deeper than most previous recessions and the shape of the recovery is unusually hard to predict.”

Les Binet, Group Head of Effectiveness, adam&eveDDB

Which sectors are going to be most affected?

Cumulatively, the world’s most valuable brands across all sectors could lose up to $1trn in brand value, but this impact will not be felt equally. Brand Finance have assessed the impact of COVID-19 on enterprise value through an analysis of global stock markets. They’ve grouped industries into three categories, based on the severity of brand value loss they are forecast to experience in their Brand Leadership Report:

High Impact [-20% or more]: Auto components, airlines, chemicals, restaurants, beers, tires, insurance, IT services, banking, leisure & tourism, aerospace & defence, apparel, hotels, oil & gas, airports, retail.

Moderate Impact [-10%]: Tech, healthcare, exchanges, auto, care rental, logistics, tobacco, mining/iron/stell, commercial services, spirits, media, engineering & construction.

Limited Impact [-0%]: Household products, utilities, telecoms, food, pharma, cosmetics & personal care, real estate, and soft drinks.

How have people reacted so far?

The UK furlough scheme now covers some 8.4 million workers. A similar scheme for self-employed workers saw 2.3 million claims made. Moreover, according to our colleagues at Walnut Unlimited  COVID-19 has caused significant lifestyle modification:

  • 47% of UK consumers have changed or cancelled holiday plans
  • 34% have delayed buying certain nonessential items such as furniture and electrical goods
  • 6% have delayed buying certain nonessential items such as furniture and electrical goods
  • 4% have take out a new loan

How will consumers’ reactions evolve?

Moreover, there is considerable consumer anxiety about the future, making it hard to accurately gauge how the kinds of lifestyle modifications we have already seen will evolve over time:

  • 46% of UK consumers describe themselves as uncertain; 34% as worried
  • 20% feel negative about their household’s current financial situation
  • 60% feel negative about the general economic wellbeing of this country, lower than at any time since they started measuring it in January 2018
  • 48% feel negative about the certainty of this country’s future

One of the big unknowns is how consumers’ reactions will change over time. EY’s Future Consumer Index, suggests that five consumer segments will appear after the COVID-19 crisis:

  • Back with a Bang (9%): This group had the most disrupted daily lives during lockdown but are now the most optimistic and will spend much more in all categories.
  • Get to Normal (31%): This group’s spending will bounce back from lockdown, largely unchanged. In many ways their daily lives were never really affected, and they were the least concerned about the pandemic overall.
  • Cautiously Extravagant (25%): This group is relatively optimistic despite a strong belief that a global recession is coming and will spend more in areas important to them.
  • Keep Cutting (13%): For this group, the pandemic was always a huge worry. They made deep spending cuts and changed what they buy and how and will continue to do so.
  • Stay Frugal (22%): This group are spending slightly less but have made some deep cuts and are amongst the most pessimistic about the future. They will be focusing on getting back on their feet.

The degree to which consumer segments like these, and perceptions of anxiety or uncertainty persist, will depend almost entirely on the duration, severity, and distribution of the coming recession. If Moody’s more optimistic scenarios are closer to the truth, we can likely expect the clouds to lift sooner and segments such as Get to Normal, Cautiously Extravagant and Back with a Bang to grow. Conversely, if it takes until mid/late 2023 for us to truly recover then, surely, far more of us will be in the Stay Frugal or Keep Cutting groups.

Brands need to combine short-term and long-term thinking

Brand planning is hugely challenged by uncertainty: Will social distancing guidelines be relaxed to lessen the 2m rule? Will we see a second spike? Will a vaccine become available and, if so, will it be taken up by the population? Will the economic impact be as bad as feared? With all this uncertainty, the key brand attributes for success will be the ability to “read the (changing) room” and adaptability to change, which we alluded to in a previous post (The Need for Flex Marketing).

More than this, brands will have to walk a very careful path back to viability and then profitability. We’d call on brands to adopt a twofold strategy, blending short-term and longer-term considerations:

Resist the urge to get consumers to pay for your increased costs of operation or for the losses you sustained during lockdown

The reopening of “non-essential” retail is a much-needed boost to the retail sector but one that comes with the considerable costs involved in creating a safe shopping environment for both shoppers and staff. While businesses will naturally want to return to profitability as quickly as possible, consumer confidence and disposition to spend may prove to be quite vulnerable if they encounter prices much higher than they are expecting as soon as they set foot back in-store. Retailers will surely have to accept that it will be some time before they get back to generating the numbers they did previously and that this first phase is just a step on a longer journey back to profitability.

Attempt to create a “temporary normal”

Of course, though, retailers will want that journey to be as swift as possible.  In recessions past we have seen considerable innovation in pricing strategies to restimulate purchase habits that had atrophied – 2009 saw the birth of M&S’s famous Two Dine in for a Tenner, for example. Such initiatives are perfectly understandable, but they do potentially create an issue in the longer-term: how do brands successfully return to the full pricing models necessary to create profit? One approach may be to be upfront with customers flagging up that these are temporary pricing models while we all “get back on our feet”.

Whatever the specifics, it is clear that, despite the reopening of our High Streets and ongoing government discussions about reducing the 2m distancing and allowing the hospitality sector to reopen, it will be some time before we see “normal”, whether new or otherwise.

This article was written by our Head of Trends, Nick Chiarelli