American mathematician Claude Shannon famously established lower boundaries for possible movement in a simple chess match: about 10120. This is 119 zeros after 10. Reflecting on the Covid-1 crisis as the crisis began to unfold around the world, I think the Shannon number adequately captures the breadth of potential economic consequences at that time.
As the crisis has evolved, two things have become clear: the epidemic has accelerated some of the already existing trends and the effects of COVID-19 will now be opaque but over time it will become undeniably clear and meaningful.
The future has been accelerated
Before the epidemic sent a swarm of office workers home to the workstation, employers were increasingly adopting methods for remote work. Recent advances in office technology allow employees to be fired on a schedule of their choice. The epidemic is decided by the employers.
Similar to how issuers can withdraw certain bonds when conditions allow re-issuance on more favorable terms, the epidemic serves as a call alternative to employers ’incrementalism. Working from home can no longer serve as a controlled test of productivity; They became essential. Ready or not, in most cases employers have successfully enabled safe and efficient work from home and redefined team mobility. The office will never be the same. Meanwhile, the demand for office square footage, which has grown on a per capita basis for 50 years, has declined significantly, giving us a new definition of city scene and suburban makeup.
Similarly, ground business travel has been shut down due to the epidemic. Irlines has historically been the most profitable business for airlines and hotels, replaced by such travel video conferencing and virtual collaboration tools. Such developments examine airline and hotel business models that rely on low-cost sensitive business travelers to help keep leisure travelers low.
Covid-1 has also accelerated the challenges faced by restaurant and brick-mortar retailers. E-retail and food delivery, already growing in popularity before the epidemic, have become essential for consumers concerned about face-to-face interactions. Like office work and air travel, restaurants and retail consumers can’t overcome the intense reluctance until an effective vaccine or treatment is created – which we didn’t expect before 2021. In some cases, the damage can be permanent.
Interestingly, changes in commercial real estate, or at least how we invest in them, are already happening in the general view. Over the past decade, office and retail components have fallen from 39% to 19% of EU REIT assets, while the residential, infrastructure and data center – sectors that could benefit from the epidemic – are now 45%.D
Epidemic next question
While some of the effects of the post-epidemic world are clear, others are, for now, more opaque:
- Will massive stimulus, supply-chain disruptions, and paint-up demand give rise to inflation that has plagued developed economies for a decade?
- Is the globalization trend that defined the post-World War II era coming to an end and what does it mean for trade and economic growth?
- As interest rates reach historic lows and deficits and balance sheets expand, what can central banks do to create jobs and price stability?
And what about inequality, a statistically significant barrier to a country’s economic health that has grown since the global financial crisis of the 200s?2 Our current crises (both health and economic) are unequally affecting people of certain races and socio-economic groups. Although I am encouraged by the emerging conversations that are both thoughtful and action-oriented, it is not yet clear whether the epidemic will accelerate or reverse the trend of inequality.
These questions will demand our attention and will continue to serve as the source material for this blog in the months and years ahead. Perhaps some answers to this question will materially influence the course of others. In that sense, the number of possible steps left in our chess match still includes a lot of zeros.
DBased on the FTSE Nareit All REITs index. The data for 2010 is December 1, 2010 and the data for 2020 is July 1, 2020.
2Singano, Federico, 201. The trend of income inequality and its impact on economic growth. OECD Social, Employment and Immigration Worksheets 163. Paris: OECD Publications; Available at https://doi.org/10.1787/5jxrjncwxv6j-en.
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