TLDR: a post-Coronavirus global economy could be one of low growth, low interest rates, and inefficient, oversized and highly indebted conglomerates. There’s a word for that - Japan
What we’re talking about: While the specifics of a post-Coronavirus world won’t be clear for some time, the potential economic components all look ominous. Lets look at some here:
Low growth, as economies struggle to rebound from a wave of bankruptcies, high unemployment, and weakened consumer spending power. High government debt, weighing down fiscal spending after major virus-driven stimulus packages. Low/negative rates, held down by the lagging revival. Persistently low inflation – while this is contested as an outcome (some predict inflation to rise), recent history suggests boosting inflation isn’t an automatic outcome of stimulus efforts.
On the corporate side, an outcome where economies are made up of large, inefficient, highly indebted conglomerates does not seem unlikely. The current pandemic will wipe out many SMEs, some of which will be hoovered up by larger companies in a wave of M&A. A number of these will be mistakes, driven by price and desperation rather than strategic logic. Many of the larger companies will also have received bailouts, mostly in the form of debt. In sum, that looks like an economy with greater corporate power, weakened competition from smaller players, debt-ridden drags on profitability and investment, and inefficient allocations of capital.
Fortunately (or unfortunately), this situation is actually somewhat familiar. In fact, there is a word for it – Japan. The former economic miracle turned zombie remains enormous, important, influential, and even still growing (until this year probably), but also has: low growth, zero/negative interest rates, low/no inflation, high government debt, highly indebted large conglomerates, and few startups / low innovation.
Things even look familiar on the societal front – Japan’s ageing society and low birth rates are a long term problem for growth due to creating a shrinking labor force, and a growing healthcare burden of taking care of the elderly. While the longer-term effects of COVID-19 aren’t yet clear from a health outcome perspective, it seems very possible the healthcare burden will remain significant for some time, and continually make full employment or a growing labor force participation rate impossible.
Lessons to learn: Well that was depressing. But Japan is still a great country! It grows. It builds stuff. It trades. It’s a cultural heavyweight. And yes its companies even make money sometimes.
But we should be clear eyed about what’s possible for other countries, and learn lessons from the experience of Japan in dealing with these longer term challenges. One more recent thing Japanese companies have been doing to growth amidst this environment is, well…escaping.
In recent years Japanese companies have been expanding aggressively abroad to find higher growth markets and diversify away from their domestic stagnation challenges. Many Japanese companies were very domestically focused so this switch was somewhat simple – lets start selling in the US! China! Already global companies will have harder and riskier decisions to make, but may well want to start considering more frontier market expansion in the near future. For Western multinationals, in a world of Japan-like economies, that doesn’t leave many options. But you might want to start dusting off that Africa expansion plan.
A final lesson from Japan is also what not to do. If you find yourself one of the “winners” of the post-Coronavirus economy, leading an enlarged, indebted company with some fresh new acquisitions under your belt – don’t hold on too tight! A continued failure of Japanese companies is the failure to focus. Japanese companies struggle mightily to allocate resources away from failing businesses toward their strategic core. So even as bargain prices may dictate some M&A, don’t just buy because you can. And if you do, do not forget what your core is, and spin-off un-strategic units quickly.