A corporate survival guide

The coronavirus crisis will change the world of commerce

Firms that make it through will face a new business climate

Most bosses and workers have been through economic crises before. They know that each time the agony is different—and that each time entrepreneurs and firms adapt and bounce back. Even so, the shock ripping through the business world is daunting.

With countries accounting for over 50% of world GDP in lockdown, the collapse in commercial activity is far more severe than in previous recessions. The exit path from lockdowns will be precarious, with uneasy consumers, a stop-start rhythm that inhibits efficiency, and tricky new health protocols.

And in the long run the firms that survive will have to master a new environment as the crisis and the response to it accelerate three trends: an energising adoption of new technologies, an inevitable retreat from freewheeling global supply chains and a worrying rise in well-connected oligopolies.

Many firms are putting a brave face on it. Pumped with adrenalin, bosses are broadcasting rousing messages to their staff. Normally ruthless corporate giants are signing up for public service. lvmh, the Parisian purveyor of Dior perfume, is distilling hand-sanitiser, General Motors wants to make ventilators as well as pickups, and Alibaba’s founder is distributing masks worldwide.

Cut-throat rivals in the retail trade are co-operating to ensure supermarkets are stocked. Few listed firms have made public their calculations of the financial damage from the freeze in business. As a result, Wall Street analysts expect only a slight dip in profits in 2020.

Don’t be fooled by all this. In the last recession two-thirds of big American firms suffered a fall in sales. In the worst quarter the median drop was 15% year-on-year.

In this downturn falls of over 50% will be common, as high streets become ghost towns and factories are shut. Numerous indicators suggest extreme stress.

Global oil demand has dropped by up to a third; the volume of cars and parts shipped on America’s railways has dropped by 70%. Many firms have only enough inventories and cash to survive for three to six months.

As a result they have started to fire or idle workers. In the fortnight to March 28th, 10m Americans filed for unemployment benefits. In Europe perhaps 1m firms have rushed to claim state subsidies for the wages of inactive staff. Dividends and investment are being slashed.

The pain will deepen as defaults cascade through domestic payment chains. h&m, a retailer, is asking for rent holidays, hurting commercial-property firms. Some supply chains linking many countries are stalling because of factory closures and border controls. Italy’s lockdown has disrupted the global flow of everything from cheese to jet-turbine components. China’s factories are cranking back into action.

Apple’s suppliers bravely insist that new 5g phones will appear later this year, but they are part of an intricate system that is only as strong as its weakest link. Hong Kong’s government says its firms are reeling as multinationals cancel orders and ignore bills. The financial strain will reveal some astonishing frauds. Luckin Coffee, a huge Chinese chain, has just admitted brewing its books.

In the past two recessions, about a tenth of firms with credit ratings defaulted worldwide. Which survive now depends on their industry, their balance-sheets and how easily they can tap government loans, guarantees and aid, which amount to $8trn in big Western economies alone.

If your firm sells confectionery or detergent, the outlook is good. Many tech companies are seeing surging demand. Small firms will suffer most: 54% in America are closed temporarily or expect to be in the next ten days.

They lack access to capital markets. And without friends in high places, they will struggle to get government help. Only 1.5% of America’s $350bn aid package for small firms has been disbursed so far and Britain’s effort has been slow, too. Banks are struggling to deal with contradictory rules and a flood of loan applications (see article). Resentment could rage for years.

Once exits from lockdowns start and antibody testing ramps up, a new, intermediate phase will begin.

Firms will still be walking, not running (China is still only functioning at 80-90% of capacity).

Ingenuity, not just financial muscle, will become a source of advantage, allowing cleverer firms to operate closer to full speed. That means reconfiguring factory lines for physical distancing, remote monitoring and deep cleans.

Consumer-facing firms will need to reassure customers: imagine conferences handing out N95 masks with the programme, and restaurants advertising their testing regimes. Over a quarter of the world’s top 2,000 firms have more cash than debt. Some will buy rivals in order to expand their market share or secure their supply and distribution.

The job of boards is not just to keep afloat, but also to assess long-run prospects. The crisis is set to amplify three trends.

First, a quicker adoption of new technologies. The planet is having a crash course in e-commerce, digital payments and remote working. More medical innovations beckon, including gene-editing technologies.

Second, global supply chains will be recast, speeding the shift since the trade war began. Apple has just ten days’ worth of inventory, and its main supplier in Asia, Foxconn, 41 days. Firms will seek bigger safety buffers and a critical mass of production close to home using highly automated factories.

Cross-border business investment could drop by 30-40% this year. Global firms will become less profitable but more resilient.

Don’t go from crisis to stasis

The last long-term shift is less certain and more unwelcome: a further rise in corporate concentration and cronyism, as government cash floods the private sector and big firms grow even more dominant.

Already, two-thirds of American industries have become more concentrated since the 1990s, sapping the economy’s vitality.

Now some powerful bosses are heralding a new era of co-operation between politicians and big businesses—especially those on the ever-expanding list of firms that are considered “strategic”.

Voters, consumers and investors should fight this idea since it will mean more graft, less competition and slower economic growth. Like all crises the covid-19 calamity will pass and in time a fresh wave of business energy will be unleashed.

Far better if this is not muffled by permanently supersized government and a new oligarchy of well-connected firms.

Monetary financing demands careful and sober management

It is simply another policy tool, neither the royal road to hyperinflation nor a cure-all

Martin Wolf

Mandatory Credit: Photo by NEIL HALL/EPA-EFE/Shutterstock (10584275h) Governor of the Bank of England Andrew Bailey poses near his office on the first day of his post at the Bank of England in London, Britain, 16 March 2020. Bailey is the 121st Governor. The role is also Chairman of the Monetary Policy Committee, with a major role in guiding national economic and monetary policy. Governor of the Bank of England Andrew Bailey, London, United Kingdom - 16 Mar 2020
Bank of England governor Andrew Bailey initially claimed the bank would not engage in monetary financing of government © Neil Hall/EPA/Shutterstock

Desperate times demand desperate measures. Among those measures might be monetary financing of government or transmission of money to members of the public from the central bank, via “helicopter money”.

So what does monetary finance really mean? Does it ever make sense? How dangerous is it?

How and by whom should it be managed?

These questions demand sober answers, not hysteria about the onset of hyperinflation.

Just this week, Andrew Bailey, governor of the Bank of England, writing in the Financial Times, insisted that the bank was not engaging in — and would not engage in — “monetary financing” of government. Yet, just a few days later, the Treasury announced that the bank would directly finance its ballooning operations. The Treasury also stated that this was to be “temporary and short-term”. But the decision on when this operation is to be reversed rests with the Treasury.

So the bank can still claim that this is not “a permanent expansion of the central bank balance sheet with the aim of funding the government”, condemned by Mr Bailey. But the bank does not, as he asserted, “remain in full control of how and when . . . expansion is ultimately unwound”. The Treasury does.

Much in this discussion consists of intellectual sleights of hand. One hinges on whether direct monetary financing is fiscal or monetary policy. The economic answer is that it is both. If one focuses on which institution is in charge, then it could be either. Another sleight of hand hinges on the tricky word “permanent”.

For policymakers, that is about intentions. If they do not intend it to be permanent, then it is not monetary financing. This is how the Bank of Japan pretends that it is not engaged in monetary financing, despite the huge scale of its holdings of government bonds.

Fine words butter no parsnips. What matters is not intentions, but actions. Supposedly temporary purchases of government bonds, or the direct monetary financing now imposed by the UK Treasury, might well become permanent.

Indeed, in the case of the expansions of central bank balance sheets over the past 12 years, it probably has. This is an embarrassing truth that dares not speak its name. Yet supposedly irreversible monetary financing might ultimately be reversed. As the French say, “Il n’y a que le provisoire qui dure.” (“Only the temporary endures.”)

The real question is whether a policy of large-scale monetary expansion in support of the government’s policies may sometimes make sense. The answer is “yes”. In exceptional circumstances, such as times of war, deep depressions or pandemics, it is the job of the central bank to support the overriding need for the state to protect people’s lives and livelihood.

Only the craziest libertarian would disagree. As an organ of the state, the central bank must help. Its independence, while normally desirable, is a means to an end, not an end in itself. Even price stability is not overriding in all circumstances. Other things matter.

This is not to deny that monetary financing brings dangers. Uncontrolled, it may lead to irresponsible spending, concealed taxation that takes the form of high inflation via the excessive creation of base money, or even hyperinflation. Fighting these dangers might then force central banks to curb bank lending via regulations, including higher reserve requirements. This might throttle development of the private sector.

Yet, in a situation like today’s, direct monetary financing can help a government to do whatever it needs to do to sustain people’s incomes and the economy through a crisis. The alternative of debt financing would reduce the desired expansionary effects, partly because it would be expected to end up with another painful round of austerity.

The question is not whether intentionally-permanent increases in central bank money can be justified. They can.

The question is rather how to manage them, institutionally and technically. The Israeli economist Eran Yashiv argues that the institutional solution is to create a funding arm for a time-limited programme of what is intended to be irreversiblemonetary financing of Covid-19-related programmes, in support of health and people’s livelihoods.

Its governing committee could include representatives of the finance ministry, the central bank and outside experts. If such arrangements do make the policy more visibly under control, this idea makes sense.

Yet there are also questions about how the policy is to be operated.

Suppose that there is indeed a very large increase in the monetary base. Suppose, too, that commercial banks seek to expand their lending dramatically, partly because they find themselves with what they think of as “excess reserves”.

Then the central bank may have to raise interest rates by more than it would otherwise have had to do. It may also have to raise the interest it pays on reserves, which is costly.

Alternatively, it may have to tax banks by imposing higher requirements of unremunerated reserves. It may feel obliged to let inflation rip. Or it may simply have to mop up excess reserves, as normal, through open-market operations.

The employment of supposedly irreversible monetary financing is just another policy tool. It has pros and cons, specific to the circumstances. It is neither the royal road to hyperinflation nor a panacea for today’s contraction of the real economy.

Right now, when government deficits are exploding in the midst of a huge crisis, it is an obvious mechanism. Use it.

Work out ways to manage it. Above all, make sure we get through this.

That is our chief aim.

The Trump Presidency Turns Deadly

Harry Truman famously had a sign on his White House desk that read, “The buck stops here”: ultimate responsibility for the country’s welfare rests with the president. Now contrast that with how the current occupant of the Oval Office has handled the COVID-19 pandemic.

Elizabeth Drew

drew54_Jim Watson-PoolGetty Images_trumpmedia

WASHINGTON, DC – For the first three years of his administration, US President Donald Trump focused on consolidating power. And yet, as the United States approached its greatest domestic peril in a century, he refused to use that power. Instead, as a deadly coronavirus was poised to invade the country, the president opted for denial and delay.

But toward the end of March, Trump’s science advisers presented him with evidence from a voluntary 15-day experiment indicating that where social distancing measures were taken seriously, the disease spread less rapidly than in places where such restrictions were not observed.

At the time, the number of COVID-19 infections was over 100,000 and deaths exceeded 1,000. Science advisers’ models indicated that if people behaved perfectly, 100,000-240,000 US residents would die, and Trump’s political advisers told him that polls showed the public wanted to extend social distancing. For once, he took the sensible approach, extending the federal government’s recommendation of social distancing for another 30 days, until the end of April.

At long last, Trump, who just days earlier proclaimed that he would lift all restrictions and “reopen” the US economy by Easter (April 12) – which he couldn’t do because the business shutdowns had been ordered by state governors – seemed to be taking the pandemic seriously. Earlier, he had also dismissed the Democrats’ criticism of his handling of the crisis as “their new hoax.”

He took over the daily news briefings when he noticed that Vice President Mike Pence, whom he had put in charge of the emergency task force, was winning praise for conducting the sessions. And then he bragged about the TV ratings. But his behavior remained uneven, and he continued his harsh attacks on reporters who pressed him on his slow response.

In denying responsibility for the appalling state of unreadiness the country was in, Trump sometimes claimed, falsely, that “nobody knew” there would be a pandemic or epidemic of this proportion (at another point he claimed that he had known all along a pandemic was coming). As usual, he blamed his predecessor, Barack Obama. In fact, as early as January, intelligence agencies had warned the Trump administration of the imminent approach of the coronavirus.

But despite persistent efforts over this period, administration officials were unable to get the president to focus on the looming crisis. To the public as well, he dismissed the coronavirus and the resulting disease, COVID-19, as less deadly than the seasonal flu. When he had reason to know better, on February 24, he assured the public that the coronavirus rampage “is very much under control in the USA.”

Trump said on March 31 that he had been upbeat previously because he “wanted to give people hope,” but according to press reports he was just as dismissive of the problem privately as he was in public.

Trump is precisely the wrong person to lead the US at such a moment. Neither the brightest nor the most focused of presidents, he’s clearly out of his depth. His resistance to reality left doctors and nurses without sufficient personal protective equipment, and as a result, some have died. Moreover, the stunning lack of test kits left policymakers flying blind about where and how many infections were occurring.

Trump’s bottomless need for praise led him to make preposterous claims, such as that the number of tests being performed in the US was “very much on par” with that of other countries.

This denial of reality affected the administration’s working relationships with state governors. Trump listened too much and for too long to his economic advisers, who for weeks convinced him to put business interests ahead of the public’s health. And he refused to invoke the Korean War-era Defense Production Act, which allows a president to order a business to meet a national emergency, before finally relenting on March 27 and ordering General Motors to begin manufacturing desperately needed ventilators.

There were also signs of political favoritism, with certain governors – such as Trump’s fellow Republican, Ron DeSantis of Florida – receiving more federal assistance than Democratic governors, with whom Trump picked fights. The US federal system has been both an obstacle and a salvation in dealing with the coronavirus: it has led to policy confusion and has also been a smokescreen for Trump’s incompetence.

Trump still refuses to nationalize the crisis, leaving the states to take different approaches and bid against one another for emergency equipment. The key to his approach may well lie in something he said when asked at a mid-March press conference if he took responsibility for the shortage of face masks. “No,” he said, “I don’t take responsibility at all.” In other words, let the governors take responsibility for any failures.

Such blame-shifting has become the norm for Trump and Republican leaders, Pence, for example, blamed China, as well as the Centers for Disease Control and Prevention. By late March, Republicans had begun arguing that the Democrats’ January impeachment of Trump had distracted him from the pandemic threat. But the timing doesn’t work: the impeachment episode was over by early February. Bill Clinton was legislatively active while he was being impeached.

We may never know what Trump actually thinks about the pandemic. What we do know is that COVID-19 is taking an ever-increasing toll. By April 2, the death count in the US had climbed to more than 5,000, and the number of infections had risen to nearly 217,000. Worldwide, nearly one million people have been infected by the virus, about which much remains a mystery – including how long it will torment us.

On the economic front, US unemployment claims increased by a stunning 6.6 million in the week ending April 1 (a figure that includes only those who filed for benefits, which is increasingly difficult to do, because labor offices have been overwhelmed). A deep and long recession is all but certain.

Whenever the crisis has passed, there will be numerous studies of what happened and why. The hardest question to face, and one that will be long debated, is how many people died needlessly as a result of Trump’s leadership.

Elizabeth Drew is a Washington-based journalist and the author, most recently, of Washington Journal: Reporting Watergate and Richard Nixon's Downfall.

Coronavirus Is Just Another Hurdle for Deutsche Bank

Even with the most optimistic resolution of the current crisis, Germany’s biggest lender is a long way from profitability

By Rochelle Toplensky

The time to buy back Deutsche Bank DB -1.51%▲ must be drawing closer, but it isn’t here yet.

Investors are understandably ambivalent about Germany’s biggest lender in the coronavirus crisis. It is one of Europe’s most fragile banks, with high leverage and a sweeping overhaul of its operations under way—not a great place to be when large parts of the global economy are no longer generating cash.

Yet it is also disproportionately exposed to the big European economy that seems to be suffering least from Covid-19.

This helps explain why Deutsche Bank stock hasn’t been punished as much as might be expected as investors factor a very sharp global recession into their forecasts. It has lost about two-fifths of its market value since mid-February, in line with the wider European banking sector.

The German giant is nearly one year into a three-year restructuring plan. Last summer it promised to refocus on core capabilities, reduce costs, dispose of bad assets and cut 18,000 jobs. Its annual results showed decent progress.

This year, though, there is a risk that lockdowns could derail plans to invest in technology and rightsize its German retail operations, both of which are expected to reduce head count.

Layoffs in the midst of a global health pandemic could prove even more unpopular than they usually do. Last month, HSBCsuspended 35,000 layoffs it had planned as part of its own restructuring.

Deutsche Bank has instead suspended communicating about its layoffs, even as negotiations continue with the powerful German employee works councils. Those traditionally take a long time, and the timing of cuts penciled in later this summer could slip if the German lockdown lasts past May. So far the lender has trimmed head count by about 4,100.

On the plus side, the need to enable most employees and clients to work from home has accelerated the development of some connectivity and contingency systems. Levels for regulatory capital seem on target, and nearly half of the €2 billion cost reduction targeted for 2020 was already locked in last year.

Beyond the restructuring, a long lockdown would create significant loan losses. Here, though, Deutsche Bank’s home turf may help. Berlin took quick action to counter the impact of shutdowns—a €750 billion ($814 billion) monster stimulus amounts to over a fifth of the country’s annual output—and would likely step in again if needed.

Germany’s death rate has also been relatively low and many of its businesses continue to produce after acting early on lessons learned in their Chinese factories.
Deutsche Bank’s shares are still among the cheapest in the European banking universe, trading on around a quarter of tangible book value. Bond investors also seem worried: The cost of insuring against the lender’s default using a credit default swap has spiked in the past two weeks, markedly more than rivals.
The bank’s real problem is less the coronavirus than its own persistently weak margins in Europe’s tough banking environment. Even with the most optimistic resolution of today’s economic crisis, Deutsche Bank still has a lot more work to do.