15 April, 2020
At the time of writing this article, the head of the International Monetary Fund announced that it is clear that the global economy has now entered a recession that could be as bad or worse than the 2009 recession.
So how far down the rabbit hole can the world economy go?
In this article, we look to understand the economic impact of COVID-19 and what the Singapore Government is doing to stimulate the economy. This is important because an organization's ability to survive a recession (and thrive after) depends on its agility and proficiency in making the right decisions to adapt to the fast changing environment.
L-shaped: refers to the type of economic recession and recovery characterized by a steep decline in economic growth followed by slow recovery.1 Greece is used as an example of a country which experienced a L-shaped economic shock whereby, following the last global financial crisis in 2006 and 2007, the country faced a prolonged period of stagnant growth and never recovered its prior output path.
I-shaped: As a sign of the pessimism held by many at present, Nouriel Roubini described the current contraction as being "I-shaped" – this being a vertical line representing financial markets and the real economy plummeting.2 This sounds rather apocalyptic because a L-shaped recession is already generally regarded as the most drastic and akin to a depression – and I-shaped isn't typically factored into the recession classification system. Unfortunately this may not be totally unreal as the World Health Organisation declared the COVID-19 pandemic as humanity's greatest threat.
At this juncture and to better adapt to changes, it is important to understand which point of the economic cycle we are in (and to adjust resourcing now) rather than its eventual shape. If we are facing an I-shaped economy it means that an inflexion point or an improvement in the economy is not envisioned in the short or medium term.
What has the Singapore Government done?
Rather encouragingly, the Singapore Government's reaction has been swift. It activated the recession stimulus playbook:
- Addressing financial system risk: The Monetary Authority of Singapore (MAS) announced on 26 March 2020 that it will draw on its new currency swap line with the US Federal Reserve to provide up to US$60 billion of funding to banks in Singapore. Even prior to the above announcements, large Singapore banks had already taken the initiative and announced various debt deferments, restructuring and moratorium measures to ease the financial burdens of its customers.
- Alleviate real economy problems: On 28 March 2020, the Singapore Government unveiled a Resilience Budget totalling some S$48.4 billion (US$33.9 billion) targeted at saving jobs and protecting workers and livelihoods. This came on top of the S$6.4 billion (US$4.48 billion) package that was announced about a month ago to cushion the impact of the COVID-19 pandemic. To put this into perspective, the total package announced by the Singapore Government is about 11 per cent of Singapore's GDP, which, comparatively on a percentage of GDP basis – is bigger than the historic US$2 trillion package that Congress just passed in the US.
What can we do?
Jack Welch once said that "the most important quality of leadership is intellectual honesty. The reality principle – the ability to see the world as it really is, not as you wish it were".
It is important for organisations to understand especially in a recession what it needs to do and to implement the change quickly enough to survive.
According to the Harvard Business Review (HBR) article "How to Survive a Recession and Thrive Afterwards" written by Walter Frick3, certain companies fared particularly badly during recessions and went bankrupt, went private or were acquired. But a small percentage of 9% didn't just recover, they flourished and outperformed competitors by at least 10% in sales and profits growth.
The HBR article cited preparation as the difference. In particular the four key areas to focus on where decisions were determinative of an organization's survival are: (1) debt and liquidity management, (2) focus on decision making, (3) how to look beyond layoffs; and (4) making investments in technology.
It cautioned against companies that when the downturn hit, switched to survival mode, making deep cuts and reacting defensively – these are those that merely limped through the recession are slower to recover and never really catch up.
Therefore to navigate through this uncertain and turbulent times, it is important to understand what the government is doing to stabilize the economy, how the incentives can benefit your organization, and what your organization can do to weather the economic shocks.
Ashurst has published a collection of articles to help you with the impact on your business, including issues regarding business continuity and undertaking risk assessments, protecting the health and safety of your employees, and mitigating risks in regard to trade and commerce.
For further information, please contact:
Jean Woo, Partner, Ashurst
jean.woo@ashurst-adtlaw.com
1. Article published on 27 March 2020, by Harvard Business Review titled "Understanding the Economic Shock of Coronavirus" by Philip Carlsson-Szlezak, Martin Reeves and Paul Swartz – https://hbr.org/2020/03/understanding-the-economic-shock-of-coronavirus
2. Article published by Channel News Asia titled "Commentary: Will COVID-19 bring on the next Great Depression?" By Nouriel Roubini, 28 March 2020. https://www.channelnewsasia.com/news/commentary/covid-19-coronavirus-economy-impact-recession-stock-fed-bail-12582976
3. https://hbr.org/2019/05/how-to-survive-a-recession-and-thrive-afterward
