Read message from Erik R. Peterson

The COVID-19 pandemic presents a historic challenge to business and government leaders. While there have been some achievements in responding to the virus—from the rapid development of vaccines to new technologies enabling effective remote work, uniform success has been elusive. Lack of preparedness, inconsistent leadership, supply chain breakdowns, and inadequate safety protections, among others, have impeded the containment of the virus. Above all, the pandemic has highlighted an absence of the imagination needed to sufficiently question conventional wisdom. As was illustrated in our 2020 FDI Confidence Index® survey of global investors, fielded in the initial months of that year, business leaders were caught off guard as the world was fundamentally changing. In fact, most respondents were optimistic about the year ahead, taking a “business as usual” view of what was to come. While it is certainly understandable that most did not expect a once-in-a-century pandemic that would cause global upheaval, the failure to even consider such an outcome was costly—in both human and economic terms.

It is for these reasons that in 2021, the Global Business Policy Council is launching a new annual flagship report to stress-test five prevailing conventional wisdoms about the global business outlook. Our annual What if? report is intended to give executives insights into plausible and powerful contingencies that could take place in the next three years. We believe that by challenging “status quo” assumptions, by affirming some and repudiating others, leaders can better anticipate and prepare for an uncertain future. We continue to hope for good outcomes in putting the worst of the pandemic behind us. But we must also prepare for a continued struggle with COVID-19 to enhance our ability to tame the virus and its adverse consequences.

In that spirit, this year’s report explores distinct contingencies that should keep executives up at night: global failure to recover from the pandemic, a world marred by persistent inflation, the emergence of broader cyberwars, a COVID-induced demographic inflection point with unexpected consequences for the marketplace, and the rise of more virulent protectionism. Each of these contingencies can easily generate outcomes counter to the conventional wisdom that is consistent with an end to the pandemic. The non-conventional outcomes may also carry high costs, to businesses and the global economy alike. For this reason, we have titled this year’s report Walking the tightrope. Given the turbulence implied in these outcomes, executives will need steady balance to stay aloft as they pursue strategic goals. A misstep or failure to plan accordingly could easily result in disaster, as many have already learned the hard way during the course of the COVID disruption.

In some cases, our Council has developed econometric models to quantitatively illustrate the potential costs of these contingencies—and they are significant. Our analysis suggests that the costs of a protracted COVID recovery could exceed $9.5 trillion in cumulative output between 2022 and 2024 relative to baseline projections. Similarly, our analysis finds that a future in which inflation remains elevated over the next three years could cost the global economy roughly $6 trillion. And in modeling an outcome in which the quest for greater national self-sufficiency spills into extreme economic protectionism, we estimate that cumulative output losses could exceed $10.5 trillion through 2024. Each represents a foundational shock to the global economy. And while each “What if?” is intended as a standalone contingency, the potential interplay between them could compound these costs. For example, a world that fails to recover from COVID, resulting in continued loose monetary and fiscal policies that fuel inflation alongside rising protectionism, remains possible.

While the contingencies explored in this report each present a distinct challenge for businesses, they also reflect the reality of constant change and disruption. For those business leaders who can stay steady and focused, traversing such obstacles not only is possible, but also presents opportunities to grow more resilient to external shocks. It is only by questioning conventional wisdom and thinking through the potential risks, however, that such success is within reach.

As always, we welcome your views regarding our analysis.

Erik R. Peterson
Partner and managing director, Global Business Policy Council

Executive summary

Business leaders have encountered their fair share of challenges since the onset of the COVID-19 pandemic. In the face of remarkable complexities and competing views on the outlook—some of which are radically divergent, business leaders have been forced to assess the viability of their operations, take immediate actions to address urgent priorities ranging from employee safety to cash flow concerns to continuity of operation, react effectively to the “great shakeout” generated by the unprecedented lockdowns, and position their operations strategically to thrive in the post-COVID environment. No small task.

Years from now, when analysts look back at the first 12 months of the pandemic and the diverse forecasts by a wide range of groups from the International Monetary Fund (IMF) to management consulting groups such as this one, no doubt they will unearth a number of prescient observations. The trouble is that they will be few and far between. The record is likely to reveal that many “conventional wisdoms” had far more “convention” than “wisdom.”

Now, more than 18 months into the pandemic, we stand at a point where many of the early assumptions and insights associated with the pandemic have been thoroughly tested. Some have been validated; others have fallen short. Many more uncertainties remain as leaders continue to extricate themselves from their respective predicaments. As before, they now need to be asking themselves, “What if?”

Thus, we have thrown the spotlight on five crucial “What if” questions that we think business leaders should be considering. Our time frame is three years. The idea is to highlight potential contingencies rather than evolving trends, which our Council considers each year in our Global trends assessment (with a five-year horizon).

Here is the summary of our thinking:

What if ...

... the world fails to recover from the pandemic? The conventional wisdom is that most advanced economies, led by the United States and Europe, will emerge from the pandemic this year or soon thereafter and that most developing economies will return to stability and growth in 2022–23. But what if even more COVID-19 variants emerge that seriously undercut—or even undermine altogether—the hard-won progress in vaccinations?

… inflationary pressures are structural rather than transitory? The conventional wisdom is that the current inflation is to be expected—part and parcel of the fast-and-furious restart of the economy after the unprecedented lockdown—and that price rises are the inevitable result of temporary supply–demand dislocations. According to analysts, many of these bubbles will likely disappear or diminish in the space of 12 to 18 months. But what if the underlying dislocations—in everything from commodities to semiconductors to skilled workers—lead to longer and higher inflation? What if government stimulus policies exacerbate the restabilization of prices?

… today’s cyberattacks are mere opening salvos of what could morph into full-blown digital wars? The conventional wisdom is that denial-of-use and other cyberattacks on governments and businesses will increase—amounting to an extrapolation of the SolarWinds and other episodes we all know. But what if continued development of computational capabilities (including quantum) and other tech developments subject large segments of society to dislocation? What if the already-serious attacks escalate into big-ticket threats—even, possibly, overflowing to kinetic conflict?

… the pandemic triggers a worldwide demographic inflection? Prepare for a gradual population deceleration, says the conventional wisdom. Maybe not. What if the pandemic fast-tracked population compressions that the Great Recession had already started? And, if the great demographic slowdown—and the potential contraction of the labor force—is really under way, what might the consequences be for markets?

… the pandemic leads many of the major economies to reimpose protectionist policies under the pretense of national self-sufficiency? The conventional wisdom is that countries will reopen their economies once they are beyond the pandemic and reach the economic limits of national self-sufficiency (the point at which they recognize that national capabilities do not exist or are too non-economic to make viable). But what if political and social movements that have surfaced during the pandemic aggressively pursue “home-shoring” of operations and mandated controls in a much greater sphere of national interests? What if this kind of economic nationalism creates the kinds of reciprocal pressures that destabilized the world a century ago?

While we hope for better outcomes, in our judgment, the jury is out on each of these crucial questions. Any one of them that runs contrary to the prevailing conventional wisdoms could have a tremendous effect on the marketplace. If all were in play, especially simultaneously, it would defy the imagination. What follows here is a more detailed exploration of each of these questions. In some cases, we have sought to deepen the assessment by layering on quantitative analysis of what might happen if the answer to “What if?” cuts in unexpected directions.

What if the world fails to recover from the pandemic?

“Global vaccination,” asserted IMF Director of Fiscal Affairs Vitor Gaspar at the IMF–International Bank for Reconstruction and Development spring meeting in 2021, “may well be the highest return public project ever identified.” Alas, against the backdrop of the infections mounting across the planet, there is scant evidence to suggest Gaspar’s assertion has gained traction. Just the opposite. The gulf between vaccinated populations and the unvaccinated majority of humanity continues to widen. Beyond that, national economic recoveries are diverging significantly. What if even more COVID-19 variants emerge that seriously undercut—or even undermine altogether—the hard-won progress in vaccinations? Our analysis suggests the costs could exceed $9.5 trillion in cumulative output between 2022 and 2024 relative to baseline projections, severely compounding existing economic, social, and political challenges across the globe.

A pyrrhic victory? The state of global COVID recovery and vaccination in 2021

The costs of the COVID-19 pandemic have already been historic. On a global level, the decline in gross domestic product in 2020 was the largest since the Great Depression. The International Labour Organization estimates that it cost the equivalent of 255 million full-time jobs. And the Pew Research Center posits that the global middle class shrank for the first time since the 1990s. While 2021 has brought signs of recovery, the realities of the Delta variant and other challenges have proven that the pandemic is far from over. As of early August 2021, global COVID cases surpassed 4 million per week—up from roughly 3 million per week just a month prior. Reported COVID cases in Vietnam surpassed 9,000 on a single day, August 8—which is four times the total case numbers in the country for all of 2020. Meanwhile, in France and Italy, surging cases compelled lawmakers to introduce “vaccine passes” and require this proof of vaccination or a negative COVID test for entry into certain spaces, sparking national protests. These developments, having hit both developed and developing markets alike, suggest there is an ongoing risk of a persistent pandemic—with effects lasting through 2024.

In leading advanced economies, the Delta variant has hit hard. Making up more than 80 percent of new COVID cases in the United States in July 2021 and causing cases to rise more than 700 percent that month, the Delta variant threatens to further delay the COVID recovery process in the country, at best. Across the Atlantic, the European Center for Disease Prevention and Control predicted that by the end of August 2021, the Delta variant would represent 90 percent of all SARS-CoV-2 viruses circulating in the EU. Australia was also experiencing a slow recovery as Delta outbreaks emerged throughout the country in June. A month later, it was still battling the virus with strict containment measures. A new lockdown in New South Wales, for example, is projected to cost $1 billion per week. And after initially experiencing what appeared to be a V-shaped recovery, New Zealand’s economy contracted in the final three months of 2020 as the tourism industry plummeted, and experts warn that a future outbreak there could quickly overwhelm hospitals and require another hefty lockdown. Thus, even a country widely recognized as a paragon of COVID response confronts the prospect of a double-dip recession and virus resurgence.

In most cases, developing markets are facing even steeper challenges than those confronting developed economies. In early 2020, developing countries saw more than $100 billion in portfolio outflows from the region—more than three times the amount during the global financial crisis. This dramatic capital outflow led to major emerging market currencies depreciating by 15 percent, forcing consumers to pay more for imported goods. The impact of these shocks has lasting implications for GDP, particularly if inflation takes hold (see What if current inflationary pressures are structural rather than transitory?). Corporate debt burdens in emerging and developing markets pose another serious threat. Already at historically elevated levels before the COVID-19 outbreak, such debt is now growing exponentially. High corporate risk premiums indicate an elevated risk of debt defaults, and large debt overhangs facing some firms may hamper future investment and cause them to grow more slowly over the medium term.

In recent months, key developing markets have been most affected. India experienced a devastating new wave of COVID-19 in early 2021, with other countries in the region such as Bangladesh, Nepal, Pakistan, and Laos set to experience similar catastrophes. China, initially quick to recover from its own COVID outbreak that was primarily centered in Wuhan, is also showing signs of a lagging economic recovery. The country’s manufacturing sector and exports have been particularly affected by the persistent semiconductor shortages resulting from COVID-disrupted supply chains.

Vaccine uptake and distribution trends are exacerbating the divide. Even in developed markets where vaccines are more accessible, challenges have emerged—namely vaccine hesitancy and misinformation. The Wharton School of the University of Pennsylvania conducted a study forecasting that if vaccine hesitancy persists in the United States and people increase social contact to 85 percent of pre-COVID levels, there could be up to 4.6 million additional COVID cases in 2021 alone.

Developing markets are faring even more poorly on the vaccine front. According to July 2021 IMF data, only 11 percent of populations in emerging economies had been administered a vaccine dose—compared with more than 40 percent in advanced economies. The discrepancy caused the IMF to raise its growth projections for advanced economies to 5.6 percent from a previous 5.1 percent and lower its forecast for the rest of the world to 6.3 percent from a prior 6.7 percent that month. Until vaccine distribution in emerging markets improves, these markets remain particularly vulnerable to new outbreaks, as developments in Indonesia, Vietnam, and South Africa show. Failure to attain high enough vaccination levels—in developed or emerging markets—could well lead to the emergence of new variants and set the world on a course toward persistent COVID.

The economic impact of persistent COVID: global, regional, and sector disruption

If new COVID variants, weak vaccine distribution, and growing vaccine hesitancy converge on a large scale, the pandemic could still be wreaking havoc in 2024. To better understand the implications of persistent COVID for the world, we have developed a set of scenarios, combined with econometric modeling analysis. Our worst-case scenario envisions a world in which global COVID recovery is slow, lockdowns are frequently reinstated, and intensified protectionism continues to disrupt supply chains. Global annual growth averages just 2.4 percent over the three-year forecast period, well below the 3.7 percent baseline and 4.9 percent rapid recovery scenario, and growth sinks to 2.1 percent by 2024 (see figure 1). The implications for cumulative global output are also striking—the global economy will be $9.5 trillion lower than our baseline over the forecast period.