COVID-19 Economic Predictions | Brexfast in Bed
Although often bleak on the surface, economic crises can present opportunities for growth to small businesses in an evolving market. No one knows what the next 6 to 12 months are going to look like. But even given this uncertainty, there are certain strategies that companies can adopt to emerge stronger than before. Brex cofounder and CEO Henrique Dubugras recently sat down with Brex Head of Corporate Development Adam Swiecicki to discuss the current state of the economy, COVID’s impact on small business, and potential strategies to navigate the current climate. Ten takeaways from the conversation include:
1. The current U.S. economy is weak, its future uncertain
With the U.S. GDP down 2x the rate of the 2008-09 recession, consumer credit card spending is down more than 40% and likely to stabilize at a lower level when all is said and done. Consumption is 70% of the U.S. GDP, and it has been virtually nonexistent during the pandemic due to the unprecedented closure of the U.S. economy. Growth is assumed to accelerate as the economy reopens, but 2020 will likely be worse than anything most businesses have ever experienced. Investors are currently trying to determine what “normal” will look like when the economy returns, and whether the damage inflicted by COVID on SMB valuations and growth will be permanent.
2. Unprecedented credit conditions signal caution, but provide opportunity to SMBs
An optimal predictor for economic activity, the credit market is currently signaling caution. In an effort to stimulate growth, the Federal Reserve is keeping interest rates low, making it as cheap as possible for businesses to borrow and invest. As the market braces for a wave of defaults, interest rates are expected to remain low, and for a longer period of time.
Investors seem willing to accept no yield on their investments, just to keep those investments safe. Credit spreads show investors are demanding higher rates of return for risky assets, indicating concerns about investment stability and longevity. Wide spreads, coupled with banks that are reluctant to lend, are creating a tight lending environment which has small business implications.
3. The fundraising environment is tough, but may be better than reported
The economic impact on new business funding is similar to the impact on VC funding reported in 2008-09, especially in the late-stage market. Venture capitalist funding has dropped roughly 33%, although actual fundraising may be underreported, as many fundraisers are presently unannounced and some businesses may opt to keep fundraising publicity quiet in the current climate. So capital might be better than the statistics suggest.
4. Low valuations reflect a tighter funding environment
Consistent with lower public market valuations and reduced growth outlooks, valuations have pulled back dramatically. The funding environment is tighter than at the beginning of the year, as companies reassess their growth plans. The underlying trend is probably more severe when you account for unreported financings, like unreported rounds that are likely being done at lower prices.
5. Current conditions herald possible long-term impacts to the U.S economy
In what is likely a sustained low-growth environment, the impact will probably be longer lived than first expected. Permanent losses to the GDP and a phased economic reopening are coupled with an unpredictable virus and a bond market not signaling a strong recovery. It is unlikely that the country will go back to its pre-COVID normal in a few months, or possibly even years, depending on when a vaccine is discovered and tested. With interest rates at zero, the U.S. government has no leverage to accelerate growth. And since the country has never really recovered from 2008-09, those extended impacts have compounded the current crisis. Economists predict that the COVID crisis will result in a rebasing of GDP, likely around 90% of the pre-COVID number, even once the country has recovered.
6. The potential for enduring paradigm shifts creates opportunities for SMBs
Human behavior and financial management often change in response to crises, creating a lot of opportunity for businesses to scale and adapt accordingly. Forced to dramatically realign their priorities and activities, U.S. consumers will likely adopt new behaviors moving through and out of the COVID crisis. Online spending, a focus on wellness, a reduction in time spent outside of the home, and an avoidance of excessive public activity all constitute the new normal of U.S. consumers, and this offers new avenues of growth for strategic SMBs.
7. Glean lessons from the 2008-2009 financial crisis
Following the 2008-09 housing crisis, homeownership declined and savings rates increased, as U.S. consumers got a wake-up call about their spending habits. With the stability of the U.S. economy called into question, consumer confidence dropped, and growth plans were put on hold until a trajectory of the crisis could be determined. While the current situation resembles that of 2008, much is also different. Structural in nature and festering for a year, the 2008 crisis resulted in a gradual increase in unemployment. Fast forward to 2020, and the U.S. economy has received a sudden and dramatic shock to its system, initiated by first a virus and then a government mandate. The 2020 economic crisis will likely result in less structural damage to the U.S. economy than its 2008 predecessor, but the impact on economic activity is no less severe.
8. Look for opportunities similar to those following the 2008 crisis
For all its tragedy, 2008 was actually a great time to fund new businesses. Despite the economic tumult, many of the best VC investments occurred around 2008. In fact, when we look at previous periods of extreme economic stress, we have seen a positive correlation between that stress and the rise of new businesses. Companies like Uber, Slack, AirBnb, Square, and Instagram were all launched during the 2008 financial crisis, against the bleak backdrop of poor funding and a subpar business environment. Business models tailored to new needs and shifting paradigms will stand a very good chance in this climate, if founders are able to seek out new trends and insights.
9. Acknowledge the evolving landscape, and pivot accordingly
The economy is shifting, and so are people’s expectations. Changes in the banking sector have been accelerated as interest loses its status as the new business success indicator, and branchless banking becomes the norm. Banks must now pivot their models to focus on virtual user-friendly spend management, integrated systems, and exceptional customer experience. As people are forced to try products and services for the first time, the changes in those markets will last far beyond COVID.
10. Adapt to emerging trends and capitalize upon vacuums in the landscape
The COVID crisis has accelerated many trends that had previously been struggling to penetrate the market or gain traction. Gains that may have taken up to a decade to achieve are now being accomplished in less than a year. Online shopping, on-demand services, online food and grocery, remote connectedness, and proactive healthcare have all established themselves as necessities of the new normal, having formerly been seen as “nice-to-haves.” Companies creating technology to deliver and streamline these services will be the victors moving forward.
The current ecommerce climate also has far-reaching opportunities for supply chains and robotics to reduce delivery cost and increase capacity, and new categories are created and launched every day. Despite decreased consumer spending, many companies are reporting increased revenue, with a clear delineation between discretionary and staple spending. As you pivot your own business to adjust to the changing environment, consider your long-term goals and the space you wish to occupy on the other side of the crisis.
In a downward economy, the outlook can often appear grim. The current environment is no exception. But there’s also a chance to experiment with new business models and evolving technologies to address new needs and trends. As companies contend with COVID and decide how and where to shift, Brex is here to offer support and insights so startup and small business owners can make their own predictions for their company’s success.