5. Missing the rebound | Top Five Risks | RiskMap 2021
Top Five Risks
Missing the reboundAn uplift is coming and opportunities are there for those that embrace risk
After a year of economic contraction, operational disruption and policy uncertainty, the arrival of COVID-19 vaccines and heightened expectations of a significant global economic recovery are fueling a more optimistic outlook for 2021. While the emergence of a more highly contagious strain has knocked back short-term expectations, pathways out of the pandemic are in sight. Businesses must focus on opportunities to avoid the risk of missing out on the post-COVID rebound.
This optimism and the quest for opportunity will continue to come up against a stubbornly high-risk business environment. In A world with long COVID, we have elaborated the scale of the challenge facing businesses in 2021. From faltering vaccine rollouts and social tensions to volatile regulations and deepening geopolitical divisions, businesses will have to take greater risks to succeed. Those that fail to embrace risk are in danger of failing to capitalise on the uplift, which will define the future global economy as much as the crisis itself.
Throughout the COVID-19 crisis, Control Risks has helped clients respond. In 2021, the challenge for all companies will be not just to recover – to get back to where we were – but to seek opportunity with a view catching the rebound when it comes. This means that some companies will graduate out of the crisis in a much stronger position to succeed in the medium term, than they would have been on a pre-COVID trajectory.
Companies stepped up and must continue to do so
The pain felt by many sectors has been unavoidable as lockdowns and restrictions have been imposed, lifted and reimposed. However, the ways in which companies have had to respond to ensure that their businesses survived or even thrived will provide a firm basis for their future.
Many companies were able to respond to the pandemic’s challenges through adaptation and innovation. The most common innovation cited by companies in a late 2020 World Bank survey across 51 countries was the rapid expansion and adoption of digital platforms for multiple aspects of business activity, including embracing remote working and expanding their reliance on digital communication with employees and clients. While larger companies have been twice as likely to invest in new digital solutions since the start of the crisis, product innovation rates were similar across different types of companies – from SMEs to large multinationals. The survey also found that one in four companies is likely to have changed their product mix: either adapting their existing products to changing demand patterns or innovating by introducing new products or services, including ones that capitalise on increased interest in maintaining good health. Other companies adapted by building more resilient supply chains or by introducing more flexible contracts with clients and suppliers.
Efficiencies that have been coping mechanisms in the full heat of the crisis will, if properly nurtured, be a source of greater productivity in the longer term. Companies have optimized and crisis-proofed their supply chains, cut down on business travel costs, introduced flexible working and expanded access to new talent and technologies. The pandemic accelerated digitalization and automation in companies and it increased digital access among their key customers. While the pace of new tech adoption will not be risk free (see Digital Acceleration hits Emerging Risks), the fruits of smart adoption will show in 2021 and beyond.
Companies are more likely to rebound strongly when they are more prepared for future disruptions. While Control Risks’ 2020 Global Resilience Survey showed that the pandemic tested the limits and boundaries of organisational resilience, 39% of businesses indicated that COVID-19 had had some positive impact, either operationally or financially. In particular, businesses will benefit from an increased level of preparedness to deal with future crises.
Market intelligence will be essential for companies that want to translate the impending economic recovery into a more transformational and sustained post-COVID rebound. Even at the height of the pandemic, some businesses were able to grow by exporting and investing into countries with fewer disruptions. In order not to miss the rebound, companies will have to monitor three categories of risk and opportunities: when will vaccines unlock pent-up demand in individual countries; what are the post-COVID supply-side requirements and competition (particularly in technology and talent/skills); what are the key enabling/constraining public policy responses, including rapidly evolving regulatory environment.
Where will the rebound opportunities be greatest?
The two key COVID-19-related external, country-based factors that will determine the strength of any economic recovery will be the severity of COVID-19 restrictions in place in the final months of 2020 and early 2021, and the ability to vaccinate a large proportion of a population in the first six months of this year.
Advanced economies – particularly those in Europe – that experienced the most severe contractions in 2020 and are able to secure and administer vaccines early will rebound fastest. Oxford Economics projects that the Eurozone growth rate will exceed that of the typically fastest-growing emerging economies such as China and India.
Having experienced deep economic contraction and multiple lockdowns in 2020, the UK and Spain are likely to experience some of the highest GDP growth rates in 2021. However, Brexit disruption will pose a challenge for UK exporters and some manufacturing companies. At the same time, EU countries will also benefit from Euro 750bn economic stimulus package, including significant climate-mitigating investment.
Among emerging markets, the countries of Central Europe that implemented severe restrictions and that will also benefit from early access to vaccines are likely to demonstrate early and higher rates of growth than other emerging markets – like Brazil, Turkey and India– where GDP has already recovered a significant proportion of the H1 falls and may be slower to vaccinate their large populations. According to OE’s forecast, Greece, Croatia and Czechia in 2021 are likely to demonstrate growth rates more than twice that of China.
While Europe will be leading the way globally, African countries are also offering new growth opportunities for investors. The pandemic has accelerated shift to e-commerce in Africa and opened new opportunities for intra-regional trade and supply chains.
Sectors will recover unevenly
The uneven impact of restrictions and behavioural changes on different sectors of the global economy is likely to continue into the recovery phase, though with different winners and losers.
The services sector was severely affected by COVID restrictions, and recovery is expected to be robust across most regions. Travel, hospitality and tourism stand to benefit most from the introduction of the vaccine. Travel and tourism will flow between countries with higher vaccination rates. Intra-European tourism is likely to recover faster than in other regions – like Egypt, Turkey and parts of South-East Asia – where vaccine orders remain lower.
Oil and other commodities will benefit from the resumption of economic activity and travel, though oil prices are not expected to reach pre-pandemic levels in 2021 and some supply side restrictions under the OPEC+ agreement are likely to continue.
Industry has performed better in 2020 than services, and this pattern is likely to continue into 2021. According to Oxford Economics analysis, many advanced economies have seen industrial output decline more than GDP in 2020. Industry is expected to fare well in 2021 as it meets a surge in pent-up demand for many products after lockdowns are lifted.
Supply chain disruption will continue into 2021, with container shipping particularly affected. Its recovery will be further tested by the introduction of new regulations to stimulate re-shoring, by continuing geopolitical tensions over trade and – in Europe – by Brexit.
Pivoting from risk to opportunity in 2021
COVID-related disruption, and the economic and social fallout will continue to pose risks to business well into 2021. Regular monitoring of relative progress in vaccination rates, and the impact on national and cross-border restrictions and on supply chains will be key. It will also be essential for businesses to aggressively pursue the innovations and efficiencies of 2020 and convert these into productivity gains in 2021 and beyond. The resilience lessons of the pandemic must be built on both internally, by sufficiently resourcing and empowering risk and security leaders, but also externally, through regular horizon scanning for emerging risks and mitigating post-COVID challenges such as social and political instability, cyber threats, and projected rises in crime and corruption levels.
With all the pain that COVID has inflicted on the world and its people, it has acted as a powerful accelerator of technological, behavioral, and societal change. Political, geopolitical and economic transformations will follow. For many businesses 2021 will be a pivotal year. It will define their strategy and performance for years to come.