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This Apocalypse is Different

COVID vs Household Solvency

War. Revolution. State collapse. Deadly pandemics. No, these are not the themes of the latest Hollywood disaster blockbusters; these are by far the most effective ways to reduce inequality, based on the research of Stanford professor Walter Scheidel. The “Four Horsemen of Leveling” – as he called the four events – arrived a few times in the past: the fall of the Roman Empire, the Bubonic Plague in the middle ages, the Great Depression combined with WWI and WWII are well-known examples from world history.

Scheidel published his book in 2017, and global inequality – following a growth trend since the 1980s – has been increasing in the years after, until a Horseman rode into our lives in the form of a COVID-19 pandemic. Undoubtedly, the virus and the crisis are changing our world, but will this Horseman have the same impact as his predecessors? Should businesspeople calculate based on redistribution of wealth and a new model of household solvency?

Unequal times and the disappearing middle class

44%. Based on the Global Wealth Report of Credit Suisse, the wealthiest 1% owns that much of the global wealth, and they are only 0.9% of the adult population. On the other side, 56.6% of the world’s poorest adults own only 1.8% of global wealth – the inequality could not be starker. Branko Milanovic’s famous “Elephant Chart” adds another important aspect to the picture: high globalisation between the Cold War and the 2008 Great Recession has weakened the position of the middle-class westerners, the traditional motors of the consumer market.

Although the last financial crisis and the slow recovery eventually turned into a period of apparent prosperity worldwide, the middle class could not establish its former position in terms of financial stability and household solvency. In the years following the Great Recession, a significant share of the middle class was trending downwards because the demand-driven labour market lifted the average salaries of blue-collar employees. In the meantime, the upper class saw increasing profits due to intensifying business. These effects combined to create a societal rift.

In the past decade, a new, polarised model of household solvency has appeared. Near the top of the chart sits the existing upper class and the emerging upper-middle class, which together represent premium demand. On the lower part of the chart sits the lower class, and drifting steadily downwards is lower-middle class, a large but financially weak part of the society. The middle is disappearing, and this fact has forced companies and brands to adapt their strategies.

Market analysts and economists forecasted an upcoming crisis many times in the last few years, but nobody imagined such a dramatic and unprecedented one as the COVID Crisis. The pandemic brought an immediate economic crash, and the number of economic crash’s victims is increasing exponentially as the months go by. Based on Scheidel’s thesis, the crisis could lead to decreasing inequality – but what can we expect in reality? Will the COVID Crisis change the current social establishment?

The Horseman rides in

History’s worst pandemics, like the Bubonic Plague, killed a larger share of the population (modern estimates state between one-third and one-half of Europe’s population died within five years, with some areas experiencing death rates of up to 80%). Unlike during wars and revolutions when infrastructure was destroyed, these pandemics left physical infrastructure unscathed, but the available labour force took a massive hit. This makes labour more valuable based on its lower accessibility.

At this stage, we cannot estimate such critical death rates caused by COVID-19, at the end of September the death toll is slightly over 221,000 in Europe, equal to the 0.02% of the continent’s population. Even though governments reacted slowly and underestimated the consequences of the spread of the virus, their limitations effectively reduced the number of the victims so far. The modern healthcare system and global controls are keeping COVID from causing such disastrous death tolls as previous plagues like the Bubonic Plague or the Spanish flu.

Owing to globalisation and ongoing digital transformations, COVID-19 elicited different changes in the western world than previous pandemics. The forced automation, remote work solutions, and IT developments are all making the human workforce less valuable – especially in lower positions. The lockdown of the international supply chains and the governmental restrictions affected lower-skilled workers significantly harder than the higher-skilled employees. As the EU’s Joint Research Centre published, the impact of COVID is higher among the most vulnerable parts of the working population.

The research highlighted that those segments facing immediate unemployment and income loss are those that are least prepared to handle this loss via savings. Women and young workers are overrepresented in the forcefully closed and non-essential sectors, where incomes have dropped and will continue to do so for the near future. Notably, the average wages in closed sectors are significantly lower than the wages in sectors where telework is possible.

Another unequivocal catalyst of the further social polarisation is booming industrial automation and robotisation. In contrast with the previous pandemics, these trends are preventing the increase in the value of human labour. Companies are now focusing on developing efficiency, which means a lower headcount in the organisation, and a continuous tendency to employ high-skilled and educated workers. The crowds who lost their jobs due to the pandemic are not only threatened by the slow recovery and the upcoming waves of the virus but have to face the impacts of the industry 4.0 transformation, promoted by many governments.

No matter where you are, the virus is not gone yet, and experts fear that the dreaded second wave is just now arriving. Therefore, research and analyses cannot make final conclusions about all of the effects of the ongoing changes. However, some trends are clearly recognisable. Unlike the Horsemen of yore, this Horseman will not narrow the gap between rich and poor, but instead will strengthen the current establishment and push more people under the poverty line.

Old Town Roads

Because the COVID Horseman will ride “‘til he can’t no more”, it is the ideal time for businesspeople to leave the old town roads. Even if the share of each segment’s solvency will not change in terms of percentage, there will be an important socio-economic transformation in the background to which companies must react. The premium segment will be deemed the only safe target group for products and services, but generational distributions will change the decision-making mechanisms of that segment.

The crisis will force the transformation of workplaces, employment, and necessary skillsets, opening a path for the younger generations into higher positions and of course, higher classes. It will be a crucial part of business to understand this group’s motivations and mindsets as they will utilise these not only in their private lives but in their professional lives as well.

The greatest pandemics in human history resulted in societal transformations, but it seems that COVID will have much lower impacts on the highest-earning groups. In China, where the rebound of the economy already started, the newly published market statistics are showing that the premium demand is booming, while the mass-market products are struggling to recover. In many segments, luxury brands have seen sales growth return in the second quarter. BMW’s Q2 sales were already higher year-over-year, rising 17%, in the same quarter, whereas Volkswagen, whose brands are also aiming at entry-level customers too, saw only a gradual recovery. Clothing and footwear, a completely different market, showed the same results: the segment was still in decline with -9%, but the luxury brand Moncler S.p.A. saw a double-digit increase during the same time.

In Europe or in the US, where the second wave is still raging, we cannot see relevant, clear post-pandemic statistics, but several studies from all over the world are reporting that the middle-class will be hit hard by COVID. In the US, more than 3.3 million workers with bachelors or advanced degrees are currently unemployed – that number peaked at 2.2 million after the 2008 Great Recession. Since the worst months, the job market is showing signs of life, except for jobs making more than 100,000+ USD, where the new openings are still not caught up to the jobs lost. In the meantime, in Mexico, the economy is facing the biggest downturn since the Great Depression; it is expected to shrink by 12.8% this year – mainly because the global supply chains are struggling. Economists say that even in a best-case scenario, it will take at least until 2028 to restore the average income. On the other side of the world, in Vietnam, the number of businesses that suspended operations increased by 42% (January-July, year-over-year) – and the number of newly registered enterprises dropped by 5%. In Vietnam, owning one’s own business is the first step out of the lower-income brackets.

Since the very beginning of the global spread of COVID-19, it was referred to as an unprecedented crisis, and this moniker is still accurate: its short- and long-term impacts will differ from any previous pandemics. Owing to this, businesspeople cannot rely on historical statistics and methodologies, and they must find innovative ways to understand the new establishment.