Businesses have spent much of the past 12 months scrambling to adapt to extraordinary circumstances. While the fight against the COVID-19 pandemic is not yet won, with vaccines in hand, there is light at the end of the tunnel — along with the hope that another train isn’t heading our way.
The year 2021 will be one of transition. Barring any unexpected catastrophes, individuals, businesses, and society can start to look forward to shaping their futures rather than just grinding through the present. The next normal is going to be different. It will not mean going back to the conditions that prevailed in 2019. Indeed, just as the terms ‘pre-war’ and ‘post-war’ are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras.
In a recent article for McKinsey.com, we identified 13 trends that leaders should consider as they prepare for the next normal. In this adapted excerpt, we will present seven of them and indicate how they will affect the direction of the global economy.
Trend 1: The Return of Confidence Unleashes a Consumer Rebound
There are lines outside stores, but they are often due to physical-distancing requirements. Theatres are dark. Fashions are in closets rather than on display. If the Musée du Louvre were open, the lack of tourists might even create the opportunity for an unobstructed view of the Mona Lisa. In these and other ways, consumers have pulled back.
As consumer confidence returns, so will spending, with ‘revenge shopping’ sweeping through sectors as pent-up demand is unleashed. That has been the experience of all previous economic downturns. One difference, however, is that services have been particularly hard hit this time. The bounce back will therefore likely emphasize those businesses, particularly the ones that have a communal element, such as restaurants and entertainment venues.
That isn’t to say that consumers will act uniformly. A recent McKinsey survey found that countries with older demographics, such as France, Italy and Japan, are less optimistic than those with younger populations, such as India and Indonesia. China was an exception: It has an older population but is conspicuously optimistic.
But China’s profile proves a larger point. The first country to be hit by the COVID-19 pandemic, it was also the first to emerge from it. China’s consumers are relieved — and spending accordingly. On Singles Day, November 11, 2020, the country’s two largest online retailers racked up record sales. That wasn’t just a holiday phenomenon. While manufacturing in China came back first, by September 2020, so had consumer spending. Except for international air travel, Chinese consumers have begun to act and spend largely as they did in pre-crisis times.
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Theoretically, up to 60 per cent of the physical inputs to
the global economy could be produced biologically.
Australia also offers hope. With the pandemic largely contained in that country, household spending fuelled a faster-than-expected 3.3 per cent growth rate in the third quarter of 2020, and spending on goods and services rose 7.9 per cent.
How fast and deep confidence will recover is an open question. In September 2020, for example, the U.S. consumers surveyed were more optimistic than before but still cautious, reporting that they planned to buy holiday gifts for fewer people and keep an eye on discretionary spending. Only around a third had resumed out-of-home activities, compared with 81 per cent of consumers in China, 49 per cent in France — and just 18 per cent in Mexico. New lockdowns and, critically, the rollout of COVID-19 vaccines have and will affect those numbers. The point is that spending will only recover as fast as the rate at which people feel confident about becoming mobile again—and those attitudes differ markedly by country.
Trend 2: The Crisis Sparks a Wave of Innovation and Launches a Generation of Entrepreneurs
Plato was right: necessity is indeed the mother of invention. During the COVID-19 crisis, one area that has seen tremendous growth is digitization, meaning everything from online customer service to remote working to supply-chain reinvention to the use of artificial intelligence (AI) and machine learning to improve operations. Healthcare, too, has changed substantially, with tele-health and biopharma coming into their own.
Disruption creates space for entrepreneurs — and that’s what is happening in the U.S., in particular, but also in other major economies. We admit that we didn’t see this coming. After all, during the 2008–09 financial crisis, small-business formation declined, and it rose only slightly during the recessions of 2001 and 1990–91. This time, though, there is a veritable flood of new small businesses. In the third quarter of 2020 alone, there were more than 1.5 million new-business applications in the U.S. — almost double the figure for the same period in 2019.
Yes, many of those businesses are single-person establishments that could well stay that way — think of the restaurant chef turned caterer or the recent college graduate with a cool new app. So it’s intriguing that the volume of ‘high-propensity-business applications’ (those that are likeliest to turn into businesses with payrolls) has also risen strongly — more than 50 per cent compared with 2019. Venture-capital activity dipped only slightly in the first half of 2020.
The European Union has not seen anything like this response, perhaps because its recovery strategy tended to emphasize protecting jobs (not income, as in the U.S.). That said, France saw 84,000 new business formations in October 2020, the highest ever recorded, and 20 per cent more than in the same month in 2019. Germany also saw an increase in new businesses compared with 2019; ditto for Japan. Britain was somewhere in between. A survey published in November 2020 of 1,500 self-employed people found that 20 per cent say they are likely to leave self-employment when they can. At the same time, however, the number of new businesses registered in the UK in the third quarter of 2020 rose 30 per cent compared with 2019 — the largest increase seen since 2012.
On the whole, the COVID-19 crisis has been devastating for small businesses. In the U.S., for example, there were 25.3 per cent fewer of them open in December 2020 than at the beginning of the year (the bottom was in mid-April, when the figure was almost half ). U.S. small-business revenue fell more than 30 per cent between January and December 2020. But we’ll take good news where we can get it, and the positive trend in entrepreneurship could bode well for job growth and economic activity once recovery takes hold.
Trend 3: The Future of Work Arrives, Ahead of Schedule
Before the COVID-19 crisis, the idea of remote working was in the air but not proceeding very far or fast. But the pandemic changed that, with tens of millions of people transitioning to working from home, essentially overnight, in a wide range of industries. For example, according to Michael Fisher, president and CEO of Cincinnati Children’s Hospital Medical Center, there were 2,000 telehealth visits recorded at the organization in all of 2019 — and 5,000 a week in July 2020. Fisher thinks telehealth could account for 30 per cent of all healthcare visits in the future. In Japan, fewer than 1,000 institutions offered remote care in 2018; by July 2020, more than 16,000 did.
The McKinsey Global Institute (MGI) estimates that more than 20 per cent of the global workforce (most of them in high-skilled jobs in sectors such as finance, insurance, and IT) could work the majority of its time away from the office — and be just as effective. Not everyone who can, will; even so, that is a once-in-several-generations change. It’s happening not just because of the COVID-19 crisis but also because advances in automation and digitization made it possible, and the use of those technologies has accelerated during the pandemic.
There are two important challenges related to the transition to working away from the office. One is to decide the role of the office itself, which is the traditional centre for creating culture and a sense of belonging. Companies will have to make decisions on everything from real estate (Do we need this building, office or floor?) to workplace design (How much space between desks? Are pantries safe?) to training and professional development (Is there such a thing as ‘remote mentorship’?). Returning to the office shouldn’t be a matter of simply opening the door. Instead, it needs to be part of a systematic reconsideration of what exactly the office brings to the organization.
The other challenge has to do with adapting the workforce to the requirements of automation, digitization and other technologies. This isn’t just the case for sectors such as banking and telecom; it’s a challenge across the board, even in sectors not associated with remote work. For example, major retailers are increasingly automating checkout. If salesclerks want to keep their jobs, they will need to learn new skills. In 2018, the World Economic Forum estimated that more than half of employees would need significant reskilling or upskilling by 2022.
Evidence shows that the benefits of reskilling current staff, rather than letting them go and then finding new people, typically costs less and brings benefits that outweigh the costs. Investing in employees can also foster loyalty, customer satisfaction and positive brand perception.
Workforce development was a priority even before the pandemic. In a McKinsey survey conducted in May 2019, almost 90 per cent of the managers surveyed said their companies faced skill gaps or expected to in the next five years. But only a third said they were prepared to deal with the issue. Successful reskilling starts with knowing what skills are needed, both right now and in the near future; offering tailored learning opportunities to meet them; and evaluating what does and doesn’t work. Perhaps most important, it requires commitment from the top that inculcates a culture of lifelong learning.
Trend 4: The Biopharma Revolution Takes Hold
Just as businesses have sped up their operations in response to the COVID-19 crisis, the pandemic could be the launching point for a massive acceleration in the pace of medical innovation, with biology meeting technology in new ways. Not only was the COVID-19 genome sequenced in a matter of weeks, rather than months, but the vaccine rolled out in less than a year — an astonishing accomplishment given that normal vaccine development has often taken a decade. Urgency has created momentum, but the larger story is how a wide and diverse range of capabilities — among them, bioengineering, genetic sequencing, computing, data analytics, automation, machine learning and AI — have come together.
Regulators have also reacted with speed and creativity, establishing clear guidelines and encouraging thoughtful collaboration. Without relaxing safety and efficacy requirements, they have shown just how quickly they can collect and evaluate data. If those lessons are applied to other diseases, they could play a significant role in setting the foundation for the faster development of treatments.
The development of COVID-19 vaccines is just the most compelling example of the potential of what MGI calls the ‘Bio Revolution’ — biomolecules, biosystems, biomachines and biocomputing. In a report published in May 2020, MGI estimated that 45 per cent of the global disease burden could be addressed with capabilities that are scientifically conceivable today. For example, gene-editing technologies could curb malaria, which kills more than 250,000 people a year; cellular therapies could repair or even replace damaged cells and tissues; and new kinds of vaccines could be applied to noncommunicable diseases, including cancer and heart disease.
The potential of the Bio Revolution goes well beyond health: according to MGI, as much as 60 per cent of the physical inputs to the global economy, could theoretically be produced biologically. Examples include agriculture (genetic modification to create heat or drought-resistant crops or to address conditions such as vitamin-A deficiency), energy (genetically engineered microbes to create biofuels) and materials (artificial spider silk and self-repairing fabrics). Those and other applications feasible through current technology could create trillions of dollars in economic impact over the next decade.
Trend 5: Portfolio Restructuring Accelerates
The COVID-19 crisis provoked divergent, even dramatic, reactions, with some industries taking off and others suffering badly. When the economy settles into its next normal, such sectoral differences can be expected to narrow, with industries returning to somewhere around their previous relative positions. What is less obvious is how the dynamics within sectors are likely to change. In previous downturns, the strong came out stronger, and the weak got weaker, went under or were bought. The defining difference was resilience — the ability not only to absorb shocks but to use them to build competitive advantage.
The COVID-19 crisis foreshadows what a climate crisis could look like:
systemic, fast moving and global.
In October 2020, McKinsey evaluated 1,500 companies by ‘Z-Score’, which measures the probability of corporate bankruptcy. The higher the score, the stronger the company’s financial position. The research found that the top 20 per cent of companies (the ‘emerging resilients’) that had improved their Z-Scores during the current recession had increased their earnings before interest, taxes, depreciation and amortization by five per cent; the others had lost 19 per cent. The emerging resilients, the evidence shows, are pulling away from the pack.
The implication is that there is a ‘resiliency premium’ on recovery. Top performers won’t sit on their strengths; instead, as in previous downturns, they will seek out ways to build them — for example, through M&A. That’s why we expect to see substantial portfolio adjustment as companies with healthy balance sheets seek opportunities in a context of discounted assets and lower valuations.
A second factor that tilts the odds in favour of portfolio restructuring is the availability of private capital. Special-purpose acquisition companies, which merge with a company to take it public, ‘had a moment’ in 2020. Through August 2020, they had accounted for 81 out of 111 U.S. IPOs.
Much more important is private equity (PE). Globally, PE firms are sitting on almost US$ 1.5 trillion of ‘dry powder’ — unallocated capital that’s ready to be invested. The COVID-19 crisis has hurt in some ways, with global deal value down 12 per cent compared with the first three quarters of 2019 and deal counts down 30 per cent.
On the other hand, global fundraising has stayed strong — US$ 348.5 billion through September 2020, on par with the previous five years — and deal making in Asia has more than doubled. The PE industry has a reputation of zigging when others are zagging, making deals in difficult times. And it has history on its side: Returns on PE investments made during global downturns tend to be higher than in the good times. Put it all together, and we don’t think the PE industry is going to keep its powder dry for much longer; there are simply going to be too many new investment opportunities.
Trend 6: Green is the Colour of Recovery
All over the world, the costs of pollution — and the benefits of environmental sustainability — are increasingly recognized. China, some of the Gulf States and India are investing in green energy on a scale that would have been considered improbable even a decade ago. Europe, including the UK, is united on addressing climate change. The U.S. is transitioning away from coal and is innovating in a wide array of green technologies, such as batteries, carbon-capture methods and electric vehicles.
To cope with the 2008–09 financial crisis, there were substantial government stimulus programs, but few of them incorporated climate or environmental action. This time is different. Many (though by no means all) countries are using their recovery plans to push through existing environmental policy priorities:
- The European Union plans to dedicate around 30 per cent of its US $880 billion plan for COVID-19-crisis plan to climate-change-related measures, including the issuance of at least US $240 billion in ‘green bonds’.
- In September 2020, China pledged to reduce its net carbon emissions to zero by 2060.
- Japan has pledged to be carbon neutral by 2050.
- South Korea’s Green New Deal, part of its economic-recovery plan, invests in greener infrastructure and technology, with the stated goal of net-zero emissions by 2050.
- While campaigning, President Joe Biden pledged to invest US $2 trillion in clean energy related to transportation, power and building.
- Canada is linking its recovery to climate goals.
- Nigeria plans to phase out fossil-fuel subsidies and to install solar-power systems for an estimated 25 million people.
- Colombia is planting 180 million trees.
The imperative for businesses is clear along two fronts. First, they need to respond to the sustainability concerns of investors. It’s possible, albeit speculative, that the COVID-19 crisis foreshadows what a climate crisis could look like: systemic, fast moving, wide ranging and global. There is a case, then, for businesses to take action to limit their climate risks — for example, by making their capital investments more climate resilient or by diversifying their supply chains.
More significantly, the growth opportunities that a green economy portends could be substantial. BlackRock, a global investment company with around $7 trillion in assets under management, noted in its 2021 Global Outlook that, “contrary to past consensus,” it expects that the shift to sustainability will “help enhance returns” and that “the tectonic shift towards sustainable investing is accelerating.” Green growth opportunities abound across massive sectors such as energy, mobility and agriculture. Just as digital-economy companies have powered stock-market returns in the past couple of decades, so green-technology companies could play that role in the coming decades.
13 Trends That Will Shape The Next Normal
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1. The return of confidence unleashes a consumer rebound
2. Leisure travel bounces back , but business travel lags
3. The crisis sparks a wave of innovation and launches a generation of entrepreneurs
4. Digitally-enabled productivity gains accelerate the Fourth Industrial Revolution
5. Pandemic-induced changes in shopping behaviour forever alter consumer businesses
6. Supply chains rebalance and shift
7. The future of work arrives, ahead of schedule
8. The biopharma revolution takes hold
9. Portfolio restructuring accelerates
10. Green is the colour of recovery
11. Healthcare systems take stock — and make changes
12. The hangovers begin as governments tackle rising debt
13. Stakeholder capitalism comes of age
From “ The Next Normal: Trends that will Define 2021 and Beyond” (available online). |
Trend 7: Healthcare Systems Take Stock—and Make Changes
Healthcare system reform is difficult. While caution is necessary when lives are involved, one consequence is that modernization is often slower than it needs to be. Learning from the experiences associated with COVID-19 can show the way to build stronger post-pandemic healthcare systems.
Consider the case of South Korea. When the MERS virus struck in 2015, resulting in the deaths of 38 Koreans, the government was stung by widespread public criticism that it had not responded well. As a result, it took action to improve its pandemic preparedness — and it was ready when COVID-19 hit in January 2020. Large-scale testing, as well as tracing and quarantine measures, began almost immediately. And it worked. While the country began seeing a significant increase in new cases in December, fewer than 1,000 South Koreans died from COVID-19 in all of 2020.
No doubt, governments all over the world will set up task forces, inquiries, and commissions to examine their actions related to the COVID-19 crisis. The key is to go beyond the temptation simply to assign blame (or credit). Instead, the efforts need to be forward thinking, with an emphasis on turning the painful lessons of COVID-19 into effective action.
Being better prepared for the next pandemic, on both national and international levels, has to be a high priority. Too often, investments in prevention and public-health capabilities are undervalued; the experience of COVID-19 demonstrates how costly, in both lives and livelihoods, such thinking can be. An upgrade of public-health infrastructure and the modernization of healthcare systems, including the wider use of telemedicine and virtual health, are two areas to address.
Business will also have a role. Employers should take the opportunity to learn from the pandemic how to redesign workplaces, build healthier work environments, and invest effectively in employee health.
In closing
In March 2020, some of our colleagues argued that the COVID-19 crisis could be the “imperative of our time.” A month later, we noted that it could bring a “dramatic restructuring of the economic and social order.” We stand by those assertions. The pandemic has been an economic and human catastrophe, and it is far from over. But with vaccines rolling out, it’s possible to be cautiously optimistic that the next normal will emerge this year or next.
We believe that, in some ways, that normal could be better. With good leadership from both business and governments, the changes we describe herein can provide an enduring foundation for the long term. 
Kevin Sneader is McKinsey & Company’s Global Managing Partner and a member of the Creative Destruction Lab’s Vision Council.
Shubham Singhal is a Senior Partner at McKinsey. The complete article on which this adapted excerpt is based can be found online.
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