There is considerable debate about the long-term impact of COVID-19 on the economy. Many have argued that the coronavirus will dramatically accelerate ongoing shifts in the economy (such as the shift from brick-and-mortar retail to e-commerce), or that it will create new trends entirely (such as permanent shifts away from dine-in restaurants or air travel).
Equity markets are implying a major reshaping of the U.S. economy compared with how it looked before the pandemic.
Preston Caldwell of Morningstar’s equity team narrows down on three main causal channels whereby COVID-19 could have a long-run impact on economic outcomes.
#1. Consumer habits could permanently change because of the pandemic.
Habits are a key channel to consider.
During the COVID-19 pandemic, people have cut back on many normal activities because of social distancing concerns, including dining at restaurants, visiting pubs, cancelling air travel, and large events. Many are speculating that demand may be permanently affected, which relies on the thesis that short-term deprivation leads to long-term changes in consumer behaviour via changes in habits. For example, perhaps consumers will get used to eating in restaurants less and develop a new habit of cooking and eating in.
The relative share price movement of various industries and companies implies that many investors are using this mental model to assess the post-COVID world. Companies seeing reduced demand due to social distancing have seen large share price underperformance to a degree that implies a lasting impact on demand after the pandemic ends.
Do read: Have consumer habits changed forever?
#2. Fear of the next pandemic could determine behaviour.
Fear of the next pandemic (including a COVID-19 resurgence) is another psychological factor that could affect many of the same industries as changes in habits.
Conditional on a successful vaccine being developed, the risk of catching a severe infectious disease post-pandemic won't be materially higher than it was before the pandemic started. Nevertheless, consumers have been made vividly aware of the risk, and it's difficult to predict exactly how this psychological factor will play out in shaping consumer behaviour. On the one hand, it seems dubious that anyone will avoid eating in a restaurant due to fear of being exposed to an emerging infectious disease. However, perhaps the largest and densest kinds of social gatherings (for example, public transit, air travel, and large events) will inspire lingering fear.
#3. Sunk costs incurred during the pandemic could change the long-term economic calculus of consumers and firms.
As a concrete example of sunk costs, retailers' increased investment in e-commerce capabilities during the pandemic could have a long-term positive impact on the online shopping experience for their customers.
Sunk costs are probably the least intuitive of the three concepts, and we've seen little discussion of this in other investor-focused research, so we'll elaborate on this concept in depth.
The pandemic has forced consumers and firms to incur costs they would not have incurred in the absence of a pandemic. As a simple example, firms may have purchased home office equipment for their employees working from home during the pandemic. These costs wouldn't have been incurred in the absence of the pandemic.
Once the pandemic is over, the home office equipment makes working from home marginally more attractive for workers and their employers, even though the impetus for the purchase decision has disappeared.
Sunk costs are even more important if we consider not only monetary costs but also the expenditure of other scarce resources by consumers and firms—namely the expenditure of time. To add another example from the work-from-home theme: The surge in working from home during COVID-19 has necessitated a large expenditure of managerial time in order to craft work-from-home capabilities, such as drawing up policies and learning the best ways to communicate with remote workers. Likewise, allowing employees to work remotely is an immense gamble of firm resources, as the effect of working remote on productivity is unknown.
For many firms, experimenting with working from home was reckoned as too costly before the pandemic. However, now that the experiment has already been carried out, that component of firms' cost of enabling working from home is no longer relevant for marginal decision-making going forward.
The above examples discussed sunk costs in the context of firm behaviour, but sunk costs are also important for consumers. Consumers have limited amounts of time and money. Therefore, experimenting with and practicing a new behaviour such as online shopping imposes a cost to consumers. Many consumers who chose not to incur the costs of acclimating to online shopping before the pandemic have now incurred those costs out of necessity, as physical shopping was unavailable. This could affect consumers' relative propensities for online versus physical shopping in the long term after the pandemic.
