One Simple Idea That Explains Why the

Economy Is in Great Danger

What happens when a major section of machinery that is supposed to run perpetually
suddenly grinds to a halt? We are about to find out.

To understand why the world economy is in grave peril because of the spread of
coronavirus, it helps to grasp one idea that is at once blindingly obvious and sneakily
profound.

One person’s spending is another person’s income. That, in a single sentence, is what
the $87 trillion global economy is.

That relationship, between spending and income, consumption and production, is at

the core of how a capitalist economy works. It is the basis of a perpetual motion
machine. We buy the things we want and need, and in exchange give money to the
people who produced those things, who in turn use that money to buy the things they
want and need, and so on, forever.

What is so deeply worrying about the potential economic ripple effects of the virus is
that it requires this perpetual motion machine to come to a near-complete stop across
large chunks of the economy, for an indeterminate period of time.

No modern economy has experienced anything quite like this. We simply don’t know
how the economic machine will respond to the damage that is starting to occur, nor
how hard or easy it will be to turn it back on again.

Thanks to government statistical tables, we can understand the sheer size of the
economic sectors that appear to be entering a near shutdown. The United States and
much of the world are on the verge of a tremendous shrinkage in consumption
spending, which in turn will mean less economic output and lower incomes among
the people who provide those services.

The Bureau of Economic Analysis tables of personal consumption expenditures

include three categories likely to see very sharp declines in the weeks ahead.
Americans spent $478 billion on transportation services in 2019 (which includes
things like airfare and train fare but not the purchase of personal automobiles).

They spent $586 billion on recreation services (think tickets to sports events or
gambling losses in a casino). And they spent $1.02 trillion on food services and
accommodation (restaurant meals and hotel stays, but not grocery store food brought
home).
That adds up to $2.1 trillion a year, 14 percent of total consumption spending —
which appears likely to dry up for at least a few weeks and maybe longer. We don’t
know how much those consumption numbers will drop, and for how long, just that it
will be by a lot.

So what might such a collapse in spending in those major categories mean for the
other side of the ledger, incomes?

That revenue from those sectors goes a lot of places. It pays employees for their labor
directly. It goes to suppliers. It pays taxes that finance the police and schoolteachers,
rent that rewards property owners, and profits that accrue to investors. All of those
flows of cash are in danger as consumption spending plunges.

The five sectors experiencing the most direct and immediate collapse in demand or
facing government-mandated shutdowns because of coronavirus are air
transportation; performing arts and sports; gambling and recreation; hotels and other
lodging; and restaurants and bars.

Together, they accounted for $574 billion in total employee compensation in 2018,
about 10 percent of the total. It was spread among 13.8 million full-time equivalent
employees.

Those numbers represent the share of the economy at most direct risk. These are the
industries and workers where revenue is likely to plummet; they will simply not have
enough revenue to fulfill their usual obligations. In danger is the $11 billion a week
they normally pay their employees, not to mention all those payments for rent, debt
service and property taxes.

It is true that there will be some offsetting effects — more food bought from grocery
stores rather than restaurants, for example, and greater health care spending. But the
economy can’t adjust on a dime, and the fact that doctors, nurses and grocery store
clerks may end up working longer hours won’t make up for millions of waiters, flight
attendants and hotel housekeepers who are likely to see their incomes plunge.

Just the potential initial effects from all those restaurant meals not eaten, hotel rooms
sitting empty and aircraft temporarily mothballed are potentially huge. And that’s
before accounting for the ways those could ripple into second- and third-order effects.

What happens if widespread bankruptcies were to cause losses in the banking system
and cause a tightening of credit across the economy? In that situation, companies
with perfectly sound finances today — which should be able to ride out the crisis —
could find themselves unable to carry on simply because of a cash crunch. (That,
incidentally, is the kind of ripple effect that the Federal Reserve and the Trump
administration are desperately trying to head off).

Or what if the plunging price of oil (caused by both geopolitical machinations and the
global collapse of demand resulting from coronavirus effects) leads to widespread job
losses and bankruptcies in energy-producing areas?

These are hardly fanciful scenarios; the financial markets are signaling that they are
quite plausible. But they show that, even as consequential as the initial economic hit
from everyone staying at home may be, it might only be the beginning of economic
troubles.

It’s tempting to look at another recent event when much of the economy, especially
tied to travel, seemed to dry up overnight. But the more you look at the actual
numbers of what happened to key industries after the Sept. 11, 2001, terrorist attacks,
the milder it looks compared with what is happening now.

Consider restaurants. Americans spent $26.9 billion at restaurants and bars in August
2001, and $26.2 billion in September 2001, a mere 2.3 percent drop. By December of
that year, sales were back above August levels (numbers adjusted for ordinary
seasonal variations).

The cumulative shortfall of restaurant sales that autumn compared with a world
where they had held steady at August levels was about $1.2 billion, a trivial amount
in what was then a $10.6 trillion economy. Employment in the food service sector
reached a trough of 8.4 million jobs in October 2001, only about 16,000 below its
August level.

It seems improbable that the coronavirus shutdown will have such mild effects on
that industry. There is a big difference between a slump in business because people
are not in the mood to celebrate, and one mandated by citywide shutdowns or other
restrictions on business activity.

For weeks, as the novel coronavirus spread, a common line among economists was
that it would cause a “supply shock,” limiting the availability of certain manufactured
goods made in China.

But huge swaths of the economy are starting to experience the biggest demand shock
any of us have ever seen. And we’ll soon find out what happens once a mighty
economic machine gets a microscopic, yet potent, virus in its gears.

https://www.nytimes.com/2020/03/17/upshot/coronavirus-economy-crisis-demand-
shock.html
The State of Fashion 2020: Coronavirus Update
— It's Time to Rewire the Fashion Industry
Faced with a 27 to 30 percent contraction in global revenues, fashion is currently
focused on crisis management and contingency planning, but eventually we must
shift towards re-imagining our industry altogether.The Coronavirus Update to The
State of Fashion 2020 outlines where we must focus once the dust settles.Download
the full report.

LONDON, United Kingdom — Even before the coronavirus disrupted financial

markets, upended supply chains and crushed consumer demand across the global
economy, fashion industry leaders were not optimistic about 2020. The industry was
already “On High Alert” and executives expressed pessimism across all geographies
and price points in our annual report, The State of Fashion 2020, released late last
year. But fast forward a few months and fashion’s outlook has gotten dramatically
and suddenly bleaker. As an industry, we are now on red alert.

This unforeseeable humanitarian and financial crisis has rendered previously planned
strategies for 2020 redundant, leaving fashion businesses exposed or rudderless as
their leaders confront a disorientating future and vulnerable workers face hardship
and destitution.With this special Coronavirus Update to The State of Fashion 2020,
we have taken a stance on what our “new normal” will look like in the aftermath of
this black swan event, analysing surveys, data and expert interviews to provide
insight for fashion professionals as they embark on the 12- to 18- month period after
the dust settles.

The Black Swan and Fashion

Covid-19 could spur the biggest economic contraction since World War II, hitting
every sector from finance to hospitality. Yet fashion, due to its discretionary nature,
is particularly vulnerable. The average market capitalisation of apparel, fashion and
luxury players dropped almost 40 percent between the start of January and the 24th of
March 2020 — a much steeper decline than that of the overall stock market.

Humanitarian repercussions are expected to outlast the pandemic itself. Dire

consequences for fashion, one of the biggest industries in the world generating $2.5
trillion in global annual revenues before the pandemic hit, entails joblessness or
financial hardship for people across the value chain — from those harvesting the
fibres used to make textiles to shop assistants selling the finished fashion product.
We estimate that revenues for the global fashion industry (apparel and footwear
sectors) will contract by 27 to 30 percent in 2020 year-on-year, although the industry
could regain positive growth of 2 to 4 percent in 2021. For the personal luxury goods
industry (luxury fashion, luxury accessories, luxury watches, fine jewellery and high-
end beauty), we estimate a global revenue contraction of 35 to 39 percent in 2020
year-on-year, but positive growth of 1 to 4 percent in 2021.If stores remain closed for
two months, McKinsey analysis approximates that 80% of publicly listed fashion
companies in Europe and North America will be in financial distress. Combined with
the McKinsey Global Fashion Index (MGFI) analysis, which found that 56% of
global fashion companies were not earning their cost of capital in 2018, we expect a
large number of global fashion companies to go bankrupt in the next 12 to 18 months.

«It is apparent that the fashion industry is just at the beginning of its
struggle.»

The interconnectedness of the industry is making it harder for businesses to plan

ahead. Just as China inched through recovery, outbreaks worsened in Europe and the
US. But it is in the developing world, where healthcare systems are often inadequate
and poverty is rife, that people will be hit the hardest. For workers in low-cost
sourcing and fashion manufacturing hubs such as Bangladesh, India, Cambodia,
Honduras and Ethiopia, extended periods of unemployment will mean hunger and
disease.

The crisis is affecting our daily lives, instilling anxiety and uncertainty in the minds
of almost everyone. Indeed, consumer pessimism about the economy is widespread,
with 75 percent of shoppers in the US and Europe believing that their financial
situation will be impacted negatively for more than two months.

Though the duration and ultimate severity of the pandemic remains unknown, it is
apparent that the fashion industry is just at the beginning of its struggle. By causing
blows to both supply and demand, the pandemic has brewed a perfect storm for the
industry: a highly integrated global supply chain means companies have been under
immense strain as they tried to manage crises on multiple fronts as lockdowns were
imposed in rapid succession halting manufacturing in China first, then Italy, followed
by countries elsewhere around the world.
A freeze on spending is aggravating the supply-side crisis. Widespread store closures
for an industry reliant on offline channels, coupled with consumer instinct to
prioritise necessary over discretionary goods, hit brands’ bottom lines and depleted
cash reserves. Even online sales have declined 5 to 20 percent across Europe, 30 to
40 percent in the US and 15 to 25 percent in China.

Once the Dust Settles

Once the dust settles on the immediate crisis, fashion will face a recessionary market
and an industry landscape still undergoing dramatic transformation. We expect a
period of recovery to be characterised by a continued lull in spending and a decrease
in demand across channels. As noted in our previous reports with themes on “Getting
Woke,” “Radical Transparency” and “Sustainability First,” the consumer mindset
was already showing signs of shifting in certain directions before the pandemic.

Now, the resulting “quarantine of consumption” could accelerate some of these

consumer shifts, such as a growing antipathy toward waste-producing business
models and heightened expectations for purpose-driven, sustainable action.
Meanwhile some of the shifts we will witness in the fashion system such as the
digital step change, in-season retail, seasonless design and the decline of wholesale
are mostly an acceleration of the inevitable — things that would have happened
further down the road if the pandemic had not helped them gain speed and urgency
now.

«The coronavirus also presents fashion with a chance to reset and completely
reshape the industry’s value chain.»

The coronavirus also presents fashion with a chance to reset and completely reshape
the industry’s value chain — not to mention an opportunity to reassess the values by
which we measure our actions. We expect that themes of digital acceleration,
discounting, industry consolidation and corporate innovation will be prioritised once
the immediate crisis subsides. Even after witnessing waves of insolvencies, industry
leaders will need to get comfortable with uncertainty and ramp-up their future-
proofing efforts as the potential for further outbreaks and lockdowns loom.

This will also be a time for collaboration within the industry — even between
competing organisations. No company will get through the pandemic alone, and
fashion players need to share data, strategies and insights on how to navigate the
storm. Brands, suppliers, contractors and landlords should also find ways to share the
burden.

This joint report by The Business of Fashion and McKinsey & Company is an effort
to advance the discussion beyond crisis management and immediate contingency
planning, by outlining the areas where the industry must focus once the dust settles
on the current crisis. Exactly when this will happen is impossible to know for sure,
except that it will, in all likelihood, be linked to the discovery of a workable antiviral
treatment and delivery of a proven vaccine, which some experts say is at least 12 to
18 months away.
Navigating this uncertainty will not be easy for fashion leaders. Players need to be
decisive and start putting recovery strategies into motion to emerge with renewed
energy. The crisis is a catalyst that will shock the industry into change — now is the
time to get ready for a post-coronavirus world.

The five themes that will set the agenda once the dust settles are:

1. Survival Instincts

Recovery from the pandemic will coincide with a recessionary market, compelling
fashion players to ramp up resilience planning and adapt their operating models.
Companies surviving the immediate crisis will have made bold and rapid
interventions to stabilise their core business before seeking out new markets, strategic
opportunities and future pockets of growth in a global fashion industry undergoing
dramatic transformation.

2. Discount Mindset

As deep discounting plagues retailers for the remainder of 2020, a decade-long build-
up of bargain shopping culture will be exacerbated by a rise in anti-consumerism, a
glut in inventory and cash-strapped consumers looking to trade down or turn to off-
price channels. To reach increasingly frugal and disillusioned consumers, brands
must find inventive ways to regain value and rethink their broader business mission.

3. Digital Escalation

Social distancing has highlighted the importance of digital channels more than ever
and lockdowns have elevated digital as an urgent priority across the entire value
chain but, unless companies scale up and strengthen their digital capabilities in the
recovery phase of the crisis, they will suffer in the longer term. Consumers will
continue to demand more in this space and brands must act fast to deliver.

4. Darwinian Shakeout
The crisis will shake out the weak, embolden the strong and accelerate the decline of
companies that were already struggling before the pandemic, leading to massive
waves of consolidation, M&A activity and insolvencies. To secure their future,
companies must adapt to the new market environment by evaluating divestment and
acquisition opportunities to strengthen their core and capture whitespaces that emerge
from the reshuffle.

5. Innovation Imperative
To cope with new restrictions, mitigate the damaging impact of the pandemic and
adapt to economic and consumer shifts, companies must introduce new tools and
strategies across the value chain to future-proof their business models. Fashion
players must harness these innovations and scale up those that work in order to make
radical and enduring changes to their organisations — and to the wider industry —
after the dust settles.

https://www.businessoffashion.com/articles/intelligence/the-state-of-fashion-2020-
coronavirus-update-bof-mckinsey-report-release-download

Online shopping makes many high street jobs

unviable, says Next boss
Simon Wolfson warns lockdown has put thousands of traditional retail roles at
risk

The chief executive of Next, one of the UK’s most successful retailers, has said the
shift to online shopping triggered by the lockdown means there is no future for
thousands of traditional retail jobs.

The high street has been one of the worst-hit sectors of the economy with
nearly 125,000 jobs lost in the UK in the first eight months of this year as retailers
closed stores and in some cases went into administration.

Simon Wolfson said what looked to be a permanent shift to online spending was
creating work for warehouse staff and couriers but that in the long run fewer people
were going to be needed in shops, and their jobs would be “unviable”.

“I wouldn’t want to underestimate the difficulty that is going to cause a lot of people
who work in retail,” he said. “ I think it’s going to be very uncomfortable.

Marks & Spencer, Debenhams and John Lewis are among the household names to
have announced major job cuts as a result of the pandemic.

His comments came as the British Independent Retailers Association (Bira) warned
of mass store closures after the chancellor scrapped the autumn budget when they had
hoped he would extend the business rates holiday, which is currently slated to end on
31 March.

Andrew Goodacre, the Bira chief executive, said many jobs in retail were not
sustainable due to low footfall and low shop sales. “More needs to be done to protect
the high street from mass closures and we hope that cancelling the budget does not
delay decisions on business rates.

Wolfson said the current rates system was “unfair” and bills for the warehouses used
by online retailers needed to rise to reflect the new high street reality.
“Over the last six or seven years the price of warehousing has gone up dramatically,
and the price of shops have come down dramatically, but both of their rates have
remained exactly the same,” Wolfson said.

“You could raise rates on warehousing between 30% and 50% and that would make
up for some of the loss, and that would be fair.

The pandemic has accelerated changes in shopping behaviour as the lockdown forced
Britons online, in many cases for the first time. The transfer of sales from physical
stores to websites has put shop floor roles in jeopardy but created thousands of new
online roles.

The delivery firm Yodel said on Friday that it would recruit nearly 3,000 people,
including couriers and parcel sorters, before Christmas.

However, only 450 of Yodel’s new hires will be employees. The other 2,500 will be a
self-employed and so not guaranteed the legal minimum wage, full sick pay or
holiday benefits. The picture is similar to Hermes which in July said it was creating
more than 10,000 jobs, the lion’s share of whom would be self-employed.

Next has emerged from the crisis as one of the high street’s most resilient
brands. Last week it raised its profit guidance for a second time as the company’s
sales recovered from the shock of the lockdown when its stores were closed for
several months.

The chancellor’s winter jobs plan, announced on Thursday, was “very

sensible”, Wolfson told the BBC. The Tory peer suggested it was “important that
employers begin to pay a little bit more for the schemes and that employees get a
little bit less …Otherwise I think there’s a risk that our economy will just become
hooked on it.

https://www.theguardian.com/business/2020/sep/25/online-shopping-makes-many-
high-street-jobs-unviable-say-next-boss

VOCABULARY
1. Perpetually – постоянно
2. To grind to a halt – остановиться
3. А grave peril – серьезная опасность
4. To grasp – понять
5. Profound – глубокий
6. A chunk – участок
7. A Sheer – абсолютный
8. A Verge - граница
9. tremendous - колоссальный
10. A shrinkage – сокращение
11. A ledger – бухгалтерская книга
12. To accrue – доставаться, накапливаться
13. To plunge – понижаться
14. To adjust –приспосабливаться
15. A Plausible – правдоподобный
16. A mild – мягкий
17. An improbable – невероятный
18. A slump - спад, кризис
19. To upend – перевернуть
20. A Bleaker – мрачный
21. An unforeseeable – непредвиденный
22. Repercussions – последствия
23. A joblessness – безработица
24. An interconnectedness – взаимосвязанность
25. An inadequate - недостаточный
26. A rife – распространенный
27. A strain – напряжение
28. A purpose-driven – целенаправленный
29. To coincide – совпадать, ровняться
30. Undergoing – подвергающийся
31. To exacerbate - усублять
32. A reshuffle - перестановка
33. To harness – запрягать
34. A lockdown – изоляция
35. An unviable – нежизнеспособный
36. Closures – закрытия
37. Warehouses – склады
38. To accelerate – ускорять
39. parcel sorters - сортировщики посылок
40. A resilient – устойчивый
41. Tory peer - коллега-консерватор