It is now clear that Covid-19 has presented the global economy with an unprecedented challenge. Efforts to control the virus through lockdowns are likely to lead to the largest decline in economic activity since the Great Depression in the United States and Europe. And while safeguarding human lives is imperative, the toll on human livelihoods will also undoubtedly be significant.
Asian nations, like others, are focused on this dual mission. In these early stages, it is difficult to quantify the economic impact. McKinsey simulations suggest that in some likely scenarios, real global GDP may decline by 4.9% to 6.2% from the fourth quarter of 2019 to the second quarter of 2020.
The World Bank's latest report paints a bleak picture: under a worst-case scenario, East Asian economies would contract by 0.5%, China's projected growth would slow to 0.1%, and 11 million people across the region would be forced into poverty.
It's important to remember that this, above all, is a humanitarian challenge. Asia is home to 60% of the world's population -- and to around 35% of the world's poorest people. Pandemics hit the most vulnerable hardest.
Yet as a region, Asia has come through crises before and emerged stronger from them. We have reason to believe it can do so again. In a post-pandemic world, can Asia's nations and companies play a major role in defining the next normal?
In 2018, McKinsey Global Institute research on developing economies around the world singled out 18 long-term and recent outperformers. Asia figured prominently on the list, with seven economies that achieved or exceeded 3.5% real annual per capita GDP growth for the entire 50-year period of the study: mainland China, Hong Kong, Indonesia, Malaysia, Singapore, South Korea and Thailand.
In an increasingly volatile world, Asian companies have demonstrated dynamism, speed and agility, which have all contributed to the region's macroeconomic stability. Asian companies have to be resilient: they operate in highly dynamic, fast-growing markets, against the same backdrop of digital disruption and rapidly evolving consumer demands that every organisation now faces.
The Covid-19 outbreak began in Asia -- but so have early indications of containment, new protocols and the resumption of economic activity. Although the risk of another outbreak remains, economic-activity indicators in China indicate that urban activities are returning to pre-outbreak levels.
A recent McKinsey survey of 2,500 Chinese consumers indicates "cautious optimism" -- a gradual regaining of confidence, which should increase spending.
At this moment, strong public-health responses in China, Singapore and South Korea appear to have been successful. Significant evidence indicates that the curve of cumulative confirmed Covid-19 patients in Asia is becoming flatter.
Southeast Asia and India are still bracing for the full impact, and a resurgence of the virus remains a possibility. Nonetheless, it's time to ask if the next normal could be emerging in Asia.
What will shape the next normal?
A shock of this magnitude will change business, society and the global economic order in many ways. Contactless commerce, for example, could become the permanent norm for consumers as enforced behavioural change becomes an everyday habit.
Supply chains may be reconfigured to remove vulnerabilities that have been exposed by the pandemic. Across all aspects of business performance, the crisis will reveal both weaknesses and opportunities to improve.
As Asia's corporate sector continues to mature and push ahead with digital innovation, we expect that businesses will have to reimagine themselves and prepare for reform. Here are four dimensions that could define it.
1. Rethinking social contracts
In times of crisis, the state plays an essential role in protecting people and prioritising resources for the response. People and businesses must adapt to change very quickly. This power shift transforms the implicit, long-held expectations of the roles that individuals and institutions play in society.
Concerns about digital and personal privacy, which continue to vary widely across the world, may yield, in some societies, to the usefulness of surveillance and medical data to monitor outbreak clusters. In Hong Kong, phone apps track movement to enforce quarantines. Mainland China's national health-code system records who is safe to be exempted from them.
Meanwhile, collaboration has increased not only between the public and private sectors but also across the private sector itself. Governments are trying levers to sustain consumer and business confidence. Companies take greater responsibility for keeping people employed or for redeploying labour when possible.
In Australia, the supermarket leader Woolworths is working with Qantas to provide up to 20,000 new jobs for airline employees laid off during the grounding of the airline industry, as well as other retail and hospitality workers.
In Singapore, the consumer bank DBS offered complimentary insurance coverage and home-loan-payment relief for employees in affected industries as well as support packages for small and medium enterprises. Special services such as online consultations with doctors, and online video lessons for children have proved popular.
2. Defining the future of work and consumption
The crisis has created an imperative to escalate the adoption of new technology across all aspects of life, from e-commerce to remote working and learning tools. In China, the adoption of Alibaba's DingTalk, WeChat Work, and Tencent Meeting to connect physically distanced teams and friends has increased rapidly. China's Ministry of Education deployed a national cloud-based classroom platform to support remote learning for 50 million students simultaneously.
Digital consumption has taken off as well. In South Korea, the online retailer Coupang shipped a record high 3.3 million items on Jan 28, and food-delivery sales of SSG.com rose by 98%. Sales of the delivery business of China's Meituan soared by 400% during the outbreak.
Many brands increased their online promotions during the crisis to capture demand. In China, Tsingtao recruited more than 40,000 employees and consumers as "Tsingtao social distributors", who promote products on their own social networks. Tsingtao's WeChat store sales subsequently surged by a factor of three.
In a recent virtual roundtable, many executives based in China shared their expectation that consumers will now move, even faster than expected, to digital and e-commerce.
3. Mobilising resources at speed and scale
Governments have had to implement policies quickly. The ability to direct resources to healthcare systems has been paramount: within weeks, China mobilised tens of thousands of doctors and added tens of thousands of hospital beds to help Wuhan. It also released 1 trillion renminbi (around US$142 billion) -- or 1% of GDP -- to build public infrastructure and redeployed the labour affected by the demand destruction the containment measures had caused.
Rather than focusing on lockdowns, South Korea emphasised a test, track and isolate model: widespread testing and monitoring to reduce the risk of transmission. To make optimum use of data, other Asian governments have also invested in the digital ecosystem, mapping clusters and controlling transmission through apps such as Singapore's TraceTogether, South Korea's Corona 100m and India's chatbot, MyGov Corona Helpdesk. Governments around the world have also implemented other extraordinary fiscal and monetary measures.
Australia just announced a wage subsidy worth A$130 billion (around $80 billion), part of a total stimulus package equal to 16.4% of GDP. Singapore provided two stimulus packages of $38 billion in all -- 11% of GDP.
4. From globalisation to regionalisation
The current crisis has shown that the world's dependence on global supply chains is a weak link, especially for commodities with a concentration around what now seem to be vulnerable nodes. China, for example, accounts for about 50% to 70% of global demand for copper, iron ore, metallurgical coal and nickel.
We could see a massive restructuring of supply chains: production and sourcing may move closer to end users, and companies could localise or regionalise their supply chains. This change is likely to become especially prominent in Asia, where a growing middle class creates its own demand for production.
Going forward, companies may accelerate their supply-chain transition from China to other parts of Asia. According to a 2019 AmCham survey, about 17% of companies have considered or actively relocated their supply chains away from China. In some sectors, such as textiles, this has already been happening, and the supply-side impact of the coronavirus could accelerate this change.
Meanwhile, regional collaboration is already under way in response to the spread of the coronavirus; economies in South Asia, for instance, are sharing best practices and protocols. Regional collaboration within Asean is also evident in efforts to deal with increasing pressure from Southeast Asia's rapid urbanisation, which led to the launch of the Asean Smart Cities Network (ASCN) in 2018.
The future global story starts in Asia.
In 2019, we observed that the Future of Asia is now, and we still anticipate a strong long-term growth trajectory in the region. By 2040, Asia is expected to represent 40% of global consumption and 52% of GDP. We may look back on this pandemic as the tipping point when the Asian Century truly began.
This is certainly the year that will challenge every assumption we held in the past. Structural change will inevitably follow a major world shock like this. The decisions leaders make today will not only influence how quickly organisations and nations emerge from the current crisis but also define how they adapt to the next normal.
Oliver Tonby is a senior partner in the Singapore office of McKinsey & Co, and Jonathan Woetzel is a senior partner in the Shanghai office. Adapted from an article originally published in McKinsey Insights. To read more, scan the QR code.
