Economic shifts will be exponential

Gradually, and then suddenly, we'll see massive, exponential economic shifts over the next few years. (New) Normality won't return until 2024.

There’s an old Bill Gates quote we’ve cited many times on this blog:

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”

This year, however, things are different. We are about to get the change of a decade in less than two years. This is true for areas like travel and tourism or (remote) work and retail, as well as other parts of our collective life. But as always, the question is: What of all this change will stick and lead to permanent changes?

As a rule of thumb, we can assume that better experiences will stick. Otherwise, we’ll try hard to get rid of worse experiences and return to the old normality as soon as possible.

Nevertheless, in many cases the old normality won’t be an option, even when the new normal sucks. Let’s take a look at travel and tourism, which is badly impacted by the pandemic. The sector roughly accounts for as much as ten per cent of global GDP. Recent forecasts estimate a decrease of around 42.1 per cent for this year, which obviously is massive. Airlines like Lufthansa are struggling and going into winter mode to survive. Trains operated by Deutsche Bahn are running at a load of around 35 per cent of capacity. Business travel once again comes to a halt.

No way back to normal

Already in August, the Financial Times ran a piece predicting that tourism’s collapse could trigger the next phase of the crisis. The paper quoted Ulf Lindahl, the chief executive of currency manager AG Bisset:

“Everyone goes on vacation, but it’s also the thing that you can cut back on quickly — unlike your car or your phone.”

For travel and tourism, there’s no way back to normal in the foreseeable future. And according to experts like Nicholas Christakis, normality isn’t coming back until 2024. From travel and tourism, the crisis could spill over to industries like manufacturing or real estate, restaurants, luxury goods, financial services and many more. We are already seeing a lot of these effects. Retail got a huge boost to its digital commerce operations, and while it’s unclear how much of this will stay, the chart looks a lot like a hockey stick.

I’m tempted to cite another quote that illustrates the nature of exponential curves. Ernest Hemingway famously wrote this dialogue:

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

That’s the same metaphor as the boiling frog, which doesn’t jump out of the hot water until it’s too late and it suddenly dies. Electronic commerce could well follow an exponential trail over the next couple of years, with brick-and-mortar retail collapsing under its own financial weight, combined with the additional stress of a once-in-a-hundred-years pandemic. This still wouldn’t mean that everyone will buy everything online – but that e-commerce would become the new normal and cross the 50-per-cent-mark of all addressable retail. In the UK, the recent peak was already at 35 per cent.

Massive economic shifts

There’s a massive reshuffling of the cards going on, and it won’t work to operate under the assumption that we’ll go back to normal anytime soon. Maybe normality itself has been lost. To survive the pandemic, we need to adapt. Adapting to exponential phenomena is pretty hard. We see this, again, as the second wave rolls through Europe. Most people simply don’t understand the power of numbers which are doubling in regular intervals. These numbers are rising gradually first, and then suddenly. We’ve seen this pattern in countless hockey-stick charts.

It’s the same pattern that governs both the digital superpowers and the pandemic: the viral, exponential spread through our dense networks. Our highly interconnected world has become highly vulnerable, and the virus simply exploits our vulnerabilities. This is pretty much the same way that successful digital products exploit our networks, while further expanding them at the same time. In comparison, the virus is a limiting factor: it exploits our networks, but enforces new restrictions.

The economic shifts in the coming months and years will be massive. Many industries and companies will struggle, while others will thrive. To which of those groups your company belongs depends on two conditions: the grade of digital maturity and the experience it provides. If the digital maturity is high and the experience is great, a company is poised to thrive. If the digital maturity is low and/or the experience is bad, start with the experience and work backwards to the technology.

Redesigning travel and tourism

Coming back to travel and tourism, there were problems with both even before the current crisis: the experience was bad, and the digital maturity quite low. The good thing is: since we’re talking about a massive industry (remember, 10% of global GDP!), there will be countless challengers emerging from the ashes of the old travel and tourism economy. They are already at their drawing boards, redesigning travel and tourism for the post-pandemic age.

As early as the 19th century, John Ruskin observed:

“All travel becomes dull in exact proportion to its rapidity.”

And it requires exponentially more energy. The overblown global business travel and tourism market didn’t look sustainable before the pandemic, in light of the climate crisis. It will take some time to return to anything like its old form, if it ever does. BloombergNEF’s (BNEF) latest New Energy Outlook 2020 now predicts that emissions from fuel combustion peaked in 2019:

“Down approximately 8% in 2020 as a result of the Covid-19 pandemic, energy emissions rise again with economic recovery, but never again reach 2019 levels.”

This is not peak oil though. BNEF expects oil demand to peak in 2035. Nevertheless, peak emissions is a huge milestone on our transformation to a low-carbon world. This transformation isn’t going to be linear, but exponential. We’ll see more of this change happen gradually and then suddenly, as soon as the learning curve (aka Wright’s law) kicks in.

Photo by Mobin Jahantark on Unsplash