The great shakeout

Executive summary

• Embattled governments. Crises of rising inequality, climate change, and now COVID-19 are converging to place unprecedented levels of fiscal and political pressure on governments throughout the world. As fiscal deficits persist through 2025, national governments increasingly constrained by stock of debt and fewer economic policy prerogatives will turn to local administrations and the private sector for support to maintain public trust.
• Push to national self-sufficiency. The pandemic has served as a wake-up call to national governments on the need for self-sufficiency and resilience in the face of crisis. As governments move to improve their domestic capabilities in key sectors—healthcare, technology, food, energy, and manufacturing—the private sector may find opportunities for increased collaboration with government. Too much government intervention, however, could stifle innovation in the long run.
• Stranded segments of society. Over the next five years, growing inequality—exacerbated by COVID-19—will lead to further marginalization of stranded segments of society, including minorities, low-skilled workers, students, children, working mothers, and others. Reintegrating them will be a tall order in a weak economic environment, but it behooves governments and businesses to work together to re-skill and reposition these important groups in society.
• Rise in food insecurity. A global food crisis is on the horizon, with disproportionate downside implications for emerging markets. Food supplies are tightening due to trade restrictions and COVID-induced production disruptions, and incomes are falling amid economic turmoil. The five-year outlook suggests the situation will get worse, resulting in changes in the food industry, widening inequality between countries, and depressed productivity overall.
• Industry consolidations, mergers, and acquisitions. The economic disruption brought about by the pandemic has weakened finances for businesses across the world. This trend will result in a wave of industry disruption and consolidation as stronger companies acquire weakened rivals, technologies, or assets—with private equity, big tech, and the energy industry poised for the biggest shakeouts over the next five years.

Trend #1 Embattled governments

COVID-19, global protests of systemic inequality, climate change, and widespread economic woes ranging from income stratification to unemployment. These are just a few of the issues placing staggering burdens on federal, regional, and city governments throughout the world. While some are crumbling under the pressure, others are making use of policy and technology to ensure they get through the pandemic while mitigating human and economic loss. Over the next five years, governments will have to contend with massive macroeconomic and health constraints while maintaining or rebuilding the trust of their citizens as the fallout from COVID-19 and social injustice protests persist. This test will be central in the coming great shakeout over the course of pandemic recovery, with implications not only for which countries emerge stronger or weaker but also for the global operating environment overall.

Government policy in an uncertain world

As the COVID-19 pandemic assails governments throughout the world, many leaders are employing fiscal and monetary tools to temper the economic fallout (see figure 1). The scale of the fiscal interventions is impressive—and is perhaps marking a reemergence in popular support for “bigger” government. Japan, for example, has introduced a fiscal stimulus package amounting to more than 20 percent of its GDP. The United States has funneled an estimated $2.3 trillion into the Coronavirus Aid, Relief and Economy Security (CARES) Act, though momentum on a second tranche is uncertain at the time of this writing. And the European Union (EU) announced a €750 billion Next Generation EU recovery fund.

The scale of monetary policy interventions is no less impressive. At the end of March 2020, the United Kingdom cut interest rates to their lowest level ever—0.1 percent—to keep borrowing costs down for government and business. Many other countries have followed suit, with some such as Chile and Peru on the verge of negative real interest rates as a result of monetary easing and inflation dynamics. In the United States, the Federal Reserve has announced a major policy shift to average inflation targeting, which means that it may allow inflation rates to exceed 2 percent before raising interest rates.

Governments are also calling on the private sector for support. Many Western governments are taking policy actions that are unprecedented outside of wartime, such as repurposing production to essential goods and seizing supply chains to produce or procure emergency equipment. The United States, for example, has relied on the Cold War-era Defense Production Act to shift production to medical equipment, mandating General Motors to construct ventilators and 3M to fabricate N95 respirator masks for the federal government—efforts that could be expanded in the future. The German health system has relied on private-sector laboratories to analyze far more COVID-19 samples than any other country. And at the beginning of the crisis, Nigerian private sector companies joined together to create the Coalition Against Coronavirus (CACOVID) in order to complement government efforts to spread awareness about the virus and support healthcare institutions.

Governments’ expanded fiscal and monetary policy actions amid COVID-19 are likely to continue over the next five years, which could lead to further challenges down the road. Advanced economies may be able to sustain additional debt burdens and low interest rates for some time, but these bills will eventually become due. While these measures are necessary to navigate this present moment of crisis, they will grow more difficult to sustain for a long period as debt mounts. Emerging markets face more immediate challenges as funds run dry sooner and borrowing opportunities are more limited. Additionally, their currencies are less accepted globally, leaving them with less room to maneuver than their more developed counterparts.

Implications of overstretched governments

Between 2019 and 2020, government deficit levels have grown dramatically as a result of the extreme fiscal and monetary measures taken to combat the economic impact of COVID-19 (see figure 2). The implications of these rising government deficits could be significant both in macroeconomic terms and to key sectors affected by public finance. In the United States, the federal deficit has reached 17.9 percent of GDP in the 2020 fiscal year—a figure almost twice as large as the highest seen during the Great Recession (9.8 percent) in 2009. As of October, the United Kingdom was facing its highest debt-to-GDP ratio in 50 years. And South Africa’s growing debt burden—which could reach 84 percent of GDP by the end of fiscal year 2020—is reducing the government’s ability to offer further support to its state-owned enterprises such as power utility Eskom and South African Airways.

Such soaring deficits are expected to continue through 2025 for many advanced economies. The implications of this budget overstretch are jarring. It could lead to a loss of trust in government overall, a tendency that has historical precedent. As a result of the 2008 financial crisis, for example, levels of mistrust toward the European Commission (EC) rose from 27 to 47 percent between 2007 and 2013. And it may be worse this time around. According to a Kantar survey, people across almost all of the world’s leading advanced economies have become more skeptical about their governments’ handling of the coronavirus pandemic over time. In the Group of Seven (G7) nations in May, only 48 percent of respondents approved of authorities’ handling of the pandemic, down from 54 percent in March.1

As federal governments become more financially constrained and public trust deteriorates, they may rely on local administrations to share the burden of leading through the crisis. While a recent Edelman survey found increasing aggregate trust in governments overall, in places where trust in the federal government was lacking, local government filled the void. This held in countries including the United States, Japan, and France. Indeed, cities across the world are taking on an outsized role during the pandemic as they carry out contact tracing, institute lockdowns, and care for the vulnerable in their respective populations. To keep local governments operating effectively, federal governments may increasingly need to provide funding support. Estimates from the World Bank and UN entities suggest that local governments may on average lose 15 to 25 percent of revenues in 2021 owing to COVID-induced economic turmoil.

There is reason for optimism, however. Despite concerns about inadequate funding or even insolvency, city governments around the world have been stepping up throughout the COVID-19 crisis, increasing pedestrian access, building makeshift hospitals, and providing housing for the homeless. Houston, Texas, for example, has developed a new initiative known as the COVID-19 Community Health Education Fellows (CHEF), designed to educate and empower at least 100 youth and young adults to help the city fight COVID-19, particularly in the most vulnerable communities. The private sector is also involved in this endeavor, as JPMorgan Chase has provided a $100k grant to the program. Such measures are not restricted to cities in advanced economies. Despite limited funding, Kigali placed numerous portable sinks for handwashing at bus stops, restaurants, banks, and shops across the city. And in Monrovia, the Cities Alliance has relied on social mobilizers to spread the word in informal settlements about basic hygiene practices. As pandemic recovery progresses, federal, provincial, and city governments globally—in concert with the private sector—will need to find ways to strengthen their cooperation to meet both the immediate and longer-range challenges posed by the pandemic.

The outlook

As governments take on additional responsibilities through and beyond COVID-19, they’ll face mounting economic, political, and social challenges. Further, embattled governments will need to find new ways to work together and engage in multilateralism to rebuild international institutions in a way that is sustainable and appropriate for the 21st century. They need to retool domestic capacity to make it more resilient as well (see Trend #2). Even with renewed efforts on the part of multilaterals, maintaining public trust in government will be a persistent challenge. To mitigate this stress, governments increasingly will rely on the private sector to re-skill the unemployed, especially stranded segments such as low-skilled workers (see Trend #3). Such cross-sector collaboration will also be necessary to develop and deploy contact-tracing technology, PPE, and vaccines. There is reason to hold out hope that the great shakeout could result in renewed multilateralism and increased government efficiency. Such efforts will be required if embattled governments are to survive the challenge ahead.

Business implications

• Businesses will take on functions that governments cannot. As governments become more financially constrained over the next five years and beyond, businesses will assume additional responsibilities to support and fill gaps—even in the absence of government regulations to guide their activities. Indeed, businesses are already supporting governments in initiatives to combat COVID-19. In May, Google and Apple announced a joint effort to enable the use of Bluetooth technology to help governments and health agencies reduce the spread of the virus. Technological and cash support to vulnerable segments will continue as businesses recognize the reputation and financial gains that follow.
• Companies will harness stimulus funds to rebuild. As beleaguered governments inject cash into diverse sectors ranging from travel and tourism in the United States and Europe to renewable energy in South Korea, businesses will take advantage of upcoming fiscal stimulus bills and identify strategies to best apply for and benefit from this government support. “Green” recovery programs will also involve the private sector, as governments offer financial support to businesses for energy efficiency improvements and installation of renewable energy systems. Such advances in the circular economy in turn help governments meet climate and sustainability goals.
• Small and medium-sized businesses (SMBs) will seek out creative funding sources to fill in government funding gaps. Though many governments throughout the world have provided emergency funds to a variety of SMBs, the support often has not been enough. Therefore SMBs will increasingly look for financing from other sources, such as through GoFundMe’s Small Business COVID Relief Initiative, microloans, and venture capital funding. As governments become even more embattled over the next five years, innovative SMB funding methods and sources will only grow in number and popularity.

Trend #2 Push to national self-sufficiency

Governments around the world face encumbered supply chains, scarce medical supplies, and a race to health and recovery. The COVID-19 pandemic has served as a wake-up call to national governments on the need for self-sufficiency and resilience in priority economic areas, including medical goods and technology. This push toward producing more goods at home, using domestic companies, will only increase in the next five years over the course of the great shakeout brought about by the pandemic. New policies to boost domestic capabilities in key sectors such as healthcare, technology, agriculture, energy, and manufacturing could have a positive impact on the economy by supporting emerging industries and minimizing the risks of globalized supply chains. Yet there are also risks of too much government intervention, which could disincentivize innovation and artificially prop up inefficient “national champions.” It’s as yet unclear where governments will fall on this spectrum, but there’s little doubt that these shifts toward greater self-sufficiency are underway.

The pendulum swings away from the world and back toward the state

From the late 1980s to the Great Recession of 2008, globalization defined the business-operating environment. As the world grew more connected following the fall of the Soviet Union, the creation of the North American Free Trade Agreement, and China’s entry to the World Trade Organization, statist policies were abandoned in exchange for free trade and global value chains. After the financial crisis, however, the pendulum began swinging away from globalization. As former US Secretary of State Henry Kissinger wrote in 2008, “globalization tempts a nationalism that threatens its fulfillment.” In the years that followed, populist leaders worldwide rose to power advocating against globalization, immigration, and open markets. The US–China trade war, Brexit, and the rise of industrial policy worldwide are just some signals of this shift. Rather than relying on international connectedness, countries started to look for opportunities to re-shore in order to bolster domestic capabilities, and they began preparing for further trade protectionism. Then COVID-19 arrived.

The virus has since spurred rapid shifts toward domestic capacity in key sectors, most notably in healthcare and technology. Springtime shortages of medical equipment have prompted governments to beef up national supply chains and stockpile materials (see figure 3). Some are investing in vaccine research, including Russia, China, and India (which is funding vaccine trials for local companies like Bharat Biotech). India’s Serum Institute, moreover, is working to mass-produce a coronavirus vaccine, half of which will be reserved for Indians, with the other half for emerging markets. The United States has mandated that US companies such as General Motors use their plants to produce ventilators under the US Defense Production Act to ensure sufficient domestic capacity without relying on imports, though critics have argued that this mandate was insufficient to meet demand. And in the EU, Brussels has advised member states to be wary of foreign direct investment in medical fields out of fears that foreign ownership could direct these products abroad. In light of the much-celebrated news from Pfizer and Moderna in November showing that their vaccines appear to be highly effective, a number of countries either have existing agreements or are reaching deals with these companies to provide the vaccine to their populations. This includes the United States, Canada, Japan, and the United Kingdom, along with the European Union, though their respective health authorities must approve the vaccine before it can be administered. If further developments are announced, more national supply deals are likely.

Apart from medical goods, the pandemic has also underscored the need for modernized domestic technology infrastructure. From contact tracing and health data analysis to communications facilitation during shutdowns, technology has been crucial to navigating the pandemic. National efforts to support domestic technology and restrict foreign products were already underway pre-COVID, exemplified by the international competition to develop 5G, US sanctions on Huawei, and the EU’s plans for “technological sovereignty” to develop digital capabilities that could match those of China and the United States. The pandemic has simply accelerated these trends. In June, US legislators proposed more than $22 billion in tax breaks and grants to support domestic chip manufacturing in an effort to build national self-sufficiency, citing vulnerabilities in existing supply chains and reliance on trading partners like China. China, on the other hand, has leaned on domestic tech companies for contact tracing efforts. And in Europe, the EU provided €164 million in R&D funding to coronavirus-focused tech start-ups based in EU member states and associated countries. Governments increasingly see domestic technology capacity not just as important for their population’s well-being but also as a crucial component to compete in the world economy and protect national security.

Countries will seek self-sufficiency in more fields to contend with future crises

Beyond the immediate need for increased medical and technological self-sufficiency, countries are looking at boosting other industries that will mitigate future crises—food, energy, and manufacturing chief among them. Some are taking measures to strengthen domestic food production, particularly as food insecurity worsens (see Trend #4). Though agricultural subsidies for domestic farming were well established before the pandemic, countries are now expanding such programs. For instance, the EU has raised agricultural aid to maintain domestic production, giving the hardest-hit farmers up to €7,000. Some member states have gone even further: lawmakers in the Czech Republic have introduced a bill that would require at least 85 percent of food on retailers’ shelves to be produced domestically by 2027. Across the Atlantic, the United States has launched the Coronavirus Food Assistance Program to disperse up to $16 billion in direct relief to domestic farmers and ranchers. Importers in the Middle East have also considered boosting local food production through tariffs and improving farming infrastructure, and Singapore is investing more in vertical farming to improve food security. National investment in domestic food production is only likely to grow in the coming years as food insecurity worsens worldwide, and especially if trade protectionism remains.

National self-sufficiency efforts in the energy sector, also long-standing, have become a part of pandemic economic recovery efforts in several countries. The United States, for example, pursued a policy of energy independence before COVID-19 with the goal of reducing reliance on energy imports. Early in the crisis, oil prices dropped to historic lows due to plummeting demand driven by stay-at-home orders. To support its domestic oil industry, the United States took the historic step of involving itself in OPEC+ discussions to lift prices.2 Europe, on the other hand, is looking to boost its renewables sector by incorporating parts of its European Green Deal into its COVID-19 recovery plans. The bloc intends to fund green projects such as the North Sea Wind Power Hub Programme, an initiative led by EU companies that will receive €14 million to increase offshore wind production. This effort will not only advance the region’s climate goals but also help diversify energy sources by supporting European companies, a win-win for greater energy self-sufficiency. South Korea has taken similar steps to help domestic companies compete in green technologies. The country’s Green New Deal, for example, aims to have at least 1.13 million electric vehicles on the road by 2025, which will likely help national firms such as Hyundai and Kia as they expand their electric fleets.

Countries also see manufacturing self-sufficiency as necessary to surviving future shocks (see figure 4). Shortly after COVID-19 struck, Japan started subsidizing companies to move production out of China in the hopes of stabilizing supply shocks. One company alone, Sharp Corporation, is slated to receive more than $536 million in this effort. India has also updated policies to increase domestic electronics production, which is aligned with its 2014 Make in India initiative. In May, the country unveiled a plan to support domestic industry through the Self-Reliant India program, which supports small and medium- sized enterprises through subsidies and tax breaks. In the medium term, these efforts will only grow as geopolitical tensions remain fraught and countries search for ways to kick-start economic growth post-pandemic.

The outlook

As the pendulum swings further toward a state-centered economy, we can expect to see more government investment in the five industries mentioned—namely healthcare, technology, agriculture, energy, and manufacturing (and potentially a few others, including infrastructure). This investment will likely add to the pressures already faced by embattled governments around the world (see Trend #1). Long, multinational supply chains are highly exposed to global risks such as an international pandemic, and external shocks show no signs of abating in the next five years. Government support for domestic industry is an attractive risk-mitigation measure and could help indigenous industry take off, creating more jobs and development. Yet it can also be costly and, if the pendulum swings too far, could create other challenges. Too much government intervention could keep inefficient and unproductive industries afloat by eliminating competition and disincentivizing innovation. And eventually rolling back such subsidies could prove politically challenging. In the next five years, the great shakeout will result in increased government intervention and moves toward self-sufficiency. It will be incumbent on strategic businesses to monitor just how far this pendulum swings.

Business implications

• Companies will face greater pressure to localize supply chains. National governments may continue to offer incentives to companies that choose to localize production. These incentives are already taking place in Japan, the United States, and parts of Europe, as governments look to rebuild manufacturing capacity and minimize disruptions from multinational value chains. Re-shoring or near-shoring will likely continue as barriers to trade and increased geopolitical tensions remain. This trend will create opportunities for companies that can relocate closer to home, and provide additional benefits such as the ability to better monitor environmental and labor standards.
• Businesses may have trouble using and sourcing foreign tech, especially components such as chips. As technological competition intensifies, strategic companies will consider where they source their component parts such as semiconductors. Efforts like those underway in the United States to boost domestic chip production will continue, while export controls could become more common in much of the world, including in China. If countries take more steps to restrict foreign technology’s access to domestic markets, companies may be encouraged to buy locally made goods over imports.
• Manufacturing could make a comeback in advanced economies. Though many advanced economies are service based, further government support in manufacturing and emerging Fourth Industrial Revolution (4IR) technologies such as digital twins could help the sector revive. This is particularly true in areas such as chip manufacturing, electronics, minerals processing, and the automotive industry, as these companies look slated to receive significant government support in the next five years. Companies can take advantage of this support by investing in manufacturing opportunities in advanced economies, as some firms such as TSMC are doing.

Trend #3 Stranded segments of society

Far from being a great equalizer, COVID-19 has disproportionately affected the world’s most vulnerable. As global poverty levels rise to new heights, inequality is growing, fueling protests and riots from the United States to Australia. Over the next five years, this inequality will worsen, exacerbated by COVID-19, and lead to further marginalization of already stranded segments of society in both advanced and developing economies—including ethnic minorities and low-skilled workers. In parallel, new segments such as students, children, and working mothers will also find themselves stranded as the virus restricts opportunities for learning and earning. As these groups fall victim to the great shakeout, there will be increased pressure for governments and businesses to work both independently and in concert to support them.

Multiple segments of society are becoming stranded

Minorities, and more specifically Black and Latinx people, have long experienced economic and social inequity in many countries; the virus is exacerbating these inequalities. In the United States, for example, a Pew Research study conducted in April found that 73 percent of Black Americans did not have emergency funds to cover three months of expenses during the pandemic, while only 47 percent of white adults said the same. Disparities are also evident in contraction of the virus—Black Americans represent roughly 14 percent of the population but around 30 percent of COVID-19 cases. And the National Bureau of Economic Research found in the same month that US Latinxs were disproportionately affected by the COVID-19 recession, experiencing an unemployment rate of 18.2 percent compared to the national average of 14.2 percent. These challenges are not limited to developed markets. In South Africa, predominantly Black townships were much harder hit by the pandemic than primarily white areas, and in Brazil COVID-19 deaths were disproportionately high among Black and mixed-race patients. Along with COVID-19, structural racism is inciting protests throughout the world as these stranded segments fight not only a disease of the body but also systemic problems that require massive policy interventions to address.

Low-skilled workers in both advanced and emerging markets, many of whom were already weathering the left-right punches of outsourcing and automation, are also facing disproportionate COVID-era challenges. Even before the onset of the pandemic, Oxford Economics predicted that 20 million global manufacturing jobs could be lost to robots by 2030. And low-skilled workers may be stranded from their jobs at even higher rates as automation ramps up. Call centers, from Manila to Bangalore and beyond, are on the decline during the COVID-19 crisis as chatbots take over. Moreover, restaurants, hotels, and food services are among the establishments around the world that employ large numbers of low-skilled workers who are now faced with unemployment. According to the US Department of Labor, by September, workers with bachelor’s degrees or higher had nearly fully recovered jobs lost in early spring. However, those with just a high school diploma held 11.7 percent fewer jobs in September than in February. As contactless technology becomes more popular, workers such as delivery drivers and supermarket employees could see similar job displacement. Dutch grocer Ahold, for example, is accelerating development of a robotic order processing arm that can scan and stock shelves.

As these technological developments cause massive job displacement among low-skilled workers, the private and public sectors will feel pressure to find ways to reintegrate these workers and other stranded segments into the economy.

Students, recent graduates, and children are among the new groups to face growing marginalization. A global survey released by Save the Children in September indicated that more than 1.6 billion learners have faced school closures due to the pandemic, with fewer than 1 percent of children from poor households having access to the Internet for distance learning. University students and recent graduates are also facing challenging futures. Indeed, it is likely that Gen Z will de-prioritize college and university education (at least in the early post-COVID world) as in-person classes are limited. In the United States, a higher education trade group has predicted a 15 percent drop in university enrollment nationwide, including many foreign students unable to return for their studies, which will amount to a $23 billion revenue loss for colleges. Recent graduates are also hard hit, with two-thirds in the United Kingdom seeing a job application withheld or put on hold as a result of the virus.

Additionally, children’s learning from home has upended the lives of many working parents, especially mothers, in both advanced and emerging economies. Among married couples who work full time, women provide close to 70 percent of childcare during standard working hours—a burden that has grown considerably as schools and other activities have shut down amid COVID-19. Indeed, in September, more than 860,000 women dropped out of the workforce in the United States, citing the need to care for children at home. Non-college-educated women have been hit especially hard by job losses in the United States (see figure 5). And in the developing world, the departure of many women from jobs in the informal sector is leading their families into financial ruin, with gender poverty gaps expected to widen even further by 2030.

A multisector response to reintegrate the stranded

Stranded segments will continue to decouple from the global economy over the next five years unless the government, international institutions, and the private sector all work both independently and together to reintegrate them. This effort includes taking action to support integration of racial and other minorities. Some modest steps have already been taken. For example, in response to the summer protests throughout the world combating structural racism, politicians have ordered the removal of Confederate statues in the United States and promised police reform. Japanese fashion retailer Uniqlo joined forces with the ACLU and committed to donating $100,000 to organizations that aid the Black Lives Matter movement. Adidas has said it will fill at least 30 percent of its open positions with Black and Latinx employees. And Apple and Japanese giant SoftBank have both pledged $100 million to minority-owned businesses and those promoting diversity. These moves will not solve long-standing and deep-rooted problems of racial inequity in and of themselves, but they do represent steps in the right direction.

For low-skilled workers, forward-thinking governments and businesses are focusing on re-skilling initiatives to ensure that stranded employees are able to progress in a more automated post-COVID world. Sweden has taken an early lead in forging a public-private re-skilling alliance during the pandemic. The partnership between HR and search firm Novare Human Capital and Sophiahemmet University offers a basic medical training program for SAS (Scandinavian Airlines) cabin staff to transition into assistant nurse roles. And Microsoft has pledged to offer digital skills training for 25 million people worldwide by identifying the most in-demand skills ahead of the COVID-19 unemployment surge and offering relevant courses accordingly.

Students and children will also need the support of both public and private institutions to avoid being further stranded. To that end, UNICEF and Microsoft have conducted an early launch of their Learning Passport program, which helps facilitate online learning in countries where the curriculum can be digitized. Timor-Leste, Ukraine, and Kosovo were the first to release their online curricula through the program. And national governments are creating their own resources to help online and on-site learners (see figure 6). Argentina, for example, has introduced Seguimos Educando, which bridges digital gaps by offering notebooks filled with learning materials to students without adequate access to technology. Initiatives such as these will ensure that educational and digital inequality do not negatively affect students’ prospects when they eventually enter the workforce.