This is an update to a posting from May 4, week seven of the general lockdown policies across most U.S. states as well as Europe, MEA and LAC. Asia was generally in the same mode, with some differences in Oz, Japan and South Korea, while of course China by that time was already starting to lift domestic travel and business restrictions.
So at that time there was some very minimal light at the end of the tunnel, and we figured it’s wise to wait awhile and see how the “reopening” would unfold. So here we are roughly two months later (and 3.5 months from the initial general lockdowns), and while the light has brightened somewhat, uncertainty remains.
Baseball fans (you remember that game no?) may be familiar with the 2012 Eastwood movie titled Trouble with the Curve, about an aging scout who is tracking a high school “phenom” as perhaps his last assignment (good back story, good cast, but no spoiler here). The movie has nothing to do with the economic activity but does have a metaphorical connection to how one deals with change, so we’ll borrow the title for a segue into the general outlook for commercial payments, which in part is going to be all about the shape and length of the recovery curve.
Corporate Cards (T&E)
We have been attending bi-weekly remote meetings of a sub-group within the Global Business Travel Association (GBTA) consisting of 100+ professionals from that industry, the one hardest hit by the lockdowns and travel restrictions. The group shares data and insights around how the various parts of the travel industry have been dealing with the pandemic and of course the fluid business travel outlook. The GBTA has also been conducting regular member polls across a broad swath of travel managers and others in the space in many regions to gauge company and segment travel policies and expectations for resumption of business travel.
The latest result from a June 17 poll suggests that although a higher percentage of responders expect domestic travel to resume within six months versus the earlier poll, international travel expectations remain basically the same as they were in April. Given the two-month lag between polls, this suggests that the restrictions are lasting longer than most expected, especially for international business trips. Table 1 compares the two poll results (in addition, there are two more data points in the June 17 poll). Other poll results suggest that there are regional differences. For example, on average 32% of responders from Canada, Europe and the U.S. have plans to resume travel within three months. However, that same number for all other regions/markets combined is only about 12%. As such we still see overall spend on corporate cards (mid- to large-sized market) to be in a 25% range of decline for 2020 versus 2019, and a level of new normalcy likely not sooner than mid-2021.
Other Commercial Spending
In the prior postings we also made the point that other types of commercial spending will be tied more closely to overall economic activity. Although the stock market indexes in the U.S. have regained much of Spring’s losses, there is a great deal of volatility due to uncertainty. Even with an expected recovery in H2, full year U.S GDP is now likely to be in a negative 6% range versus 2019. This would the largest year-on-year drop since 1946 and the 5th largest decline since 1929.
Of course this is a self-made recession, which makes a steep two-quarter drop followed by a steep two-quarter rise seem more likely. However, since this was (and basically remains) an unprecedented simultaneous reduction in global economic activity, there is no real guidepost for the subsequent impact of restarting. Economies don’t just stop and start like flipping a light switch. Based on one of the available forecasts a good case scenario in the U.S. is that 2021 will have GDP of 2.1%, which leaves a production loss of about $1 trillion versus 2019. That is a U shaped recovery. The W shaped recovery may look more like -2.1%, which means a longer time before catching up to the lost production from prior growth trajectories and a $1.7 trillion gap to 2019 (Figure 1). That is a lot of ground to make up. This assumes further pandemic repercussions, and perhaps other things that could go wrong.
Bad Makes Good
As we have pointed out before, although initial conclusions would logically point to a decline in the transactions and value of B2B payments during this period, particularly global commercial invoiced payables, there is an offsetting trend as well. During our discussions with industry participants it emerged that slower moving companies will be moving towards digital financial processes, not only in payments but across the spectrum of cash cycle transactions and trade services as well. That development would suggest an oncoming spate of activity in financial software, shifting away from analog and into modern technology. So a prospective decline in global GDP, reducing overall payment activity to an extent, might induce modernization of financial operations; resulting productivity gains may in turn help spur capital investment and larger growth in the long term. So banks and fintechs retain tremendous opportunity to capitalize on the move towards better process and controls.
Please feel free to reach out for additional discussion on these or other commercial payments topics.