Looking Ahead to the Next Growth Supercycle

Prospering In The Post Covid-19 Supercycle: The Liquidity Of Countries And Firms

July 2021

Firms need to focus on growth and competitiveness in the emerging post-Covid-19 growth supercycle. Today, we are in a similar position to the post-World War II supercycle, when certain countries and firms grew exponentially and other countries and firms showed limited or even declining growth. We suggest that the liquidity of a country or a firm will define its future growth.

Post World War II Supercycle Growth—The Focus on Scale

The supercycle growth of countries post World War II was both expected and surprising. By 1990, USA was the largest economy, but Japan and Germany, countries destroyed during World War II, were the second and third largest economies. UK had a larger economy than Japan and Germany in 1950, but slipped behind them by 1990. Our research shows that the common focus of these countries was on scale. During World War II, the USA had developed manufacturing scale that it coupled with mass marketing and mass distribution (supermarkets and department stores). Germany and Japan had limited infrastructure and were able to develop new industrial policies, and these policies labeled export-driven or producer, focused on scale. These countries created industrial policies that focused on a few industries where they could create scale and effectively compete in world markets. Firms that became global competitors also focused on scale. Examples are General Motors, Whirlpool, Caterpillar; US Steel, and RCA from USA; Volkswagen, Siemens, and Thyssen Krupp from Germany; and Panasonic, Sony, Toyota, and Komatsu from Japan.

Post Covid-10 Supercycle Growth—The Focus on Liquidity and Speed

The Covid-19 pandemic has been regarded as the most severe disruption since World War II, and we are expecting a supercycle growth period. The conditions for a supercycle growth period are emerging as saving rates have exploded in the USA (34% in April 2020; 21% in January 2021), asset prices are high, and demand far outstrips supply in multiple industries such as commodities, housing, automobiles, clothing, appliances, and even services. While the post World War II growth was driven by scale, we suggest that post-Covid-19 growth will come from speed and liquidity, and certain countries and firms will grow exponentially, and other countries will show limited or even declining growth.

Country Growth

As we get ready for a supercycle growth period, we are already witnessing differences in growth rates across countries. Countries that made quick decisions and were flexible are growing faster than countries that were slow and rigid. According to IMF, USA will be the only country in G7 that will have positive real GDP growth of 2.68% in 2020-21, compared to 2019. In contrast, Japan will have a -1.66%, Germany will have a -1.48%, France will have a -2.88%, and UK will have a -5.23% growth rate during the same period.

A proxy of a country’s liquidity is the ease of doing business score (www.doingbusiness.org), as it measures the speed, flexibility, and scalability of a country. We find that ease of doing business scores of G7 countries are correlated with their growth rates. In addition, we find that the liquidity scores of executives in a country are associated with the country’s 2020-21 growth rates.

There is data that supports increased liquidity in the USA. Census reports that 4.4 million new businesses were created in 2020 in the USA, which is at least double what we have observed in the last 20 years. The new businesses created in 2020 in the USA are higher than new businesses created in all other G7 countries combined. USA also demonstrated a higher learning orientation (a facet of liquidity), and Udemy, an online course provider, finds that 38% of workers took some additional training during 2020, up from only 14% in 2019.

Firm Growth

In our database of firms, we observed that high liquidity firms had a revenue growth rate of 19.83% in 2020-21, compared to 2019. In contrast, low liquidity firms had a negative growth rate of -0.63%. Some of these effects were due to the differential growth rates of industries. However, even within industries, we saw a similar effect—high liquidity firms had substantially higher growth rates than low liquidity firms. The dramatic effect of liquidity was observed in the pharma industry, where none of the larger firms, except J&J, could develop, test, and market a Covid-19 vaccine.

We observed that higher liquidity firms have higher levels of digitalization and have geographic liquidity. Digitalization is the use of digital technologies to create and implement strategies through digital structures and digital processes. If firms are not “digital native,” firms typically undertake a digital transformation journey to increase liquidity.

Liquid Geography. Liquid geography refers to the ability of employees, suppliers, and customers to effectively and efficiently work from any location, bridging time and locational differences. There are two areas of liquid geography that we saw were important. First, in higher-performing firms, creative teams and executives that need to collaborate within and outside the function worked from the office. Second, successful firms have quickly reduced the distance between the firm and their customers. For example, customers in the post-Covid-19 era want products in an alternate form than visiting retail stores. Therefore, successful retailers have increased curbside pickup and delivery, even when health concerns are less relevant. Similarly, successful business-to-business firms have created communication platforms that provide comprehensive and customized information to their customers in the manner that the customer would prefer.

Example of Liquid Geography—Delivery-first Restaurants. Restaurants cater to both providing food and an area for social gatherings. Therefore, traditional restaurants were located in prime high-traffic locations with large seating for customers. Since social gatherings were not possible during the Covid-19 pandemic, National Restaurant Association reports that 17% of restaurants in the USA closed by the end of November 2020. Interestingly, to cater to food needs, we have seen a rise of delivery-first restaurants in the USA. These restaurants opened during the peak of the Covid-19 crisis and primarily cater to delivery. The delivery-first restaurants are located in less desirable locations, have a smaller dining room, focus on social media, adjust prices for delivery, and create a liquid staff. Needless to say, while traditional restaurants are struggling, delivery-first restaurants are prospering.

SUMMARY

We find that we are in a growth supercycle, and countries and firms that display higher levels of liquidity will grow exponentially. In contrast, countries and firms that display lower levels of liquidity will have negligible or negative growth. Countries should increase the speed and flexibility of their processes to increase liquidity. Their liquidity is reflected in the ease of doing business. Firms should work to increase their liquidity and the liquidity of their executives. A common strategy to increase firm liquidity is through digitalization. Finally, firms should work to increase liquid geography. First, firms need to increase work from the office for executives in creative or collaborative tasks. Second, firms need to reduce the distance between the firm and the customer.