Again today, it gives the team of TextileFuture pleasure to dedicate this issue of the TextileFuture Newsletter to two different items.
The first feature is an introduction to IMF’s October 2020 World Economic Outlook, with the possibility to download the entire WEO report with all graphics and text. Thus an important item for the forecast of the global economy.
The second item, entitled “Re-imaging consumer-goods innovation for the next normal” was established by the McKinsey Consultance Group and delivers some insight on what might happen in an after Covid-19 period of time.
Even the items have a very distinctive separate content, we hope you do enjoy both readings.
Here starts the first item:
IMF’s October 2020 World Economic Outlook
ASSUMPTIONS AND CONVENTIONS
A number of assumptions have been adopted for the projections presented in the (WEO).
It has been assumed that real effective exchange rates remained constant at their average levels during July 24 to August 21, 2020, except for those for the currencies participating in the European exchange rate mechanism II(ERM II), which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be USD 41.69 a barrel in 2020 and USD 46.70 a barrel in 2021 and will remain unchanged in real terms over the medium term; that the six-month London interbank offered rate (LIBOR) on US dollar deposits will average 0.7 % in 2020 and 0.4 % in 2021; that the three-month euro deposit rate will average –0.4 % in 2020 and –0.5 % in 2021; and that the six-month Japanese yen deposit rate will yield, on average, 0.0 % in 2020 and 2021. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would, in any event, be involved in the projections. The estimates and projections are based on statistical information available through September 28, 2020.
The following conventions are used throughout the WEO:
. . . to indicate that data are not available or not applicable;
– between years or months (for example, 2019–20 or January–June) to indicate the years or months covered,
including the beginning and ending years or months; and
/ between years or months (for example, 2019/20) to indicate a fiscal or financial year.
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
Data refer to calendar years, except in the case of a few countries that use fiscal years. Please refer to Table F in the Statistical Appendix, which lists the economies with exceptional reporting periods for national accounts and government finance data for each country.
For some countries, the figures for 2019 and earlier are based on estimates rather than actual outturns. Please refer to Table G in the Statistical Appendix, which lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments indicators for each country.
What is new in this publication:
• Following the recent release of the 2017 International Comparison Program (ICP) survey for new purchasingpower- parity benchmarks, the WEO’s estimates of purchasing-power-parity weights and GDP valued at purchasing power parity have been updated. For more details, see Box 1.1 in the October 2020 WEO at http://www.imf.org/external/pubs/ft/weo/2020/02/index.htm
• Starting with the October 2020 WEO, data and forecasts for Bangladesh and Tonga are presented on a fiscal year basis.
• Data for West Bank and Gaza are now included in the WEO. West Bank and Gaza is added to the Middle East and Central Asia regional group.
In the tables and figures, the following conventions apply:
• If no source is listed on tables and figures, data are drawn from the WEO database.
• When countries are not listed alphabetically, they are ordered on the basis of economic size.
• Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless noted otherwise, country group composites represent calculations based on 90 % or more of the weighted group data.
The boundaries, colors, denominations, and any other information shown on the maps do not imply, on the part of the IMF, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
Corrections and Revisions
The data and analysis appearing in the World Economic Outlook (WEO) are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary (see below). All substantive changes are listed in the online table of contents.
Print and Digital Editions
Print copies of this WEO can be ordered from the IMF bookstore at imfbk.st/29296.
Multiple digital editions of the WEO, including ePub, enhanced PDF, and HTML, are available on the
IMF eLibrary at http://www.elibrary.imf.org/OCT20WEO
Download a free PDF of the report and data sets for each of the charts therein from the IMF website at
This version of the World Economic Outlook (WEO) is available in full through the IMF eLibrary (www.elibrary.imf.org) and the IMF website (www.imf.org ). Accompanying the publication on the IMF website is a larger compilation of data from the WEO database than is included in the report itself, including files containing the series most frequently requested by readers. These files may be downloaded for use in a variety of software packages.
The data appearing in the WEO are compiled by the IMF staff at the time of the WEO exercises. The historical data and projections are based on the information gathered by the IMF country desk officers in the context of their missions to IMF member countries and through their ongoing analysis of the evolving situation in each country. Historical data are updated on a continual basis as more information becomes available, and structural breaks in data are often adjusted to produce smooth series with the use of splicing and other techniques. IMF staff estimates continue to serve as proxies for historical series when complete information is unavailable. As a result, WEO data can differ from those in other sources with official data, including the IMF’s International Financial Statistics.
The WEO data and metadata provided are “as is” and “as available,” and every effort is made to ensure their timeliness, accuracy, and completeness, but these cannot be guaranteed. When errors are discovered, there is a concerted effort to correct them as appropriate and feasible. Corrections and revisions made after publication are incorporated into the electronic editions available from the IMF eLibrary (www.elibrary.imf.org) and on the IMF website (www.imf.org). All substantive changes are listed in detail in the online tables of contents.
For details on the terms and conditions for usage of the WEO database, please refer to the IMF Copyright and Usage website (www.imf.org/external/terms.htm)
The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department, Asia and Pacific Department, European Department, Middle East and Central Asia Department, and Western Hemisphere Department—together with the Strategy, Policy, and Review Department; the Monetary and Capital Markets Department; and the Fiscal Affairs Department.
The analysis in this report was coordinated in the Research Department under the general direction of Gita Gopinath, Economic Counsellor and Director of Research. The project was directed by Gian Maria Milesi-Ferretti, Deputy Director, Research Department, and Malhar Nabar, Division Chief, Research Department; Oya Celasun, Division Chief, Research Department directed Chapter 3.
The primary contributors to this report are Philip Barrett, John Bluedorn, Christian Bogmans, Benjamin Carton, Francesca Caselli, Johannes Eugster, Francesco Grigoli, Florence Jaumotte, Toh Kuan, Weicheng Lian, Weifeng Liu, Adil Mohommad, Andrea Pescatori, Evgenia Pugacheva, Damiano Sandri, Marina Tavares, Nico Valckx, and Simon Voigts.
Other contributors include Gavin Asdorian, Srijoni Banerjee, Eric Bang, Thomas Brand, Luisa Calixto, Sophia Chen, Wenjie Chen, Gabriela Cugat, Sonali Das, Federico Diez, Angela Espiritu, Niels-Jakob Hansen, Jinjin He, Mandy Hemmati, Youyou Huang, Benjamin Hunt, Christopher Johns, Jaden Jonghyuk Kim, Lama Kiyasseh,Eduard Laurito, Jungjin Lee, Claire Mengyi Li, Chiara Maggi, Susanna Mursula, Futoshi Narita, SavannahNewman, Cynthia Nyanchama Nyakeri, Emory Oakes, Nicola Pierri, Yiyuan Qi, Daniela Rojas Fernandez, Max Rozycki, Susie Xiaohui Sun, Nicholas Tong, Shan Wang, Julia Xueliang Wang, Yarou Xu, Hannah Leheng Yang, and Huiyuan Zhao.
Joseph Procopio from the Communications Department led the editorial team for the report, with production and editorial support from Christine Ebrahimzadeh, and editorial assistance from Lucy Scott Morales, JamesUnwin, Harold Medina (and team), and Vector Talent Resources.
The analysis has benefited from comments and suggestions by staff members from other IMF departments, as well as by Executive Directors following their discussion of the report on September 30, 2020. However, both projections and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.
More than one million lives have been lost to COVID-19 since the start of the year and the toll continues to rise. Many more have suffered serious illness. Close to 90 million people are expected to fall into extremedeprivation this year. These are difficult times, yet there are some reasons to be hopeful. Testing has been ramped up, treatments are improving, and vaccine trials have proceeded at an unprecedented pace, with some now in the final stage of testing. International solidarity has strengthened along some dimensions, from rolling back trade restrictions on medical equipment to enhancing financial assistance for vulnerable countries. And recent data suggest that many economies have started to recover at a faster pace than anticipated after reopening from the Great Lockdown.
We are projecting a somewhat less severe though still deep recession in 2020, relative to our June forecast. The revision is driven by second quarter GDP outturns in large advanced economies, which were not as negative as we had projected; China’s return to growth, which was stronger than expected; and signs of a more rapid recovery in the third quarter.
Outturns would have been much weaker if it weren’t for sizable, swift, and unprecedented fiscal, monetary, and regulatory responses that maintained disposable income for households, protected cash flow for firms, and supported credit provision. Collectively these actions have so far prevented a recurrence of the financial catastrophe of 2008-09. While the global economy is coming back, the ascent will likely be long, uneven, and uncertain. Indeed, compared to our forecast in June, prospects have worsened significantly in some emerging market and developing economies where infections are rising rapidly. Consequently, emerging market and developing economies, excluding China, are projected to incur a greater loss of output over 2020-21 relative to the pre-pandemic projected path when compared to advanced economies. These uneven recoveries significantly worsen the prospects for global convergence in income levels.
Moreover, recovery is not assured while the pandemic continues to spread. With renewed upticks in COVID-19 infections in places that had reduced local transmission to low levels, re-openings have paused, and targeted shutdowns are being reinstated. Economies everywhere face difficult paths back to prepandemic activity levels.
Preventing further setbacks will require that policy support is not prematurely withdrawn. The path ahead will require skillful domestic policies that manage trade-offs between lifting near-term activity and addressing medium-term challenges. The October 2020 Global Financial Stability Report highlights such trade-offs for monetary policy. Sustaining the recovery will also require strong international cooperation on health and financial support for countries facing liquidity shortfalls. Finding the right policy mix is daunting, but the experience of the past few months provides grounds for cautious optimism that the priorities laid out in this report can be achieved.
A key aspect of combating the health crisis is to ensure that all innovations, be they in testing, treatments, or vaccines, are produced at scale for the benefit of all countries. Advance purchase commitments for vaccines under trial can help spur this process for manufacturers who may otherwise hesitate to bear the upfront cost. This effort should include a strong multilateral component to help distribute doses to all countries at affordable prices. More generally,the global community will need to continue helping countries with limited health care capacity through sharing equipment, know-how, and through financial support from international health agencies.
At the national level, governments have already responded with a variety of fiscal countermeasures that include efforts to cushion income losses, incentivise hiring, expand social assistance, guarantee credit, and inject equity into firms. These measures have prevented widespread firm bankruptcies and have helped employment rebound partially. Employment and labour force participation, however, remain well below pre-pandemic levels, and many more millions of jobs are at risk the longer this crisis continues. To preserve jobs, it is important for governments, where possible, to continue to support viable but still vulnerable firms with moratoria on debt service and equity-like support. Over time, once the recovery has taken a strong hold, policies should shift gradually to facilitating reallocation of workers from sectors likely to shrink on a long-term basis (travel) to growing sectors(e-commerce). Along the transition, workers will need to be supported, including through income transfers, retraining, and reskilling programs.
Advanced economies have generally been able to deliver larger direct spending and liquidity support relative to GDP than others constrained by elevated debt and higher borrowing costs. Those constrained countries will need to create room for immediate spending needs by prioritizing crisis countermeasures and reducing poorly targeted subsidies. Some will require additional help from creditors and donors through debt restructuring, grants, and concessional financing, building on important initiatives under way. The IMF has been central to these initiatives through its joint call with the World Bank on debt service suspension for low-income countries, its call for reform of the international debt architecture, and its extension of funding at unprecedented speed to several member countries.
Further complicating the task that countries face is the need to address challenges coming out of the pandemic. In this report we are releasing mediumterm growth projections for the first time since the crisis started. While uncertainty remains substantial, growth is expected to moderate significantly, following the projected rebound in global activity in 2021.
Both advanced and emerging market economies are likely to register significant losses of output relative to their pre-pandemic forecasts. Small states as well as tourism-dependent and commodities-based economies are in a particularly difficult spot.
Most economies will experience lasting damage to supply potential, reflecting scars from the deep recession this year and the need for structural change. The persistent output losses imply a major setback to living standards relative to what was expected before the pandemic. Not only will the incidence of extreme poverty rise for the first time in over two decades, but inequality is set to increase because the crisis has disproportionately affected women, the informally employed, and those with relatively lower educational attainment, as discussed in Chapter 2 of this report.
The loss of human capital accumulation after widespread school closures poses an additional challenge. Moreover, sovereign debt levels are set to increase significantly even as downgrades to potential output imply a smaller tax base that makes it harder to service the debt. On the plus side, the prospects of low interest rates over a longer period, alongside the projected rebound in growth in 2021, can help alleviate debt service burdens in many countries. To ensure that debt remains on a sustainable path over the medium-term governments may need to increase the progressivity of their taxes and ensure that corporations pay their fair share of taxes while eliminating wasteful spending.
Near-term support policies should be designed with a view toward placing economies on paths of stronger, equitable, and sustainable growth. As discussed in Chapter 3 of this report, policymakers can simultaneously aim to mitigate climate change and bolster the recovery from the COVID-19 crisis. This can be achieved through a comprehensive package that includes a sizable green public infrastructure push, a gradual rise in carbon prices, and compensation for lower income households to make the transition fair. More generally, expanding the safety net where gaps exist can ensure the most vulnerable are protected while supporting near-term activity, as already seen, for example, in many advanced economies where disposable income remained relatively stable even as GDP registered record collapses. And investments in health and education (including to remedy losses incurred during the pandemic) can help achieve participatory and inclusive growth. The October 2020 Fiscal Monitor makes a strong case for public investment in these times of heightened uncertainty.
We have already had significant policy innovations in the past few months: the establishment of the European Union pandemic recovery package fund, the launch of asset purchases by emerging market central banks, and the novel use of digital technologies to deliver social assistance in places like Sub-Saharan Africa. Such actions have prevented even more extreme collapses and are a powerful reminder that effective, well-designed policies protect people and collective economic well-being. Building on these actions, policies for the next stage of the crisis must seek lasting improvements in the global economy that create secure, prosperous futures for all.
Gita Gopinath, Economic Counsellor and Director of Research
The global economy is climbing out from the depths to which it had plummeted during the Great Lockdown in April. But with the COVID-19 pandemic continuing to spread, many countries have slowed reopening and some are reinstating partial lockdowns to protect susceptible populations. While recovery in China has been faster than expected, the global economy’s long ascent back to pre-pandemic levels of activity remains prone to setbacks.
Global Growth Outlook and Risks Near-term outlook. Global growth is projected at −4.4 % in 2020, a less severe contraction than forecast in the June 2020 World Economic Outlook (WEO) Update. The revision reflects better-thananticipated second quarter GDP outturns, mostly in advanced economies, where activity began to improve sooner than expected after lockdowns were scaled back in May and June, as well as indicators of a stronger recovery in the third quarter. Global growth is projectedat 5.2 % in 2021, a little lower than in the June 2020 WEO Update, reflecting the more moderate downturn projected for 2020 and consistent with expectations of persistent social distancing. Following the contraction in 2020 and recovery in 2021, the level of global GDP in 2021 is expected to be a modest 0.6 % above that of 2019. The growth projections imply wide negative output gaps and elevated unemployment rates this year and in 2021 across both advanced and emerging market economies.
Medium-term outlook. After the rebound in 2021, global growth is expected to gradually slow to about 3.5 % into the medium term. This implies only limited progress toward catching up to the path of economic activity for 2020–25 projected before the pandemic for both advanced and emerging market and developing economies. It is also a severe setback to the projected improvement in average living standardsacross all country groups. The pandemic will reverse the progress made since the 1990s in reducing global poverty and will increase inequality. People who rely on daily wage labour and are outside the formal safety net faced sudden income losses when mobility restrictions were imposed. Among them, migrant workers who live far from home had even less recourse to traditional support networks. Close to 90 million people couldfall below the USD 1.90 a day income threshold of extreme deprivation this year. In addition, school closures during the pandemic pose a significant new challenge that could set back human capital accumulation severely.
The subdued outlook for medium-term growth comes with a significant projected increase in the stock of sovereign debt. Downward revisions to potential output also imply a smaller tax base over the medium term than previously envisaged, compounding difficulties in servicing debt obligations.
The baseline projection assumes that social distancing will continue into 2021 but will subsequently fade over time as vaccine coverage expands and therapies improve. Local transmission is assumed to be brought to low levels everywhere by the end of 2022. The medium-term projections also assume that economies will experience scarring from the depth of the recession and the need for structural change, entailing persistent effects on potential output. These effects include adjustment costs and productivity impacts for surviving firms as they upgrade workplace safety, the amplification of the shock via firm bankruptcies, costly resource reallocation across sectors, and discouraged workers’ exit from the workforce. The scarring is expected to compound forces that dragged productivity growth lower across many economies in the years leading up to the pandemic— relatively slow investment growth weighing on physical capital accumulation, more modest improvements in human capital, and slower efficiency gains in combining technology with factors of production.
Risks. The uncertainty surrounding the baseline projection is unusually large. The forecast rests on public health and economic factors that are inherently difficult to predict. A first layer relates to the path of the pandemic, the needed public health response, and the associated domestic activity disruptions, most notably for contact-intensive sectors. Another source of uncertainty is the extent of global spillovers from soft demand, weaker tourism, and lower remittances.
A third set of factors comprises financial market sentiment and its implications for global capital flows. Moreover, there is uncertainty surrounding the damage to supply potential—which will depend on the persistence of the pandemic shock, the size and effectiveness of the policy response, and the extent of sectoral resource mismatches. Progress with vaccines and treatments, as well as changes in the workplace and by consumers to reduce transmission, may allow activity to return more rapidly to pre-pandemic levels than currently projected, without triggering repeated waves of infection. And an extension of fiscal countermeasures into 2021 could also lift growth above the forecast, which factors in only the measures implemented and announced so far.
However, the risk of worse growth outcomes than projected remains sizable. If the virus resurges, progress on treatments and vaccines is slower than anticipated, or countries’ access to them remains unequal, economic activity could be lower than expected, with renewed social distancing and tighter lockdowns. Considering the severity of the recession and the possible withdrawal of emergency support in some countries, rising bankruptcies could compound job and income losses. Deteriorating financial sentiment could trigger a sudden stop in new lending (or failure to roll over existing debt) to vulnerable economies. And cross-border spillovers from weaker external demand could amplify the impact of country-specific shocks.
Policy Priorities: Near-Term Imperatives, Medium-Term Challenges
Besides combating the deep near-term recession, policymakers have to address complex challenges to place economies on a path of higher productivity growth while ensuring that gains are shared evenly and debt remains sustainable. Many countries already face difficult trade-offs between implementing measures to support near-term growth and avoiding a further buildup of debt that will be hard to service down the road, considering the crisis’s hit to potential output.
Policies to support the economy in the near term should therefore be designed with an eye to guiding economies to paths of stronger, equitable, and resilient growth. Tax and spending measures should privilege initiatives that can help lift potential output, ensure participatory growth that benefits all, and protect the vulnerable. The additional debt incurred to finance such endeavours is more likely to pay for itself down the road by increasing the size of the economy and future tax base than if the borrowing were done to finance ill-targeted subsidies or wasteful current spending. Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence can further those objectives.
Research spending can facilitate innovation and technology adoption—the principal drivers of long-term productivity growth. Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income than more affluent individuals. In all instances, adhering to the highest standards of debt transparency will be essential to avoid future rollover difficulties and higher sovereign risk premiums that raise borrowing costs across the economy.
Given the global nature of the shock and common challenges across countries, strong multilateral efforts are needed to fight the health and economic crisis. A key priority is funding advance purchase commitments at the global level for vaccines currently under trial to incentivise rapid scaling up of production and worldwide distribution of affordable doses (for example, by bolstering multilateral initiatives for vaccine development and manufacture, including the Coalition for Epidemic Preparedness Innovations and Gavi, the Vaccine Alliance). This is particularly important given the uncertainty and risk of failure in the search for effective and safe vaccines.
A related priority is to help countries with limited health care capacity. Beyond assistance with medical equipment and know-how, several emerging market and developing economies—in particular low-income countries—require support from the international community through debt relief, grants, and concessional financing. Where debt restructuring is needed, creditors and low-income-country and emerging market borrowers should quickly agree on mutually acceptable terms.
The global financial safety net can further help countries deal with external funding shortfalls. Since the onset of the crisis, the IMF hasexpeditiously provided funding from its various lending facilities to about 80 countries at unprecedented speed.
For many countries, sustaining economic activity and helping individuals and firms most in need—while ensuring that debt remains sustainable—is a daunting task, given high public debt, the spending needs triggered by the crisis, and the hit to public revenues. Governments should do all that they can to combat the health crisis and mitigate the deep downturn while being ready to adjust policy strategy as the pandemic and its impact on activity evolve. Where fiscal rules may constrain action, their temporary suspension would be warranted, combined with a commitment to a gradual consolidation path after the crisis abates to restore compliance with the rules over the medium term. Room for immediate spending needs could be created by prioritizing crisis countermeasures and reducing wasteful and poorly targeted subsidies.
Extending maturities on public debt and locking in low interest rates to the extent possible would help reduce debt service and free up resources to be redirected toward crisis mitigation efforts. Although adoptingnew revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. Countries should also cooperate on the design of international corporate taxation to respond to the challenges of the digital economy.
With the pandemic continuing to spread, allcountries—including those where infections appear to have peaked—need to ensure that their health care systems can cope with elevated demand. This means securing adequate resources and prioritising health care spending as needed, including on testing; contact tracing;personal protective equipment; life-saving and fiscal responses—where fiscal space exists—can help prevent deeper and longer-lasting downturns, even if their ability to stimulate spending is initially hampered by mobility restrictions.
As countries reopen, policies must support the recovery by gradually removing targeted support, facilitating the reallocation of workers and resources to sectors less affected by social distancing, and providing stimulus where needed to the extent possible. Some fiscal resources freed from targeted support should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint.
Moreover, as lifelines are unwound, social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage as needed. Where inflation expectations are anchored, accommodative monetary policy can help during the transition by containing borrowing costs.
Beyond the pandemic, multilateral cooperation is needed to defuse trade and technology tensions between countries and address gaps—for instance in services trade—in the rules-based multilateral trading system. Countries must also act collectively to implement their climate change mitigation commitments. As discussed in Chapter 3, joint action—particularly by the largest emitters— that combines steadily rising carbon prices with a green investment push is needed to reduce emissions consistent with limiting increases in global temperature to the targets of the 2015 Paris Agreement. A broadly adopted, growth-friendly mitigation package could raise global activity through investment in green infrastructure over the near term, with modest output costs over themedium term as economies transition away from fossilfuels toward cleaner technologies.
Relative to unchanged policies, such a package would significantly boost incomes in the second half of the century by avoiding damages and catastrophic risks from climate change.
Moreover, health outcomes would begin to improve immediately in many countries thanks to reduced local air pollution. The global community should also take urgent steps to strengthen its defenses against calamitous health crises, for example by augmenting stockpiles of protective equipment and essential medical supplies, financing research, and ensuring adequate ongoing assistance to countries with limited health care capacity, including through support of international organisations. equipment, such as ventilators; and facilities, such as emergency rooms, intensive care units, and isolation wards.
Countries where infections continue to rise need to contain the pandemic with mitigation measures that slow transmission. As Chapter 2 shows, lockdowns are effective in bringing down infections. Mitigation measures—a much-needed investment in public health—set the stage for an eventual economic recovery from the downturn brought on by mobility constraints. Economic policy in such cases should limit the damage by cushioning income losses for affected people and firms while also supporting resource reallocation away from contact-intensive sectors that are likely to be constrained for an extended period of time.
Retraining and reskilling should be pursued to the extent feasible so that workers can look for jobs in other sectors. Because the transition may take a while, displaced workers will need extended income support as they retrain and search for jobs. Complementing such measures, broad-based accommodative monetary and fiscal responses—where fiscal space exists—can help prevent deeper and longer-lasting downturns, even if their ability to stimulate spending is initially hampered by mobility restrictions.
As countries reopen, policies must support the recovery by gradually removing targeted support, facilitating the reallocation of workers and resources to sectors less affected by social distancing, and providing stimulus where needed to the extent possible. Some fiscal resources freed from targeted support should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. Moreover, as lifelines are unwound, social spending should be expanded to protect the most vulnerable where gaps exist in the safety net.
In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage as needed. Where inflation expectations are anchored, accommodative monetary policy can help during the transition by containing borrowing costs.
Beyond the pandemic, multilateral cooperation is needed to defuse trade and technology tensions between countries and address gaps—for instance in services trade—in the rules-based multilateral trading system. Countries must also act collectively to implement their climate change mitigation commitments. As discussed in Chapter 3, joint action—particularly by the largest emitters— that combines steadily rising carbon prices with a green investment push is needed to reduce emissions consistent with limiting increases in global temperature to the targets of the 2015 Paris Agreement. A broadly adopted, growth-friendly mitigation package could raise global activity through investment in green infrastructure over the near term, with modest output costs over the medium term as economies transition away from fossil fuels toward cleaner technologies.
Relative to unchanged policies, such a package would significantly boost incomes in the second half of the century by avoiding damages and catastrophic risks from climate change. Moreover, health outcomes would begin to improve immediately in many countries thanks to reduced local air pollution. The global community should also take urgent steps to strengthen its defenses against calamitoushealth crises, for example by augmenting stockpiles of protective equipment and essential medical supplies,financing research, and ensuring adequate ongoing assistance to countries with limited health care capacity, including through support of international organisations.
Here starts the second feature:
Reimagining consumer-goods innovation for the next normal
By guests authors Stacey Haas, Jon McClain, Paul McInerney, and Björn Timelin from McKinsey.
Stacey Haas is a partner in McKinsey’s Detroit office; Jon McClain is an associate partner in the Washington, DC, office; Paul McInerney is a senior partner in the Tokyo office; and Björn Timelin is a senior partner in the London office.
The authors wish to thank Jordan Bar Am, Felicitas Jorge, Zachary Kubetz, and Erik Roth for their contributions to this article.
As the COVID-19 pandemic continues and new consumer behaviors play out, it’s time for manufacturers to reimagine their innovation portfolios to lead usiness leaders and consumers have adapted after the initial shock of the widespread lockdown that followed the outbreak of the COVID-19 pandemic. Demand patterns have started to normalize, supply chains are largely stable, and shelter-in-place orders are being lifted and replaced by physical distancing across the United States.
Although many consumer-packaged-goods (CPG) leaders have come to terms with the crisis, they are still challenged to know what comes next. Seventy-nine % of the executives responding to a survey believed that the COVID-19 crisis would have a lasting impact on their customers’ needs in the next five years. But fewer than 30 % of all executives felt that their companies were well equipped to address such changes. Even fewer—only 10 % of all executives—believed that they were well equipped to pursue net new growth 1 and M&A.in the next normal.
The foundation for profitable growth
We see a three-step predictive growth process as the foundation for profitable growth: first, predicting levels and areas of growth in consumer consumption and spending; then, transforming growth levers in response; and, finally, sustaining growth with operating-model changes. Consumer behavior and engagement with products, brands, and channels have changed so much that innovation must now be top of mind for CPG leaders.
A midcrisis answer to what’s next on the innovation agenda is crucial for delivering outsized performance. During the first five years after the Great Recession of 2008, CPG leaders that could answer this question outperformed the market by an average of 20 % (Exhibit 1).
Most CPG companies reduced the pace of innovation back then; in fact, 2008 was the only year in the past 15 when innovation activity declined (Exhibit 2). Yet small brands and other innovators continued to develop disruptive offerings: new products, services, and business models paved the way for the gig-economy giants, direct-to-consumer (DTC) start-ups from eyewear to pet food, and other innovations across the consumer landscape. These innovators looked beyond the immediate challenges and into the next normal, and manufacturers hoping to emerge stronger from the pandemic must do the same. What does the future hold in store this time around?
In an April 2020 article, we identified six key consumer behaviors, ranging from price sensitivity to unprecedented channel shifting, during the first wave of COVID-19. In several ways, consumer behavior jumped forward by years in a few weeks. As the pandemic has unfolded, we’ve seen the texture of these consumer trends evolve even further. CPG companies and retailers that accommodate these changing behaviors will probably emerge from the crisis stronger, putting pressure on competitors to keep pace. Three behaviors are particularly germane to the innovation agenda:
- Trying new products. In most categories, significant shares of consumers are trying new products (Exhibit 3). In some categories, almost half of all product purchases are new trials. On search engines, for instance, interest in previously away-from-home activities has exploded: to give one example, the use of the search term “at home workouts” has increased by 50 % year over year globally as consumers rushed to try premium subscriptions. Apparel manufacturers, premium gym operators, and fitness-equipment manufacturers, among others, have all offered such subscriptions free of charge. 2 As categories experiencing tailwinds continue to grow exponentially, how will incumbents use trials to maintain their market share?
- The resurgence of large brands. Availability and trust have enabled large CPG companies to come back. Globally, consumers are opting for “brands they can absolutely trust”—from the United States (55 % of consumers) to Europe (48 % in Germany and 52 % in the United Kingdom) and, in particular, Asia (89 % in China and 77 % in India). 3 Indeed, large brands have been the beneficiaries of about 30 % of consumer-switching choices during the pandemic. Although consumer trials of new products increased, satisfaction rates for new products range only from 20 to 60 % across categories, so redesigned branded products could have an opportunity to deliver more value. With consumers remaining somewhat unsatisfied, store brands did relatively well: 60 % of consumers reported that the store brands they bought during the COVID-19 crisis represented good value for money. 4 In a recent survey, 90 % of retailers said that they planned to increase shelf-space allocations for private labels. 5 Going forward, as the consumers’ price–value relationship evolves, large brands versus store brands will be an emerging battlefield, just as it was during the Great Recession.
- Nesting at home. Protracted physical distancing has encouraged mobile-first consumer mindsets, which are likely to persist. Digital engagement has continued to remain high: 80 % of consumers report safe, easy, and convenient experiences in DTC channels. However, specific consumer-buying factors remain largely unaddressed: for instance, more than 60 % of consumers identify expense and an inability to choose products as disadvantages of DTC channels. 6 Brands must continue to use personalization, the right social-media and mobile presence, and the right marketing message to capture their share of growth.
As communities continue to reopen, economic and public-health realities will inform consumer behavior in the next normal. But it will also be shaped by the response of manufacturers that seize the opportunity by offering breakthrough products and using innovative business models.
How should CPG companies reimagine innovation for the next normal?
In this context, we see four imperatives for CPG companies as they anticipate the next normal: renovate the core using recent trials as a springboard, reset the innovation pipeline to help consumers thrive in their new reality, accelerate DTC evaluation and testing, and harness new ways of working—including digital—to accelerate the development process.
1. Renovate the core using recent trials as a springboard
With consumers slowly returning to public spaces, how can major brands continue to deliver new, powerful experiences that build upon trials of new products seen thus far in 2020?
With a period of economic uncertainty ahead, store brands are poised to take share. During the Great Recession and the time that followed it, private-label sales rose by 10 %, versus only 2 % for branded products. 7 In the United States, private-label penetration now stands at only 18 % across grocery categories. A look at Europe, where penetration stands at 32 %, provides a view of the possibilities. In fact, 78 % of retail buyers say they expect private-label growth to come at the expense of national and challenger brands. 8 The next normal’s curve for private labels could very well be on the horizon.
This possibility means that branded manufacturers have a critical need to focus on their core brands and to simplify their efforts across the portfolio more broadly. The good news for large manufacturers is that the COVID-19 crisis has reestablished their market-leading position in many categories. In the 23 weeks ending August 8, 2020, such companies enjoyed 47 % of all growth in the market, versus only 16 % from 2015 to 2018. 9
Although that represents a near-return to “fair share” for private-label brands, which had been growing in recent years, large brands should aim higher: they can build upon this momentum by redesigning their products to maximize things consumers value and to minimize costs for less relevant buying factors. To stave off the private-label threat, large manufacturers must amp up their renovation agendas for their core brands and rethink the approximately 75 % of new-product development they now focus on line extensions. 10
2. Reset the innovation pipeline to help consumers thrive in their new reality
A brand marketer speaks her mind
Jessica Spaulding is now head of Cheetos marketing at Frito-Lay. In nearly 12 years of marketing at PepsiCo, she has seen consumer behavior change—but not as profoundly as it has during the COVID-19 pandemic. The disruption has created opportunities, particularly for market leaders, with “strong companies only getting stronger,” she says. But those opportunities do not come without challenges and big strategic questions.
New trials or reengagements have spanned categories. In food, this has meant that “consumers were definitely looking for comfort brands that are familiar to them,” at least initially, she says. But “health and wellness brands, now, have dramatically ticked up.” Where the dust will settle remains an open question, but marketers in every category are rapidly thinking through how to ride the tailwinds of new consumer engagement or, in some cases, to correct course.
The evolving channel landscape is also shaping how manufacturers think about innovation. E-commerce was once a “nice to have.” Now, in Spaulding’s mind, it is a “must-win battle” for all consumer-goods companies. Retailers and manufacturers alike are evolving to reflect that imperative. “It completely changes how you think about innovation, about investment, about your relationships.”
Manufacturers are left with open questions, says Spaulding. “How do you simplify the experience? How do you offer value to consumers? How do you evolve your products to address new occasions? COVID-19 has completely changed how you have to think about each of those. Where do you place your big bets?”
Healthy innovation pipelines are developed with a multiyear view in mind. Of course, many projects currently being contemplated—or even developed—started before the COVID-19 crisis and therefore take no account of it or of the next normal to follow. Certainly, the heightened brand opportunity wasn’t fully reflected in pre-COVID times (see sidebar, “A brand marketer speaks her mind”). With the new context in mind, consumer-goods manufacturers should review their project portfolios with an eye to the following (Exhibit 4):
- Projects to accelerate or launch. The current pipeline may not address some of the most attractive opportunities. Single-serve needs, at-home consumption, evolved shopping missions, and growing private-label competition will all dictate the new pipeline priorities. Understand which consumers you must target for repeat and loyal purchases, and diagnose how your pipeline trial rates, satisfaction rates, and price/value considerations will drive the overall net present value of your projects.
- Projects to pause. In other cases, the realities of the next normal may dictate a pause. Retailers have streamlined their assortments during the crisis, and the standard annual shelf reset is no longer a foregone conclusion. Line extensions, which represented 33 % of all global product launches last year, 11 are the most likely candidates to reconsider. As we wrote in our recent article on measuring innovation incrementality, corporate mindsets must shift: instead of defining line extensions first and using the remaining resources for breakthrough innovation, companies should devote resources to line extensions only when necessary and only with clear, measurable goals.
Where might the opportunity spaces be most pronounced? The nesting behavior that the COVID-19 pandemic has prompted will create a new array of possibilities and challenges, especially in foodservice. According to Slackline, Amazon has grown its grocery business by 45 % in the United States and by 80 % in the United Kingdom. With this growth only set to accelerate as Amazon moves into brick-and-mortar stores, consumer-goods manufacturers should take a hard look at brands and packs that are most likely to succeed online and reevaluate the role that e-commerce can play in new product launches.
Foodservice also presents challenges for consumer-goods manufacturers. For restaurants, this has meant evolving from the traditional foodservice focus to everything from groceries to destination shopping. Consumers, for their part, have been surprised to see local restaurants offering grocery boxes containing everything from personal-care products to artisanal home goods. They seem primed to continue seeking out this new form of distribution. Looking to fill the void created by the closing of so many restaurants, consumers have also purchased meals through grocery retailers.
Manufacturers must consider the role they can play in supporting this evolution of consumer needs. Cash-constrained operators looking to reduce waste and inventory will want their suppliers to provide more “bespoke” packages of raw ingredients that help manage cash flows. Restaurants optimizing their delivery services will look for ways to enhance the customer experience with new product formats of packaged accompaniments, such as single-use condiments. Others, particularly scale operators, may look to CPG companies for thought partnerships to raise sales of high-margin add-ons, particularly beverages. CPG companies have an opportunity to help consumers find what they need for today’s reality.
3. Accelerate DTC evaluation and testing
In the face of the Great Recession, entrepreneurs successfully pivoted to generation-altering innovations—ideas ranging from online pure plays to the sharing economy. How will the collision of consumer behavior and technology during the COVID-19 pandemic set the stage for the next disruptors?
The innovations have already started. Although 60 % of CPG executives do not feel prepared to pursue DTC opportunities, 12 signs are emerging that many are taking bold steps—for instance, launching new DTC sites focusing on snacks, pantry items, condiments, and alternative meats, among other things. For some companies, particularly those in high-engagement categories with differentiated products, these offerings may very well stick in a commercially viable way. Certainly, that’s what the companies launching them hope. For others, DTC forays will provide valuable direct connections to consumers, rich data, and opportunities to test and learn quickly.
The challenging economics of DTC persist, so while it should be on the agenda of every CPG leader, it requires a hard look. Customer-acquisition costs spiked before and during the pandemic and that is likely to persist. Given the high churn rates associated with the channel, its customer lifetime value—at gross margin—must cover that acquisition cost just to break even and must then reach approximately five times the acquisition cost for a DTC venture to scale up successfully.
To achieve this goal, CPG companies must consider DTC’s full omnichannel value (sales, insights, testing); embrace a distinctive value proposition; focus deeply, from day one, on unit economics; and get ahead of the operating model and tech stack early to support scale if it can be reached. Given the many pieces that must fall into place, the right starting point will probably be an iterative venture capital–like model to surface insights rapidly, develop concepts, and build business cases. Further investment should follow only if the initial sprint yields promising results.
4. Harness new ways of working, including digital, to accelerate the development process
To weather the COVID-19 pandemic, many CPG companies stood up new ways of working in weeks—things that would normally have taken years. From restructuring teams to put them outside old reporting lines to implementing scenario-tested response plans, many CPG companies now have new proof points for how to operate an agile organization. These can now be leveraged to improve product development. The nerve centers that have buoyed operations during the pandemic can be carefully redeployed in the form of sprint teams focused on integrating consumer, competitive (including private-label), technological, and supply-chain insights. These teams can rapidly collide them to identify specific brand and product changes that meet consumer needs and preferences.
The evolving landscape also gives companies new opportunities to digitize their development process. Use cases for digital can address the needs of employees and consumers alike. For R&D teams, digital tools can help track project portfolios and the critical drivers of business cases. This approach, which we call “assumption-based development,” dramatically improves a CPG company’s innovation performance. As projects progress toward commercialization, the rising prominence of e-commerce and, for some CPG companies, of their own DTC sites can enable and accelerate the test-and-learn process, to improve both speed to market and innovation outcomes.
Many CPG companies have already started to act. Some manufacturers have announced that they will trim their innovation pipelines by 50 % or more to focus on the most promising projects. Others have rapidly launched DTC websites. Large brands are celebrating falling times to market—to just eight weeks, from a year. Yet many more companies are still flat-footed, wondering what to do. The race has already begun, and in the next normal, as in the Great Recession, companies that fail to innovate will probably be left behind.
The Newsletter of last Week
Designing Resilience into Global Supply Chains, and IMF: The great Lockdown – Dissecting the Economic Effects https://textile-future.com/archives/59246
The highlights of TextileFuture’s News of last week. For your convenience just click on the feature.
Europe can Impose Tariffs on U.S. in Long-Running Aircraft Battle https://textile-future.com/archives/59390
Italian Textile Machinery – ACIMIT Conference confirms industry downturn https://textile-future.com/archives/59445
EU Sectors affected by Transatlantic Aircraft Trade Disputes Call for Urgent De-escalation https://textile-future.com/archives/59496
THE START-UPS WHATROCKS, REFORESTUM AND DEPOLY, WINNERS oF THE “BEAUTY TECH FOR GOOD CHALLENGE” by l’Oréal https://textile-future.com/archives/59430
What are retailers doing for Black History Month 2020? https://textile-future.com/archives/59380
Nestlé joins US dairy to reach net zero carbon emissions by 2050 https://textile-future.com/archives/59288
Boohoo & Select linked to “extraordinary” money laundering garment network https://textile-future.com/archives/59347
Swiss Bossard Group – Third quarter shows considerable improvement network https://textile-future.com/archives/59397
Lonza: Investor Update Details Business Structure, Divisional Dynamics, New External Reporting and Guidance https://textile-future.com/archives/59450
ISKO Vital™+ Premium face covers are now sold through 1400 stores in the VARNER fashion brand portfolio https://textile-future.com/archives/59480
India to produce 360 lakh bales of cotton in FY 2020-21 https://textile-future.com/archives/59333
Bangladesh raw cotton production to 2 million bales by 2041 https://textile-future.com/archives/59343
OECD area employment rate falls by 4.0 percentage points, to 64.6 % in second quarter of 2020 https://textile-future.com/archives/59402
McKinsey’s week in Charts https://textile-future.com/archives/59521
September 2020 Annual inflation down to -0.3 % in the Euro Area, down to 0.3 % in the EU https://textile-future.com/archives/59532
August 2020 Euro Area international trade in goods surplus EUR 14.7 billion, EUR 11.3 billion surplus for EU https://textile-future.com/archives/59544
China Economy grows 4.9 %, as Rest of World struggles with Coronavirus https://textile-future.com/archives/59564
Engineers from Africa for Africa https://textile-future.com/archives/59375
ITAVTS: FPM to showcase comfortemp® thermal insulation on virtual exhibition booth https://textile-future.com/archives/59295
ITA will be present with at Innovative Textile & Apparel Virtual Trade Show https://textile-future.com/archives/59331
Kornit Digital Joins the 2020 Innovate Textile & Apparel Virtual Trade Show https://textile-future.com/archives/59360
Textile Technology Leaders Heading for New Markets for Their Investments Await ITM 2021 https://textile-future.com/archives/59420
SERI swissnex Network: two decades of serving Swiss education, research and innovation https://textile-future.com/archives/59441
128. Canton Fair showes innovtions to enhance the future change of life style https://textile-future.com/archives/59515
First edition of Nonwovens Circular Forum closes to great aclaim https://textile-future.com/archives/59528
How Matthew M. Williams Is Refreshing Givenchy: Behind-the-Scenes of His First Collection https://textile-future.com/archives/59274
Switzerland at virtual IMF and World Bank 2020 Annual Meetings and G20 Finance Ministers Meeting https://textile-future.com/archives/59469
Time to move: EU-OSHA launches campaign to address Europe’s most common work-related health problem https://textile-future.com/archives/59299
Principality of Andorra becomes IMF’s 190th Member https://textile-future.com/archives/59569
UNIQLO launched AIRism Mask in India on October 12, 2020 https://textile-future.com/archives/59353
WIPO -Holy Smokes, Batman: Caped Crusader is the Go-To Franchise Character for Movies and Gaming over the Decades https://textile-future.com/archives/59471
Technology, creativity and sustainability – Meet the new FW 21-22 Riri Group collection https://textile-future.com/archives/59311
Covid second wave: The knock-on impact of Europe’s lockdown https://textile-future.com/archives/59491
DyStar Launches Cadira® Polyamide and Cadira Polyester/Cellulosic Exhaust https://textile-future.com/archives/59317
Anker, Devan & Shark Solutions develop world’s first flame retardant aviation carpet with recycled PVB based binder New, High-volume EFI POWER and COLORS Printers Create Profit Opportunities in Soft Signage https://textile-future.com/archives/59321
SABIC and Fibertex Personal Care to bring world’s first nonwoven made with certified circular polypropylene https://textile-future.com/archives/59336
New, High-volume EFI POWER and COLORS Printers Create Profit Opportunities in Soft https://textile-future.com/archives/59371
Control costs today, ready for future profits…USTER’s newest launch allows spinners to react flexibly to shifting business conditions https://textile-future.com/archives/59417
Trade has a role to play in making the COVID-19 response more effective, says WTO DDG Agah https://textile-future.com/archives/59304
New WTO report looks at the global intellectual property system and COVID-19 https://textile-future.com/archives/59486
UK: spending to address COVID-19 and Brexit should fit with productivity, social and environmental goals, says OECD https://textile-future.com/archives/59413
Vietnam emerges a global hub for face masks and PPE equipment https://textile-future.com/archives/59326
Webinar: WIPO Mediation and Arbitration Workshop (Nov. 16 – 18, 2020) https://textile-future.com/archives/59488
Remarks by World Bank Group President David Malpass at the G20 Finance Ministers and Central Bank Governors Meeting https://textile-future.com/archives/59437
New WTO publication addresses common questions about trade and the environment https://textile-future.com/archives/59518