The next normal arrives: Trends that will define 2021—and beyond

Courtesy of McKinsey & Company

By Kevin Sneader and Shubham Singhal

Businesses have spent much of the past nine months scrambling to adapt to extraordinary circumstances. While the fight against the COVID-19 pandemic is not yet won, with a vaccine in sight, there is at least a faint light at the end of the tunnel—along with the hope that another train isn’t heading our way.

2021 will be the year of transition. Barring any unexpected catastrophes, individuals, businesses, and society can start to look forward to shaping their futures rather than just grinding through the present. The next normal is going to be different. It will not mean going back to the conditions that prevailed in 2019. Indeed, just as the terms “prewar” and “postwar” are commonly used to describe the 20th century, generations to come will likely discuss the pre-COVID-19 and post-COVID-19 eras.

In this article, we identify some of the trends that will shape the next normal. Then we discuss how they will affect the direction of the global economy, how business will adjust, and how society could be changed forever as a result of the COVID-19 crisis.

The return of confidence unleashes a consumer rebound

There are lines outside stores, but they are often due to physical-distancing requirements. Theaters are dark. Fashions are in closets rather than on display. If the Musée du Louvre were open, the lack of tourists might even create the opportunity for an unobstructed view of the Mona Lisa. In these and other ways, consumers have pulled back.

As consumer confidence returns, so will spending, with “revenge shopping” sweeping through sectors as pent-up demand is unleashed. That has been the experience of all previous economic downturns. One difference, however, is that services have been particularly hard hit this time. The bounce back will therefore likely emphasize those businesses, particularly the ones that have a communal element, such as restaurants and entertainment venues.

The return of confidence unleashes a consumer rebound There are lines outside storesThat isn’t to say that consumers will act uniformly. McKinsey’s most recent consumer survey, published in late October, found that countries with older demographics, such as France, Italy, and Japan, are less optimistic than are those with younger populations, such as India and Indonesia. China was an exception—it has an older population but is conspicuously optimistic.

But China’s profile proves a larger point. The first country to be hit by the COVID-19 pandemic, it was also the first to emerge from it. China’s consumers are relieved—and spending accordingly. On Singles Day, November 11, the country’s two largest online retailers racked up record sales. That wasn’t just a holiday phenomenon. While manufacturing in China came back first, by September, so had consumer spending. Except for international air travel, Chinese consumers have begun to act and spend largely as they did in precrisis times. Australia also offers hope. With the pandemic largely contained in that country, household spending fueled a faster-than-expected 3.3 percent growth rate in the third quarter of 2020, and spending on goods and services rose 7.9 percent.

How fast and deep confidence will recover is an open question. In late September, for example, the US consumers surveyed were more optimistic than before but still cautious, reporting that they planned to buy holiday gifts for fewer people and keep an eye on discretionary spending. Only around a third had resumed out-of-home activities, compared with 81 percent of consumers in China, 49 percent in France—and just 18 percent in Mexico. New lockdowns and, critically, the rollout of COVID-19 vaccines have and will affect those numbers. The point is that spending will only recover as fast as the rate at which people feel confident about becoming mobile again—and those attitudes differ markedly by country.

Leisure travel bounces back but business travel lags

People who travel for pleasure will want to get back to doing so. That has been the pattern in China. The CEO of one major travel company told us that, beginning in the third quarter of 2020, business was “pretty much back to normal” when referring to growth. But it was a different normal: domestic travel was surging, but international travel was still depressed given pandemic-related border restrictions and concerns about health and safety. In China as a whole, hotel occupancy and the number of travelers on domestic flights were more than 90 percent of their 2019 levels at the end of August, and over the October Golden Week holiday, more than 600 million Chinese hit the road, around 80 percent of last year’s figure. Because of confidence in the country’s health and safety measures, domestic travel is almost back to the level seen prior to the pandemic, and high-end domestic travel is actually ahead of it.

By definition, leisure travel is discretionary. Business travel is less so. In 2018, business-travel spending reached $1.4 trillion, which was more than 20 percent of the total spending in the hospitality and travel sector. It also brings in a disproportionate share of profits—70 percent of revenues globally for high-end hotels, for example. During and after the pandemic, though, there is a question about business travel: Exactly when is it necessary? The answer is almost certain to be not as much as before. Video calls and collaboration tools that enable remote working, for example, could replace some onsite meetings and conferences.

The larger context is also informative. History shows that, after a recession, business travel takes longer than leisure travel to bounce back. After the 2008–09 financial crisis, for example, international business travel took five years to recover, compared with two years for international leisure travel.

Regional and domestic business travel will likely rebound first; some companies and sectors will want to resume in-person sales and customer meetings as soon as they safely can. Peer pressure may also play a part: once one company gets back to face-to-face meetings, their competitors may not want to hold back. All told, however, a survey of business-travel managers found that they expect business-travel spending in 2021 will only be half that of 2019. While business travel will return at scale, and global economic growth will generate new demand, executives in the field think that it may never recover to the 2019 level.

In short, leisure travel is driven by the very human desire to explore and to enjoy, and that has not changed. Indeed, one of the first things people do as they grow more prosperous is to travel—first close to home and then further afield. There is no reason to believe that the rise in global prosperity will reverse itself or that human curiosity will diminish. But the effective use of technology during the pandemic—and the economic constraints that many companies will face for years after it—could augur the beginning of a long-term structural change in business travel.

The crisis sparks a wave of innovation and launches a generation of entrepreneurs

Plato was right: necessity is indeed the mother of invention. During the COVID-19 crisis, one area that has seen tremendous growth is digitization, meaning everything from online customer service to remote working to supply-chain reinvention to the use of artificial intelligence (AI) and machine learning to improve operations. Healthcare, too, has changed substantially, with telehealth and biopharma coming into their own.

Disruption creates space for entrepreneurs—and that’s what is happening in the United States, in particular, but also in other major economies. We admit that we didn’t see this coming. After all, during the 2008–09 financial crisis, small-business formation declined, and it rose only slightly during the recessions of 2001 and 1990–91. This time, though, there is a veritable flood of new small businesses. In the third quarter of 2020 alone, there were more than 1.5 million new-business applications in the United States—almost double the figure for the same period in 2019.

Yes, many of those businesses are single-person establishments that could well stay that way—think of the restaurant chef turned caterer or the recent college graduate with a cool new app. So it’s intriguing that the volume of “high-propensity-business applications” (those that are likeliest to turn into businesses with payrolls) has also risen strongly—more than 50 percent compared with 2019. Venture-capital activity dipped only slightly in the first half of 2020.

The European Union has not seen anything like this response, perhaps because its recovery strategy tended to emphasize protecting jobs (not income, as in the United States). That said, France saw 84,000 new business formations in October, the highest ever recorded, and 20 percent more than in the same month in 2019. Germany has also seen an increase in new businesses compared with 2019; ditto for Japan. Britain is somewhere in between. A survey published in November 2020 of 1,500 self-employed people found that 20 percent say they are likely to leave self-employment when they can. At the same time, however, the number of new businesses registered in the United Kingdom in the third quarter of 2020 rose 30 percent compared with 2019, showing the largest increase seen since 2012.

On the whole, the COVID-19 crisis has been devastating small business. In the United States, for example, there were 25.3 percent fewer of them open in December 2020 than at the beginning of the year (the bottom was in mid-April, when the figure was almost half). US small-business revenue fell more than 30 percent between January and December 2020. But we’ll take good news where we can get it, and the positive trend in entrepreneurship could bode well for job growth and economic activity once recovery takes hold.

Digitally enabled productivity gains accelerate the Fourth Industrial Revolution

There’s no going back. The great acceleration in the use of technology, digitization, and new forms of working is going to be sustained. Many executives reported that they moved 20 to 25 times faster than they thought possible on things like building supply-chain redundancies, improving data security, and increasing the use of advanced technologies in operations.

How all that feeds into long-term productivity will not be known until the data for several more quarters are evaluated. But it’s worth noting that US productivity in the third quarter of 2020 rose 4.6 percent, following a 10.6 percent increase in the second quarter, which is the largest six-month improvement since 1965. Productivity is only one number, albeit an important one; the startling figure for the United States in the second quarter was based in large part on the biggest declines in output and hours seen since 1947. That isn’t an enviable precedent.

More positively, in the past, it has taken a decade or longer for game-changing technologies to evolve from cool new things to productivity drivers. The COVID-19 crisis has sped up that transition in areas such as AI and digitization by several years, and even faster in Asia. A McKinsey survey published in October 2020 found that companies are three times likelier than they were before the crisis to conduct at least 80 percent of their customer interactions digitally.

That evolution has not always been a seamless or elegant process: businesses had to scramble to install or adapt new technologies under intense pressure. The result has been that some systems are clunky. The near-term challenge, then, is to move from reacting to the crisis to building and institutionalizing what has been done well so far. For consumer industries, and particularly for retail, that could mean improving digital and omnichannel business models. For healthcare, it’s about establishing virtual options as a norm. For insurance, it’s about personalizing the customer experience. And for semiconductors, it’s about identifying and investing in next-generation products. For everyone, there will be new opportunities in M&A and an urgent need to invest in capability building.

The COVID-19 crisis has created an imperative for companies to reconfigure their operations—and an opportunity to transform them. To the extent that they do so, greater productivity will follow.

To read the full article, please visit https://www.mckinsey.com/featured-insights/leadership/the-next-normal-arrives-trends-that-will-define-2021-and-beyond

About the author(s)

Kevin Sneader, the global managing partner of McKinsey, is based in McKinsey’s New York office; Shubham Singhal, the global leader of the Healthcare Systems & Services Practice, is a senior partner in the Detroit office.

This article was edited by Cait Murphy, a senior editor in the New York office.