Will economic recovery continue or will there be a second dip?

All kinds of questions. Are we getting/keeping the coronavirus under control? Will the economic recovery continue or will there be a second dip? Will there be a Brexit deal or will the UK 'crash' out of the EU? Will the US Elections Bring New Uncertainty? The moment of truth is approaching in several areas.

There are currently more registered corona infections in our country than in March/April. This is certainly partly due to more testing being done. The figures on the infections can therefore lead to too negative a conclusion.

Number of positively tested people per 100.000 inhabitants

_{Source: Corona dashboard}

On the other hand, the number of hospital admissions and ICU admissions remains very low. But that is partly because the age profile of the infections has changed. Currently, 55% of those who test positive are under the age of 40 and only 15% are 60 or older. Because young people suffer less from the virus and perhaps because treatment has been improved at an early stage, relatively and absolutely fewer people end up in hospital.

The picture below may lead to an underestimation of the dangers.

Progression of hospital admissions

_{Source: Corona dashboard}

The RIVM corona dashboard also contains the following two variables: estimated number of contagious persons and the results of sewage measurements. Both have shown an increase in recent weeks. This increase does not seem alarming to me.

However, it has been said that the virus can really kick in in the autumn, when it gets colder and wetter and more people are inside. The nice weather of the last two weeks should have pushed the virus back a bit. Apparently that didn't happen. We must therefore remain vigilant. The situation still implies uncertainty for the economic outlook.

Will the economic recovery continue?
Unemployment in our country rose to 4,6% in August, slightly better than expected. In the 3 months to August, the number of registered unemployed increased by nearly 100.000. That's a hefty number. Nevertheless, some positive trends can be discerned in the figures. The vast majority of the increase was caused by more people looking for a job.

Only a small proportion, approximately 7.000 people, was caused by more people losing their jobs than there were unemployed people who found a job. Over the period March-June, the rise in unemployment was due to the fact that many people lost their jobs. In the period May to August, the total number of jobs increased by 53.000. According to the UWV, the number of new unemployment benefits in August was approximately 7.100, lower than the 8.700 in July and only fractionally higher than a year ago.

Explosion to the unemployed?
The following chart shows how the development of unemployment in our country differs from the development in the US.

^{Source: Refinitiv Datastream}

The much more favorable course with us is of course due to the completely different approach to the crisis. In the Netherlands, companies have been supported to keep people employed. In the US it is precisely the unemployed who have been supported with extended benefits. What is completely uncertain in our country is whether there will be an explosion in the number of unemployed if the support measures decrease or expire. In the MEV presented at Budget Day, the CPB assumes that unemployment will continue to rise, but it is by no means an explosion. According to the CPB, unemployment will rise to almost 6% until the end of next year.

According to the CPB, unemployment rises to almost 10% in a so-called 'second wave scenario'. The new estimates are, however, an improvement on previous estimates. The labor market is therefore likely to deteriorate further, but less than previously forecast. So much has already been said and written about the Budget Memorandum, the MEV and the General Views that I have nothing to add to it. Sorry.

Impressive recovery in China
Since restrictions on public life have been eased, the economy has been recovering all over the world, even in countries where the virus has not yet been curbed. As I have said before, the recovery in China is remarkably strong. Industrial production growth accelerated from 4,8% yoy in July to 5,6% in August.

As a result, year-on-year growth has quickly recovered to close to the pre-crisis growth rate. That's impressive, because the numbers imply that the increase in production in August was a lot higher than in August 2019. Is this just a case of catching up or is something else going on? I don't know, but we'll see from the numbers in the coming months.

Hausse of industrial robots
In any case, I say that upside risks dominate for the global economy here. An interesting detail in the Chinese figures may be that the production of industrial robots grew by 32,5% in August compared to a year earlier. Unfortunately, I can't properly interpret this figure, because I don't have a historical series of figures, but it seems that 'someone is investing in expanding production capacity'.

Private consumption in China is clearly recovering more slowly than industrial production. Nevertheless, steps are being taken here as well. Retail sales in August were 0,5% higher than a year earlier, the first plus in months. In July the figure was still -1,1%. That's quite a jump and implies that the month-on-month increase was 1,6% higher than in August last year.

ZEW index for Germany at record level
The ZEW surveys several hundred analysts every month about the state of affairs and the prospects for various economies. But the most important indicator to draw from the resulting numbers is the 'expectations component' for the German economy.

The ZEW expects that index to rise in September to its highest level since 2004 (my data provider doesn't provide any further backing, though I'm sure this range goes back further). It is of course logical that expectations about economic recovery are high after the deepest recession ever, but it is nice that this is confirmed in these types of indices.
_{Source: Refinitiv Datastream}

Incidentally, it is not that difficult to find sectors where the recovery still has a very long way to go. Aviation, in particular, still records deep red figures. Soon after the lockdowns started and the number of flight movements collapsed, airlines already came up with adjusted estimates for their turnover this year. I think they assumed the recovery would be faster and more powerful than it turns out.

The number of flights to and from Schiphol was still almost 50% lower in August than a year earlier. That is of course better than the -89,9% of April, but it remains a solid minus. The number of passengers passing through Schiphol in August was still 72,8% lower than in August 2019.

_{Source: Refinitiv Datastream}

The recovery in the US is also continuing, but - as expected - it is losing momentum. Take manufacturing in the manufacturing industry. It increased by 1,0% in August compared to July. That was nice, but in the previous 2 months, increases of 4,0% and 7,6% were recorded, respectively. The production level was still 6,6% lower than in August 2019. But slightly better than the -6,9% in July and much better than the -19,7% in April. Between now and the end of the year, the year-on-year figure is likely to improve substantially, as production did not grow on balance in the last 4 months of the previous year.

US retail sales increased 0,6% in August compared to July. Here, too, the rate of growth has slowed considerably in the first recovery. Meanwhile, the temporary rise in the level of unemployment benefits has been reversed and political parties are at odds over new support measures. This makes the financial situation uncertain for many people and that probably leads to reticence. In the absence of new support measures, the recovery will lose further momentum.

controversial Brexit
The time is approaching when the transition period of Britain's exit from the EU will come to an end. Recent disagreements over controversial new UK legislation raise the risk of a no-deal Brexit. There is no way I can tell whether this is a cutting edge negotiating tactic or whether the British are really prepared to 'crash' out of the EU. This applies to the Netherlands: hope for the best, prepare for the worst.

Trump vs Biden
The US elections are approaching. Joe Biden is winning in most polls. But so was Hillary Clinton 4 years ago. And in the few states that will make the difference, Biden's lead is certainly not unbridgeable for Trump. Four years ago, stock markets reacted very positively on balance to the election of Trump.

I suspect that this could turn out differently with a Trump victory because another 4 years of erratic leadership might be just a bit too much of a good thing. If Biden wins, it is hoped for the stock market that the Biden administration will take a moderate course. That seems to be in Biden's character. What markets are certainly not waiting for is a legal battle after November 3 over the question of who actually won.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.