A dime on its side with corona control

The global cyclical recovery continues, but is at risk. Business confidence in industry is improving, while that in the service sector is falling. The economic outlook depends very much on keeping corona under control. In the Netherlands, however, there is an unusual divergence. This crisis is different from the previous one.

The global recovery continues, but is clearly losing momentum in some places. Last week I wrote about China, where the recovery is impressive. The European recovery appears to be jeopardized in the short term by the increase in corona infections in many countries. In the US, it is important that politicians find a compromise on extending or renewing support measures. The discussion about whether the current president will leave the White House without a fight, if he loses the election, is of no help.

Number of infections too negative, low number of IC admissions too positive
The number of reported corona infections in our country continues to rise. Yesterday (Thursday) there were 2.552 according to the RIVM site. In the first wave in March/April, the peak was 1.335. I have written before that these figures most likely paint too negative a picture, because there is much more testing now than then. The number of hospital admissions, ICU admissions and deaths remains much lower than in March/April.

For example, yesterday there were 10 IC shots against a peak of 110 in the first wave. But these numbers probably paint too rosy a picture. The number of infections is now high among young people who are less likely to end up in the ICU. RIVM also provides figures on virus particles in the sewage. The most recent reading is 313. That's a lot lower than the 1430 from early April, but this figure had fallen below 20 by July. I therefore think that we must remain very vigilant.

We are certainly not the only country where the number of reported infections is increasing. It is a pattern in many European countries, although there are significant country differences. For example, the figures in Germany, Switzerland and Italy are much less bad than in our country and, for example, in Spain, France and Belgium.

Outside Europe the patterns are different. In most cases there is now no question of a second wave. With regard to the differences within Europe, my impression is that discipline plays a major role, with which people adhere to the rules and recommendations. But I'm speculating here.

Business confidence in the service sector is falling again
The preliminary figures on business confidence in September indicate that the recovery in the manufacturing sector is continuing. This is especially the case in Germany. The preliminary Markit manufacturing PMI rose from 52,2 in August to 56,6 in September. A big jump.

German entrepreneurs reported the strongest increase in 'new work' in more than 10 years. This was mainly due to a strong and accelerating increase in export orders. It looks like Germany is benefiting from the impressive recovery in China. In France and in the eurozone as a whole, the industrial confidence index also rose in September, but the increase was more modest.

The leading German Ifo index, which measures business confidence across the German economy, also rose in September: 93,4 from 92,5 in August. It was the fifth rise in a row, but the pace at which the index rises is slowing. A low of 74,3 was registered in April.

Trust is related to corona
In contrast to manufacturing, business confidence in the eurozone services sector declined in September. The Markit PMI fell to 50,5 from 47,6 in August. A figure below 50 suggests a contraction. The deterioration in confidence in the service sector appears to be related to the increase in the number of corona infections.

Whether it concerns new restrictions on public life or whether people immediately change their behavior when they hear about increasing numbers of infections, I do not know. It doesn't really matter either. The figures suggest that the progress of the economic recovery depends on keeping the virus under control. Incidentally, the current state of business confidence in the services sector is much higher than the low in April. That was 12 (on a scale of 0 to 100).

US recovery at risk
The political disagreement in the US over new support measures threatens the economic recovery. The temporary easing of unemployment benefits has ended and many families are in danger of getting into trouble as a result. The improvement in the labor market is also not really continuing for the time being. Weekly figures can be quite volatile, influenced by chance factors and national holidays, but it would be nice if the number of new unemployment benefits continued to fall.

In the week of September 19, however, the number was fractionally higher than in the week before. Still, several surveys indicate that US companies are planning to increase investment and hire people. Against this background, it is not surprising that Fed chief Jerome Powell and the Chicago Fed president Charles Evans this week explicitly called for burying the political hatchet and launching a new aid package.

Wonderful housing market
It is precisely the housing market that is going crescendo. This is a wonderful phenomenon that is also manifesting itself elsewhere in this crisis. For example, with us. The following chart shows that both the number of new-build and existing homes sold in August reached the highest number in years. It seems that there is quite a split in this crisis, between people who have a secure job and income and those who don't.

The combination of the support measures by the US government, the fall in mortgage interest rates in the US this year and the sharp decline in consumption earlier this year are now supporting the housing market. Many families have seen their savings increase as a result and apparently they find it opportune to buy a house. For the time being, that trend does not seem to end and as people moving into a new home also have to furnish and perhaps do some odd jobs on it, this gives a boost to private consumption.

Divergence in the Netherlands
Statistics Netherlands published a number of indicators about the Dutch economy this week. It is important for future growth that companies (continue to) invest. During the crisis, investments in tangible fixed assets had fallen sharply earlier this year. The low point was in May, according to Statistics Netherlands, with a minus of 20% compared to a year earlier. There has since been an improvement, but investment in July was still almost 5% lower than twelve months previously.
As I have noted before - and in line with other countries - there is a striking divergence between consumer confidence and business confidence. Consumer confidence in our country was slightly higher in September than in August: -28 against -29. In fact, consumer confidence has been stabilizing at a low level for months. Producer confidence, on the other hand, is improving, although no September figure has yet been published by Statistics Netherlands.

keep the virus down
The divergence between the two series is not unique, but it cannot last very long. In the past, consumer confidence often followed producer confidence when going high. However, this crisis is different from previous ones. If spending fails to materialize, and perhaps more restrictions are imposed on public life, this time it could also be the other way around. Here too it is therefore of the greatest economic importance that we keep/get the virus under control.
The pattern of private consumption is quite disturbed. The following chart illustrates the divergence between retail sales growth and total consumer spending. The difference between the two is formed by consumer spending on services. They are therefore suffering greatly from the corona crisis and the 'one and a half meters'.

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.