Reason for some optimism in this recession

The Chinese recovery is remarkably solid. A strong housing market in many countries is unusual in a recession and provides unexpected dynamics. The investment intentions of US companies are unusually strong for this economic phase. And Dutch entrepreneurs are about less pessimistic about the chances of survival between June and September. There is reason for some optimism.

This weekly commentary focuses specifically on global economic developments. Since the frequency is weekly, the focus is on the short term. The number of corona infections in the Netherlands does not play a major role in this. Unless it reflects the international trend, which is actually not the case now. Looking at the global economy, I notice that most forecasters have made their expectations for the economic downturn less negative this year. I see 3 developments that I would like to see as positive for the economic outlook. Of course, the pandemic remains a major potential disruptor.

Main growth engine
First, the Chinese economic recovery is impressive. Moreover, because China apparently has the virus well under control, a continuation of the Chinese recovery can be expected. Remember that China has actually been the main growth engine of the global economy for years.

A second positive development can be found in the housing market in many countries. In many cases, the housing market is remarkably strong. This is not common during or soon after a recession. Since people have to furnish and/or do jobs in a different or new house, this leads to additional expenditure. In the US, for example, the number of new-build homes sold has been more than 2% higher for 40 months than a year earlier. The number of existing homes for sale is more than 10% higher than last year. We do not know whether this strength will continue in the various housing markets. In any case, it is unexpected and certainly gives extra dynamism to the economy.

Don't bump into the back
A third notable development is the apparent willingness to invest mainly by American companies. Unfortunately, it is not yet clear what the situation is with regard to the investment intentions of European companies. Business investment is not an expenditure category that normally plays a pioneering role in the cyclical recovery. In fact, business investment tends to lag behind in recovery. At least not this time in the US.

Surveys show that US companies' investment intentions are high and capital goods shipping figures confirm that spending in this area is on the rise. It is not immediately clear what the exact cause is. I think the availability and cost of credit play a role. Perhaps the realization that a digitization step is necessary will also help.

Earnings model affected
Some companies also realize that their revenue model has been affected and that adjustment is necessary. Finally, some companies may have seized on the reduction in regular activity to carry out overdue maintenance. In any case, the unusual relative strength of US corporate investment gives the business a dynamic that you don't normally see at this stage of the cycle. That's positive.

The German economy may benefit from the combination of the Chinese recovery and improving investment in the US. After all, the German economy is more dependent on exports to China than most other European countries and the capital goods industry is also more important in Germany than elsewhere. Recent figures on German industrial production have been disappointing, but factory order figures have been encouraging.

US unemployment benefits continue to fall
There is still no clarity about a new support package for the US economy. Fed Chair Jerome Powell this week again appealed to Democrats and Republicans to get down to business. Meanwhile, weekly unemployment benefit figures provide little clarity on whether optimism or pessimism is warranted.

In the week to October 3, 840.000 new claims were made for benefits, only fractionally lower than a week earlier. You actually want the number to drop faster. So there is no reason for much optimism. On the other hand, the total number of unemployment benefits fell from 12,0 million to 11,0 million in the week to September 26. That was encouraging though.

Dutch companies slightly less pessimistic
This week, CBS published the results of an ad hoc survey that, among other things, provides information on how entrepreneurs estimate their chances of survival if the corona crisis continues. I found it interesting and encouraging that the percentage of entrepreneurs who think they can only survive for a maximum of 12 months has decreased between June and September. There are, of course, major differences between sectors, but the reduction in pessimism has been recorded in all sectors. The absolute level, of course, remains alarmingly high.

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

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