Dutch consumer remains quite depressed

Ireland in second lockdown, what is the Netherlands doing? Is there a trade-off between the interests of public health and the economy? Dutch consumers remain quite depressed, although spending is improving. China remains the main growth engine and the rest of the world is benefiting. And in the United States, the recovery continues unabated.

Ireland went into lockdown again last Wednesday. For a period of 6 weeks, residents are not allowed to go further than 5 kilometers from their home, except for 'essential travel'. The police check this through 'check points'. That is not easy, because how do you prove that your trip is justified and how do the police prove the opposite? It seems that the police do not want to deter citizens so much with the threat of fines, but with the risk of long travel times due to the traffic jams caused by the check points.

'Non-essential' shops are closed again and in the catering industry it is, as before, 'take-away only'. Even the golf clubs are closed. Yet this Irish lockdown is less stringent than the one in March-May. The schools will remain open (for now) and construction will continue this time. Irish measures are more stringent than those in the Netherlands, although the Irish numbers of infections and deaths are no worse than those in the Netherlands.

The decision to impose a lockdown appears to be mainly motivated by pressure on the healthcare sector. It does not appear that the authorities have succeeded in expanding the capacity in the care sector during the summer period. And while that may sound easier than it is to implement, isn't that cheaper than the economic damage that is now being suffered to prevent care overload?

Trade-off between the interests of public health and the economy?
A debate is now raging among economists as to whether economic damage is primarily caused by the government's lockdown or by people's changed behavior now that a dangerous virus is circulating. Much recent research concludes that the latter. Countries with a modest lockdown are also shrinking economically. According to this view, there is no trade-off between the interests of public health and economic interests. Reducing the virus is also good for the economy. This is then used as an argument for a strict lockdown.

It remains to be seen whether this reasoning is correct. If you assume that we can push back the virus, but not eradicate it, this strategy seems to turn out to be a repetition of moves. In other words: lockdown, followed by easing, followed by lockdown, and so on. It is doubtful whether this will turn out well economically.

Recalcitrant or rational
Moreover, the question is whether people's behavior always remains the same. In the first wave, people voluntarily restricted their movements and thus their spending. In this second wave, people are less compliant with regulations. Should that be seen as recalcitrant or rational? What may argue in favor of the latter is that the figures (hospital and ICU admissions, deaths) so far (!) suggest that the health hazards are less great than they appeared in the first wave and therefore previously assumed.

It is therefore possible that the voluntary behavior of people and not the government measures during the first wave was the primary cause of the economic damage, but that it may well be the other way around in the second wave.

Dutch consumer remains quite depressed
According to the CBS measure, consumer confidence in the Netherlands fell to -30 in October (-28 in September and -31 at the low point in May). In fact, the index has been moving in a tight horizontal range since May. Confidence did improve slightly in June and July, but since the number of corona infections has increased again, confidence has weakened again.

This is not good news, although spending is developing somewhat more positively and that is ultimately what matters. The volume of household consumption has improved in each month since its trough in April (-17,1% yoy). But the pace of that improvement is slowing down. In July consumption was 6,4% lower than a year earlier, in August it improved to -5,8%. That remains a solid minus.

China remains the main growth engine
Reports on the Chinese economy remain positive. In the third quarter, the Chinese economy grew by 2,7% compared to the second quarter, when a plus of 11,7% was registered. Compared to the same quarter last year, GDP growth improved from 3,2% in the second quarter to 4,9%. That was slightly lower than expected and also below the approximately 6% that was customary before the crisis.

Manufacturing production and retail sales figures were strong in September. Industrial production was 6,9% higher than a year earlier, which is a higher growth figure than the average before the corona crisis. Apparently catch-up production is taking place. The recovery in retail sales has been weaker than that of manufacturing in recent months. Consumers apparently exercise caution. But the Chinese consumer is coming back. In September, retail turnover was 3,3% higher than a year earlier. That is better than the +0,5% of August, but still clearly lower than before the corona crisis.

The rest of the world benefits
I regularly emphasize the importance of the Chinese recovery for other countries. How this is going is beginning to be clearly expressed in figures elsewhere. World trade is recovering. Take the Japanese export figures. In May, Japanese exporters had recorded a decline of almost 30% year-on-year. In September, the minus was only 4,9%. That is of course still nothing to write home about, but it is better than in the previous months.

The Chinese recovery is also making itself felt in Europe. German industry is much more focused on trade with China than, for example, the French industry. Preliminary figures from IHS Markit on business confidence (PMI) in October show that industrial companies in Germany are quickly becoming more optimistic. Certainly in comparison with their French colleagues. In the press release, IHS Markit writes that German entrepreneurs report: '…a record increase in order book volumes, supported by a surge in export business'. It is obvious that trade with China is mainly responsible for this.

At the eurozone level as a whole, confidence in manufacturing increased (54,4 versus 53,7 in September), but business confidence in the services sector declined (46,2, after 48,0 in September). The composite PMI index for the eurozone fell from 50,4 in September to 49,4 in October. This undoubtedly has to do with the second corona wave and the tightening of the measures to contain that wave.

Notable was the increase in British business confidence in October (industry: 54,1 against 53,1 in September, services: 56,1 after 54,0; and the composite index: 56,6 against 53,9). Perhaps this reflects preparations for Brexit. Companies that trade internationally must have their administrative and logistical affairs in order before the end of the year. In addition, some companies may be stockpiling ahead of Brexit. If that reasoning is correct, you can expect a downward correction after the turn of the year. But it could also be the case that the British economy is more resilient than that of the continental countries.

US recovery continues unabated
The second debate between presidential candidates Trump and Biden was quieter than the first. That certainly improved the substance of the debate. The choice is now up to the electorate. We will see.

The US housing market remains strong. The National Association of Home Builders' confidence index rose to 85 in October, the highest I can find (numbers up to 1985). In line with that confidence, home sales are also increasing at an accelerating pace. In September, the number of existing homes sold was almost 21% above the level in September 2019.

The development in the American labor market also remains positive. Of course, there is still a huge challenge here. Last week, the decline in the weekly number of claims for unemployment benefits appeared to have come to a halt. However, that seems like noise. In the week to October 17, 787.000 applications were made, compared to 842.000 the week before.

The total number of unemployment benefits fell in the week to October 11 to a still significant 8,4 million, a million less than the week before. This decline reflects the resilience of the US labor market, but may also be partly caused by some benefit recipients losing their entitlement to benefits due to the length of their unemployment.

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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