Notable movements in the global economy

The coronavirus pandemic is bringing remarkable and unusual moves in the global economy. GDP will grow better than expected in the third quarter, but the European economy is in danger of falling again. While the American seems to hold up better. Hopefully next week it will be clear who the new president of the US is.

What is most striking about the course of the global economy is the divergence that is developing. It has everything to do with the coronavirus. Asia is doing well, Europe is not and the US is in an intermediate position. International cyclical cohesion is normally high, but divergence occurs when countries are affected by different shocks.

In the jargon of economists, this is called an 'asymmetric shock'. This is relevant for the further course of the economy. When all countries contract sharply at the same time, no economy receives 'outside help'. Now that the Asian region is recovering strongly, and the US also outperforms Europe, we may be able to achieve some growth via the export channel.

I will not comment on the American elections. What can I add to what is already being written? It looks like Joe Biden will be the next president. The 3 most important issues now are whether the polls are right this time around, whether the Democrats also win a majority in the Senate and whether President Trump will give way to his successor if he loses without resistance.

V-shaped recovery in the third quarter, but what comes next?
After the unprecedented and dramatic decline in economic activity in the first and especially the second quarter, it was only logical that the third quarter showed a strong recovery. After all, restrictions on economic life were relaxed in the course of the second quarter and economic life continued towards 'normal' in the third quarter.

The US economy grew by 7,4% quarter-on-quarter in the third quarter, or as the Americans put it 33,1% annualized (that is the percentage that results when quarterly growth is repeated for 4 consecutive quarters). The economy had contracted 31,5% (annualized) in the second quarter and 5,0% in the first quarter.

In the year-on-year comparison, a minus of 2,9% remained. Such contraction and growth in a quarter are unprecedented. Private consumption grew at an annualized rate of 40,7% in the third quarter, investment in equipment by 70,1%, housing construction by 59,3% and the export and import of goods even by 104,5% and 107,9, respectively. .XNUMX%.

GDP in the eurozone also grew strongly in the third quarter: 12,7% qoq (expressed in the American way, that is 61,3%). That figure was significantly better than expected. The growth figure follows a contraction of 11,8% in the previous quarter and -3,6% in the first quarter. Compared to the same quarter last year, 'growth' was -4,3%, compared to -14,8% in the second quarter. Beautiful, but not enough.

And what next?
The fact that the second corona wave in Europe is damaging the economic recovery can be seen from various indicators. The German Ifo index, which has long been a reliable measure of German business confidence and thus a good reflection of economic developments, fell slightly in October: 92,7, compared to 93,2 in September.

Since the second wave of corona only gained momentum in the course of October and the various lockdown measures did not come into effect in most European countries until the end of the month, a further weakening in November is likely. The assessment of the current situation did improve somewhat in October, but the more forward-looking 'expectations' fell from 97,4 in September to 95,0.

The Economic Sentiment index compiled by the European Commission for the member states, the EU as a whole and also for the eurozone stabilized in October. That was actually a stroke of luck. Confidence in the industry continued to improve, but consumer and service-sector confidence fell. It should be noted that the latter fell less than expected.

After the strong GDP growth in the third quarter, it was always clear that the pace of recovery would slow down considerably, the question was how much. Due to the second corona wave, it may just be that the economy in the eurozone will shrink again in the fourth quarter, although it seems to me too early to take an explicit position on this. Consumers and companies may still deal with the current lockdown differently than with the previous one. And when restrictions are rolled back around the start of December, a recovery in December could keep the quarter out of the red GDP growth charts. But that's getting tricky.

Difference Between Europe and Asia
In our own country, producer confidence fell slightly in October after rising for 5 months: -5,6 versus -4,8 in September. That is not a dramatic fall, but the movement is in the wrong direction and the level is low.m As I have argued before, there is quite a bit of cyclical divergence in the world.

In most Asian countries, especially those that have a major impact on the global economy (China, Japan, Korea, Taiwan), the coronavirus is well under control and the recovery is continuing. The recovery in China is particularly impressive. I regularly receive a warning that the Chinese statistics may not provide an accurate representation of reality. But if you look at other Asian countries, the ongoing recovery is undeniable and should be driven by heavyweight China. Reports from European car companies about their sales in China also point to a strong recovery there.

A nice way to clarify the difference between Europe and Asia is to compare consumer and producer confidence in the Netherlands on the one hand and Korea on the other. The next two pictures speak for themselves. In our country, the recovery is slowing down, in Korea it is continuing.

That Korea is making a good recovery is also apparent from hard data for September. Manufacturing production in the month was 8,3% higher than a year ago, the first plus since March. In August it was still -3,1%. It must be said, however, that production figures in that country are quite volatile. Korean retail sales in September were 4,4% higher than in September last year.

Japan's larger and somewhat more closed economy is having a harder time. There is also talk of recovery, but there is still a long way to go. Japanese industrial production was still 9,0% lower in September than a year earlier, after -13,8% in August and -26,3% at its low in May.

European inflation stable
Inflation in the eurozone stabilized in October. The total price index was 0,3% lower than in October last year. That was also the case in September. 'Core inflation', excluding food, energy and a few other volatile elements, was also stable: +0,2% yoy. This is all clearly below the ECB's target and also well below at the start of the year.

At the press conference yesterday, ECB President Christine Lagarde was explicitly asked whether she is not afraid of deflation. She replied somewhat indirectly by saying that (headline) inflation may be negative, but that she does not call it deflation. After all, these negative figures are caused by one-off, temporary factors such as the German VAT reduction and the lower oil price. I strongly agreed with Lagarde when she said that real deflation can only be said to be a process that is self-perpetuating or even self-reinforcing. That is not the case. Not yet, at least…

The American middle position
The US is in fact working on its third wave of corona infections, although the number of new infections in proportion to the population is clearly lower than in the Netherlands and until recently higher than in Germany. The economy also behaves differently. While the signs of a slowdown in growth after the strong third quarter are undeniable, the picture in the US is much more mixed. I have already mentioned the remarkable development of some indicators that shed light on business investment.

In September, $67,5 billion worth of capital goods (excluding defense and aircraft) was shipped in the US (a reasonable proxy for business investment development). That was 2,5% more than a year earlier and the highest monthly amount since September 2014. The message of this figure is that companies are increasing their capital expenditures. Unfortunately, there are no such signals in Europe.

The various regional business confidence indices in October also show further improvement in most cases.

Of course, not all signals are positive in the US. For example, the number of people with rent arrears is rising to alarming levels. Most states still have an eviction ban, but that will soon expire. Tenants may have defaulted because they knew they couldn't be evicted after all. Those who can pay eventually will. But the risk of large numbers of evictions is significant. This could have repercussions on the housing market, which has developed so strongly up to now.

How the economy will continue in Europe and the US depends on the development of the corona virus and the response of consumers, companies and governments. It remains to be seen whether the very negative economic developments of March-April will be repeated. On the negative side, it should be noted that many companies that have managed to survive thus far are probably quite depleted of their reserves. It is also questionable whether governments are just as quick and generous.

In the US, a stalemate between Republicans and Democrats seems to be standing in the way of new support measures. On the plus side, it might be said that we now know better what we're dealing with. The lockdown measures are also strict, but slightly less strict than in March-May. And finally, we are hit by a second wave with much more infections than in March-April, but with a much less high toll in terms of deaths, IC admissions, etc. Perhaps because of this, the fear is less this time and thus spending remains a bit better. Fingers crossed.

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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