Just a little longer, then 2020 is happily over

Economy Minister Eric Wiebes sees a bright spot somewhere, but bank president Christine Lagarde is more concrete. Industrial activity is picking up again and trucks are back on the German Autobahn. The economy in the US is weakening. A few positive developments at the end of a annus horribilis.

For many years I worked at ABN Amro as chief economist. My team was responsible, among other things, for devising risk scenarios. About 15 years ago, a pandemic appeared on such lists. Initially, I found those discussions very interesting. Then there will be no pandemic for 15 years.

Constantly warning about a risk that doesn't manifest itself, gets boring and over the years I lost interest in the subject. A pandemic was still regularly on our risk list, but to be honest it was nothing more than 'going through the motions'. Anyway, I have not yet turned my ass at ABN Amro or the pandemic is there.

Perhaps I failed by not taking a pandemic more seriously as a risk than I have all these years. Yet my aftertaste is different. We could never have imagined with any degree of certainty how the economy would develop in such a scenario. And even if we could have done that, the question is whether the bank could and would have taken many risk-mitigating actions.

Wiebes sees a bright spot, Lagarde is more concrete
Ministers Wiebes, Hoekstra and Koolmees gave a press conference this week about the extension of the cabinet's economic support measures. Employers reacted critically to the lack of perspective on when life will return to normal. Wiebes saw light at the end of the tunnel, now that the roll-out of vaccines has started. But he was not very specific.

ECB President Lagarde was specific. The ECB extended its support measures by 9 months until the end of March 2022. There appeared to be a rationale behind this. According to Lagarde, the consensus among virologists and epidemiologists is that normal life has been restored around the end of 2021. The economy will then recover and the ECB wants to support that recovery in the first phase.

Brexit and the US support package
Before long, we will know whether the UK will 'crash' out of the EU without further agreements or whether a trade agreement will be reached at the last minute. After Boris Johnson's visit to Brussels, I heard a reporter on Irish radio say that good progress had been made and that an agreement was likely. On Dutch radio I heard a reporter say that nothing had been achieved and that there is a good chance that the UK will 'crash' out of the union at the end of the year.

I remain hopeful. We have to realize that not only do the negotiators have to reach an agreement, which is difficult enough, they also have to sell it to their supporters. An agreement becomes a compromise anyway. If you come home with a compromise (well) before the absolute deadline, you run the risk of critics arguing that you've admitted too much. That you could have achieved more if you had kept negotiating longer. Therefore, these kinds of agreements cannot be concluded other than at the very last moment.

Agreement more likely than crash
And since it seems obvious to me that both parties have a great interest in an agreement, I continue to expect an agreement to be reached. To my surprise, the British this week appeared willing to withdraw the controversial legislation, breaking the previously agreed arrangement for the border between Ireland and Northern Ireland. I think it supports my view that a trade deal is more likely than a 'crash'.

In the US, an agreement on new economic support measures also seems likely. For months, Democrats and Republicans have been fighting over new measures as the intensity of the pandemic has risen sharply. Various economic indicators also indicate that the economy is weakening again, now that the support from the CARES legislation is ending or has already ended.

I am sometimes told that I am irresponsibly optimistic. Perhaps. But my guess is that we annus horribilis with some positive signs.

Second wave very different from the first
Europe and the US are struggling with the second corona wave, or perhaps the third in the US. The differences with the first are enormous. On the side of the pandemic itself, it should be noted that the number of hospital admissions, ICU admissions and deaths are less high than during the first wave. You can also say that the decrease in the number of infections, hospital admissions, etc. is now much less rapid than after the first peak.

The economic differences are, if possible, even greater. First, not the whole world has been affected by the second wave. The virus seems to be under control in most Asian countries. That means that the economy in Asia continues to run. Unlike the spring, we don't have to deal with supply problems now. This also keeps the industry going for us. The restrictions imposed on public life are undoubtedly once again taking their toll on the service sector. However, here too the decline is less than in the spring.

The first picture shows the growth of China's exports and imports (no figures have been published for January this year). In November, Chinese exports were more than 21% higher than a year earlier, while imports were 4,5% higher than a year earlier. These figures are consistent with figures published elsewhere on world trade, container throughput, and so on.

Taiwan also released foreign trade figures for November this week. Exports were 12,0% higher than a year earlier. This not only indicates that global trade is picking up, especially in the region, but also that digitization is accelerating in the world. Taiwan's export package is strongly focused on microelectronics.

My thesis has been that many companies have seized the abrupt challenges for their revenue models to accelerate digitization. The revival of business investment, at least in parts of the world, is also evident in Japan, for example, where machine orders in October were 2,8% higher than twelve months previously. The first positive growth figure since November 2019.

Maybe contraction in Q4, but not much after all
The European economy recovered strongly in the third quarter, but that recovery is being severely undermined by the second corona wave. ECB President Christine Lagarde said at a press conference yesterday that the eurozone economy will contract again in the fourth quarter this year, but that the rate of contraction is disproportionate to what we experienced in the second quarter. Recent confidence data indeed show a weakening in October and November.

The first figures for December are starting to trickle in. The German ZEW index, which measures confidence among analysts, surprised positively. The expectation index for Germany had fallen for 2 months in a row, but recovered slightly in December. This indicator is not the most leading, but it is the first available. So: fingers crossed.

The improvement in the ZEW index seems consistent with the traffic on the road. In Germany, trucks have to pay tolls on the Autobahn. The German statistical office, the Bundesbank and the Bundesamt für Güterverkehr publish figures on how many vehicles this 'Maut' pay. The recovery continues briskly. More trucks are on the road during this period than a year ago.

Last week I already reported that the order position of the German industry is developing strongly. This week, figures on production were added. In October, German industrial production grew 3,2% compared to September, when production also grew 2,3% month-on-month. In the year-on-year comparison it is still -2,7%, but it is clearly moving in the right direction.

In our own country, production in the processing industry was still 4,1% lower in October than a year earlier. Month-on-month there was an increase of 2,0%. Machinery manufacturing (-18,1% yoy) and machine repair and installation (-16,5% yoy) in particular remained weak. The latter is remarkable, because elsewhere in the world business investment seems to be picking up.

Inflation in our country was 0,8% yoy in November, clearly lower than the 1,2% in October. But not the lowest observation this year, which was the 0,7% from August. Incidentally, CBS notes that estimates have to be made for about 10% of the articles, because these are not available due to the lockdown. The margin of uncertainty surrounding the inflation figures is therefore larger than normal.

For some time now, there has been a discussion among economists (and also among non-economists) as to whether we are on the way to significantly higher or lower inflation. Much depends on the period to which the reflections relate. In a period of 12 to 18 months, a clearly higher inflation does not seem likely to me. In such a period, wage costs play an important role.

Employers' organization AWVN publishes figures on contractual wages in newly concluded collective labor agreements. In February the increase was still 2,96%, but in November it fell to 1,69%. Now negotiated wages are not the only element in labor costs, but such a decline suggests easing inflationary pressures.

US economy weakens
As mentioned earlier, the US economy is weakening somewhat. The recovery in the labor market is slowing down. That became clear last week in the monthly jobs report for November. The most recent weekly unemployment benefit figures confirm the picture. In the week ending December 5, 853.000 new benefits were claimed, the highest number since October 10. Admittedly, these numbers can fluctuate weekly and maybe Thanksgiving (this year on November 26 in the US) has had an impact on recent numbers.

Another sign of a somewhat weaker economy in the US comes from the National Federation of Independent Business. This organization measures the confidence of SME entrepreneurs. In November, the index fell from 104,0 to 101,4. It underlines the need to curb the virus and to introduce new economic support measures from the government.

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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