Economic damage this corona wave much less

The economic damage of the current corona wave is much less than during the first wave. The industry continues to rumble and a survey by the European Central Bank (ECB) confirms the alert response of companies to the corona challenges.

'This time it's different' are the 5 most dangerous words for investors. It is usually wiser to start from the wisdom of Mark Twain: "history doesn't repeat itself, but it does rhyme''. Today I argue that it is different now. By this I do not mean the financial markets, but the economic situation. And what I mean is that the economic consequences of the current corona wave and lockdown are very different from those of the first wave in the spring.

Separating causes and effects
You have to distinguish between the causes and the effects here. In the first wave, economic activity slumped as the pandemic hit. That is now very different. The first chart is a spectacular one. It shows the US producer confidence index in the services sector according to ISM and also the number of deaths caused by corona.

In December, nearly 75.000 people died from the virus in the US, significantly more than in April. While producer confidence collapsed in April, it remained stable in December. In fact, it rose from November and the level of 57,2 suggests that the sector is growing quite a bit. Of course, that picture may change in the coming months and it also depends on the lockdown measures.

Earlier this year, there was a debate among economists as to whether the damage to the economy was caused by the virus or the lockdown. In addition, the argument seemed settled in favor of supporters who judge that the measures of the lockdowns were not so relevant. And that the damage mainly stemmed from the virus-fear-driven economic behavior of people. Perhaps recent figures like the one in the first chart are reason to reopen this discussion.

While the current wave seems to have little negative impact (for now) on confidence in the US services sector, the industry continues to rumble. The following picture shows the US ISM manufacturing industry confidence index and the order position assessment sub-index. That order position is seen as a very important early cyclical indicator. As the chart shows, industry entrepreneurs have not been more positive about their order position in the past 14 years than they were in December 2020.

In Europe the developments are similar. Even with us, confidence indices are not shrinking (for the time being), despite the increased number of infections and other corona consequences. Although the confidence indices in the services sector are clearly lower than in the US.

The hard numbers paint a more mixed picture. As the following picture shows, retail sales volume in the eurozone fell 6,1% in November from October. This was undoubtedly the result of the increase in the number of infections and the tightened lockdown measures.

However, it is striking that the decrease is (for now) much less than in the spring. Of course, this could easily get worse, as restrictions on public life were further tightened in many countries in December. Mobility data from Google and Apple show that mobility has fallen sharply in most countries in the latter part of December, but it is not clear to what extent this reflects a seasonal pattern.

The industry remains strong in Europe for the time being. In Germany, factory orders rose 2,3% mom in November and more than 6% year-on-year. That offers perspective.

Production in the processing industry is also on the rise, although it is still lower in both Germany and the Netherlands than a year ago (the Netherlands -2,5%, Germany -2,6%).

What explains the big difference with the first wave?
Now that we have established that the economic damage of the current wave in our country and in the US is much less than during the first wave, the question must be answered as to why. This of course remains speculation, but a number of things are obvious.

Firstly, the virus is much better controlled in Asia than it is here. Although there is also an increase in infections in various Asian countries, this is of a different order of magnitude than with us. In China in particular, the economic recovery is continuing unabated and we are of course benefiting from that.

Second, I think we have adapted to the challenging conditions. In the spring, the collapse in activity may have been triggered in part by a startle. This is now less the case.

Finally, the uncertainty is less great now than it was then. With the advent of vaccines, there is light at the end of the tunnel. Perhaps more importantly, the various support measures are sufficiently known and have proven their effectiveness.

Remarkable ECB survey results
It is entirely possible that economic momentum will decline in the coming months due to the stricter lockdown measures. Still, I think we can be hopeful that 2021 will be a year of recovery and I even think a very solid recovery in the end.

A recent ECB survey of companies shows some remarkable results. The ECB asked companies about their response to the pandemic and how they estimate its longer-term consequences. Not unexpectedly, many companies say that working from home is here to stay for their staff. Not completely, of course, but in any case much more than was thought possible before the pandemic.

The next two images are copied from the ECB's most recent monthly bulletin. According to the first picture, the trend of digitization has accelerated due to the pandemic. A large majority of companies also say they have become more efficient and resilient. I find that remarkable. Apparently, 'what doesn't kill you makes you stronger.'

Early in the pandemic, when there were many problems with deliveries, it was often argued that companies wanted to reduce their vulnerability in this area by shortening their supply chains and re-shoring production activities. A large majority of companies say in the ECB survey that they have no intention of shortening supply chains at all. That also seems logical to me, because companies did what they did because of competition. That competition has not disappeared.

Perhaps the most striking and most positive result from the ECB survey is that a large majority of companies believe that the measures they have taken themselves will increase productivity. This is also something I have argued before. The pandemic is leading to unprecedented disruption, which businesses must respond to.

Although many companies will still go bankrupt, companies will remain that will ultimately be in better operational condition. The increased debt burden presents a new challenge in many cases, but when public life normalizes and the economy is likely to recover faster and stronger than expected, underlying corporate results could surprise positively.

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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