Economy position: light at the end of the tunnel

It is still dark in many places in this corona pandemic, but there is light at the end of the tunnel. The drama at Schiphol continues, but expectations for Germany are improving. The Fed sharply raises its 2021 growth forecast, but tighter monetary policy is still a long way off. And what will the recovery plan for the Dutch economy entail?

When the pandemic broke out last year, international air traffic collapsed. A year later, this sector is still in a sad state. This certainly applies to Schiphol. The number of passengers passing through Schiphol in February was 89,3% lower than a year earlier, the number of flights was 69,6% lower. Incidentally, Schiphol's figures show how things are going in the economy.

While the numbers of flights and passengers are much lower than a year ago, freight traffic has actually grown. That shows that we use more 'stuff' after all. Those numbers are consistent with world trade. Perhaps aviation will also benefit from the problems in ocean shipping. As a rule of thumb you can assume that about 10% of world trade in volume goes through the air and 30% in value.

The first picture below will change spectacularly in the coming months. Because in March and especially April we will compare with the months in 2020 in which everything collapsed. The year-on-year percentage changes then skyrocket. We saw such an effect in China for example this week. Industrial production there turned out to be 35,1% higher in February than in February 2020. Retail sales were 33,8% higher. But yeah, that doesn't say much.

That things are improving outside Europe, is apparent from the following picture, which shows the number of commercial flights worldwide. There has clearly been some improvement in recent weeks. This improvement is mainly due to the US and Asia.

And that trade between the US and China is picking up, according to figures from the Port Authority of Long Beach, the second largest container port in the US. The number of incoming full containers (in TEUs, 20-ft equivalent units) was more than 50% higher in February than one year previously. The following chart shows the 3-month moving average.

The logistical disruptions in the world are well known. Containers are not where they are needed. This has led to exorbitant freight rates and problems with deliveries. The solution is of course to drag empty containers. The next picture suggests that process is underway. The number of empty containers that departed from the port of Long Beach was more than 71% higher in February than a year earlier. (Even under normal circumstances, many empty containers leave Long Beach, because the US has a large trade deficit with Asia).

Here comes the effects of the US aid packages
The new US government's $1.900 billion bailout package has now been legislated and is soon to be implemented. That will give the US economy a significant boost. The December stimulus package is already doing that.

Various indicators are now showing an acceleration of growth. The Philly Fed index, a measure of business confidence in the Philadelphia Fed district, rose to 51,8 in March from 23,1 in February. The March figure was the highest in 50 years. The increase was mainly driven by a much more positive view of businesses on their order position.

The European economy is clearly weaker. The EU is a long way behind with the roll-out of the corona vaccinations. Despite this, the 2 main series of the so-called ZEW index improved in Germany in March. This measures the confidence in the economy among analysts. The assessment of the current situation remains sharply negative, but rose from -67,2 in February to -61,0. And expectations about the recovery are high. That series rose from 71,2 to 76,6.

Powell Is Trying His Best, But Markets Remain Uncertain
I always enjoy watching Fed Chair Jay Powell's press conferences. This week it happened again. Of course, the Fed made no changes to its interest rate policy or its buying policy. But those press conferences are about exactly what Powell is saying. He always does his best to explain it all well.

These are the main messages. The outlook for economic growth has improved significantly since December. In December, policymakers predicted growth of 4,5% this year, now it is 6,2%. Inflation will rise in the near future, but that is temporary and there is no reason to tighten monetary policy. The Fed is still a long way from its targets of 2% inflation and maximum employment.

Powell insisted that some 9 million people still don't have a job that they did a year ago. This justifies a continuation of the very accommodative monetary policy. The Fed will only raise interest rates when: a. maximum employment has been achieved, b. inflation actually amounts to 2% and c. when there is a realistic perspective that inflation will modestly exceed the 2% target for some time.

Financial markets are not quite sure what to do with this. On the one hand, an accommodative monetary policy is positive, but market participants also want to be sure that inflation does not resurface as it did in the 70s. And if that threatens to happen, they want to be confident that the Fed will not wait too long to tighten monetary policy. On balance, US capital market interest rates rose further this week.

Recovery plan Netherlands
Prime Minister Rutte has suggested formulating a recovery plan for the economy after the elections. The response from the business community was positive. But when you look for details, such as what such a thing should consist of, you find little concrete. In my opinion, this is partly because Rutte has announced a recovery plan, but has not defined what the exact goal of that plan should be.

Should it focus on the short term, i.e. on switching as smoothly as possible from a partially closed to a free economy? Or should the emphasis be on paying attention to more structural underlying challenges? Or maybe it's both? In any case, it seems logical to me that the government should enter into discussions with various representative organizations to find out where the companies expect problems and how they can be tackled.

It is evident that there are logistical disruptions in the world. When sectors that are largely at a standstill reopen, problems could arise there. It is not immediately clear to me what the government can do about this.

It is obvious that the liquidity position of many SMEs is weak. That's a big problem. When the economy reopens, there will be a need for working capital. Because many entrepreneurs are out of financial reserves, bank credit is difficult to obtain. A recovery plan must respond to this. Less urgent, but not unimportant, is that many entrepreneurs have emptied their pension provision. It would be wise to enable entrepreneurs to rebuild these in the coming years.

How this will go on is yet to be seen. I think a recovery plan is a good idea. But then everyone has to agree on the objectives, and so on. To be continued.

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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