Shape and strength economic recovery remains guesswork

There is no doubt that the economic recovery is imminent. What that will look like remains a mystery. The decline in economic activity since the outbreak of the corona pandemic was unique. That is why the form and strength of this recovery is by definition also special.

But first let's look at the recent past. The eurozone economy contracted again in the first quarter, according to preliminary figures: -0,6% from the previous quarter and -1,8% from a year ago. This had everything to do with the spread of the coronavirus in the last weeks of last year and in the first quarter, as well as the continued or even tightened restrictions on public life everywhere.

Of the last 5 quarters, 4 have now delivered negative growth rates for the Eurozone's Gross Domestic Product (GDP). Germany, which had escaped contraction in the fourth quarter of last year, had to let go of a significant spring: German GDP shrank 1,7% from the previous quarter and 3,0% year-on-year. However, this is a very flattering image, negatively flattered that is.

The combination of the lockdown measures, the harsh winter weather, the end of the temporary VAT cut, the logistical disruptions in world trade and the consequences of the effective Brexit have led to this dramatic figure. It is inevitable that a strong recovery will follow. Earlier I calculated that the production level in the important industrial sector is about 12% behind orders. That will certainly be caught up and then production growth will be above the actual growth in demand for a while. Fasten seat belts, I'd say.

'Economic Sentiment' makes record jump
Besides, the first quarter has been behind us for some time now. The end of the pandemic is in sight with vaccinations and those looking ahead are becoming optimistic. The Economic Sentiment index compiled by the European Commission rose for the eurozone from 100,9 in March to 110,3 in April. For the Netherlands, the jump was even slightly larger: from 97,9 to 108,6.

In both cases it was the biggest jump in a month, at least as far as I can tell, back to 1985. Incidentally, the development of the leading Ifo index of German business confidence in April was a bit disappointing: 96,8 against 96,6 ,99,5 in March. The expectation component even fell: 100,3 against XNUMX. This may have to do with the exact moment when the surveys were conducted. Under the current circumstances, I tend to value the Economic Sentiment index more than the Ifo index. But maybe that's because I'm an optimist...

In our own country, the producer confidence index of Statistics Netherlands rose sharply in April and reached the highest level since April 2019. Entrepreneurs were especially positive about their order position.

Still, I maintain that the strength of the recovery remains speculative. There are many things about which we can say little with certainty. How many companies will go bankrupt? No one can predict it with any certainty. The same applies to the long-predicted, but hitherto elusive rise in unemployment.

And how quickly and to what extent will families with better-than-average bank accounts meet their catch-up demand? Or what will the government's recovery plan look like? Will there be a waiver of tax debt and if so, for whom? How fast will inflation rise and will it erode purchasing power? And to what extent are the logistical disruptions in the world hindering production recovery?

Comfort buying or retail therapy
Retail turnover in the Netherlands was 8,2% higher in March than twelve months previously. According to the CBS, 5,9% of this remained when you correct for shopping days (because on some days more is bought than on others) and 4,9% if you also correct for price increases. Online sales were 68,3% higher than a year earlier.

As can be seen in the picture from Statistics Netherlands, retail sales actually grew more strongly last year than in the period before the pandemic. This was because consumers were able to spend less on services and then apparently indulged in 'comfort buying', or 'retail therapy' in the field of goods. Around the turn of the year there suddenly came a huge blow for 3 months, but in March it went fairly crescendo. That March increase is not a 'base effect'. Last year there was also a healthy +3,4% year-on-year in March.

For the time being, the inflation visible in the pipeline is reaching the consumer level in the eurozone only to a limited extent. According to preliminary figures, inflation in the eurozone rose to 1,6% in April, from 1,3% in March. That is of course considerably higher than the -0,3% measured in December, but most of the acceleration is due to the oil price. Core inflation actually fell from 0,9% in March to 0,8% in April. Core inflation was still 0,2% in December, but the increase from that level is partly due to the end of the temporary VAT cut in Germany.

America first
The economy in the US is now well ahead of ours. The vaccination process is going more smoothly there than with us and the government has thrown a lot of money into the economy to stimulate it. US GDP volume grew 6,4% on an annualized basis from the previous quarter (1,6% our way) and 0,4% from the first quarter last year. huh

The growth figure slightly exceeded expectations, but I think it paints a too conservative picture of what is actually going on in the US. Foreign trade contributed negatively to GDP growth: -0,9%, as imports grew while exports shrank slightly. When that happens, that negative growth contribution from international trade is usually partially or completely offset by inventory building.

The imported goods are then apparently stored and that makes a positive contribution to growth. But in the first quarter, the growth contribution of inventory build-up was also negative: -2,6%. The fact that international trade and stock building both contribute negatively to growth is unusual and unsustainable. That is going to be compensated, causing growth figures to be higher than justified by what is actually going on.  

Happy rolling out
The national accounts show some remarkable figures. We know, of course, that the December stimulus package ($900 billion) and the package that Biden steered through Congress in March ($1.900 billion) provided a huge boost. Federal government spending (excluding defense) grew in volume by 44,8% annualized in the first quarter this year, according to national accounts. The previous record was 37,6% in the second quarter of last year, when President Trump had to do it alone. The Trump/Biden combination has turned out to be even more decisive…

By the way, President Biden happily continues to roll out one initiative after another. We already had the stimulus package, the proposal to raise corporate taxes and agree on a minimum rate internationally, and a sizeable infrastructure package. Recently, a proposal was made for a substantial increase in the Capital Gains Tax and an extensive package called the American Families Plan. Whether the president can get all of that through Congress fairly unscathed is uncertain. Apparently, he hopes his relative popularity among Republican voters is enough to persuade some Republican Congressmen to support him.

What also strikes me in the national accounts for the first quarter is that business investment in digitization appears to be growing strongly. The following picture shows companies' expenditure on information processing equipment, in volume. Year-on-year, the growth rate in the first quarter is 30,6%. Of course, there's a base effect here as this spending fell in the first quarter of last year, but the chart clearly shows its impressive strength.

The American consumer is also determined to be happier. According to the Conference Board measure, the consumer confidence index rose from 109,0 in March to 121,7 in April. There was also a significant increase in March. Measured over 2 months, the increase was just short of a record. I have looked at figures from 1967 and only in 1974 the index rose slightly faster over 2 months than in March and April this year. The absolute level of the index is clearly above the historical average but is still a long way from the all-time high.

Biden checks trump the Trump ones
The figures on the development of so-called 'personal income' and 'personal spending' in the US show nicely what happens when you send checks for huge amounts to citizens. The following chart shows the monthly changes in income and expenses (annualized). Until the beginning of last year there was hardly any movement on this scale. In March 2020, both income and expenditure will tumble.

The checks with the president's name on them sent out under the CARES legislation will arrive in April 2020, but consumers will continue to skimp on spending first. Higher spending will not follow until May. The December checks are another highlight. That is only slightly lower than the peak in April.

The latest package from the new administration has delivered checks to families, annualized personal incomes of more than $4.000 billion, significantly more than under the CARES legislation. Of that amount, only over $600 billion (annualized) has been spent. So there is enough money on the sidelines to finance a huge spending wave.

Although the CPI inflation figures for March have already been published before, the inflation figures according to the measure of Personal Consumption Expenditures (PCE) are also relevant. This is because the Fed focuses primarily on core inflation below the PCE. The next chart shows that inflation is on the rise, but that the level is by no means alarming. However, we must continue to monitor this closely and with suspicion. I'm not sure.

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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