Economic recovery makes big leaps forward

Dutch producer confidence is the highest in three years. The sharp increase in the output prices of the Dutch industry is strongly concentrated. Legion of confidence indices make a giant leap in May and investments by US companies continue to grow strongly. The weekly economic look.

The global economy is improving across a broad front. Restrictions on public life are being relaxed, business is increasing and expectations are rising. Some statistics show unimaginably high growth rates, but that is mainly due to so-called base effects. For example, due to the complete collapse of tourism a year ago, the number of tourists arriving in Turkey was 3.162% higher in April. In Indonesia, 282% more motorcycles were sold and car production in the UK was apparently 3.457% higher in April. That doesn't say much. Above all, it shows how dramatically activity fell a year ago.

Producer confidence in our own country rose to 8,8 in May, according to CBS, from 6,5 in April. It was the highest level in three years and well above the historical average. Entrepreneurs were more positive across a broad front than in previous months, as the first chart shows.

Factory prices sharply higher, but mainly due to petroleum and chemicals
As elsewhere, producer prices are rising sharply here. That will at least partly end up in inflation at the consumer level. Manufacturing output prices were 11,8% higher in April than a year ago (+6,8% in March and +0,7% in February). However, the following chart shows that this price increase is very concentrated in petroleum and chemicals. For foodstuffs, the year-on-year increase is a lot less, but still 5%.

Giant Jumps in Germany, Italyë and France
Various confidence indicators in some major European countries are all moving in the same direction. After a small hiccup in April, the important German Ifo index of business confidence among our eastern neighbors improved again in May. The 'expectations' sub-index rose from 99,2 to 102,9. The last time a higher value was measured was early 2011.

In Italy consumer confidence took a giant leap in May. It was the second largest monthly increase in the last twenty years.

Business confidence in France (by the Banque de France measure) improved from 96 in April to 108 in May. That's starting to look like it. And here too there was an unusually large monthly increase.

If we are to believe these kinds of indicators, and why shouldn't they be, then a very solid economic recovery is underway. However, it is unclear how strong that is exactly, how long it will last, how strongly inflation will rise and how many companies will still not survive.

The 'Economic Sentiment' index, which is compiled by the European Commission and reflects the confidence of producers in all sectors as well as consumers, also rose from 110,5 in April to 114,5 in May. The monthly increase far exceeded expectations. The source I use gives figures for this series from 1985. In those more than 35 years, the 114,5 of May was only exceeded in two previous periods.

At the end of 2017/beginning of 2018 there were about two months with higher values ​​and 2000 yielded 8 months with higher values. So there is really quite a cyclical force developing. The next picture shows the development from the beginning of 1985. The picture after that zooms in on the index that applies specifically to the Netherlands. The strong correlation with GDP growth is clear and the latest readings for the index suggest that our GDP growth is going to skyrocket.

Support measures in the Netherlands extended by 3 months
The Dutch government has again extended the temporary support measures for businesses by three months until the end of the third quarter. Companies may also take more time to repay debts they have accrued to the tax authorities. There is no question of a generic waiver and that seems justified to me.

In difficult cases, the tax authorities will think constructively about solutions. Stef Blok, the new (outgoing) Minister of Economic Affairs, indicated that the support should not continue for too long, but also that it should certainly not be stopped too early. The speed and extent to which activity is returning to pre-pandemic levels - once all restrictions on public life have been lifted - will undoubtedly vary by sector. It would be a shame to let viable companies stumble just before the finish line just because they operate in an industry that is slower to recover than others.

To see whether the support measures only keep companies going that would have collapsed without the pandemic and related support measures, one can look at the number of bankruptcies. Last year the number of bankruptcies fell unexpectedly. Analogous to how Statistics Netherlands calculates figures for 'excess mortality' as a result of the pandemic (the difference between the number of deaths that would have been normal and the number of actual deaths), you can calculate 'undermortality' among companies based on those bankruptcy figures. When the number of companies that are still using the support moves towards the under-mortality rate, it is time to end the support.

Business investment continues to increase significantly
It is sometimes argued that the support should be terminated quickly, because allowing these measures to continue for too long encourages the emergence of zombie companies. An eventual innovation and an increase in productivity hinders. Although this certainly applies to a number of companies, it must be said that companies have not been idle during the pandemic, even though many were closed.

Companies have invested heavily in digitization. This applies not only to us, but also to other countries. The following picture shows the value of capital goods shipped monthly in the United States. It is a good indication of the investment propensity of the American business community. That these investments will continue to crescendo in the coming period is strongly suggested by orders for capital goods (excluding defense and aircraft) that have risen faster than shipments in recent months.

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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