Panic buying companies and rising inflation

The optimism of Dutch industrial entrepreneurs is at an all-time high, but so is the slowdown in deliveries. Companies are making panic buying. In the eurozone, inflation is at 2%, but due to base effects, inflation can easily rise above 4%. And the number of bankruptcies and the unemployed may be less than expected if the corona support is ended.

The global economic recovery is well underway. Take, for example, what American entrepreneurs say about their order books. According to the ISM survey, the US manufacturing new orders sub-index rose from 64,3 in April to 67 in May. And in the services sector, this sub-index rose from 63,2 to 63,9. Those are strong numbers and they imply very solid growth momentum.

NEVI sets record
In our own country, the NEVI reported a record level in May for business confidence. As the following chart shows, the correlation between this index and industrial production growth is high. A strong pick-up in production is therefore in the offing.

Still, all the positive survey results certainly carry a caveat: Delivery issues are on the rise. In the latter part of last year it became clear that logistical disruptions were occurring in the world. Demand for goods grew much stronger and earlier than expected. While shipping containers were in the wrong places, shipping carriers withdrew ships and manufacturers had scaled production, anticipating a long period of weak demand.

This resulted in supply problems and shortages of all kinds of inputs. I am not a supply chain expert and, in my optimism and apparent naivety, had thought that these problems were temporary. But the situation is only getting worse. The NEVI statement says that delivery delays have never been more severe (this series goes back to 2000). It is certainly not inconceivable that a number of companies will try to profit from the situation.

But my former colleague Albert-Jan Swart of ABN Amro explained to me that some shortages, such as memory chips, occur in very capital-intensive sectors, where scaling up production cannot be done easily and quickly. That sounds plausible and implies that the problems could continue for months. So far, the figures do not indicate that production growth will be severely limited by the supply problems, but that is almost inevitable. We will see…

Incidentally, an entrepreneur friend in the manufacturing industry told me that although he can order stainless steel, delivery could be four months at the earliest and that he cannot agree on the price yet. That makes doing business difficult. He also told me that the supply problems are driving entrepreneurs to buy anything they can get their hands on. In many cases, stocks are built up in this way, which means nothing for the time being. While such behavior is understandable, it only exacerbates the situation.

Is the flag flying at the ECB?
Hoera! Inflation in the eurozone rose to 2% in May. That was 1,6% in April and -0,3% in the last months of last year. You may think that the ECB has thus achieved its objective. And that monetary policy can therefore be normalized, i.e. higher interest rates and the cessation of bond purchases. However, that is too short-sighted.

First of all, the year-on-year measure of inflation is being pushed up as prices fell in May last year compared to April. So there is a 'base effect'. Moreover, half of inflation is caused by energy prices. Core inflation, ie excluding food, energy, alcohol and tobacco, stood at 0,9% (year-on-year) in May. Inflation driven to a large extent by energy prices is not the kind of inflation you want. Such inflation acts as a tax that energy-importing countries pay to energy-exporting countries. It sucks purchasing power out of the economy. What you really want is inflation generated domestically and driven by a recovering economy and accelerating wage growth.

Base effects will cause reported inflation in the eurozone to rise much further in the coming months. These effects include the impact of the temporary VAT cut in Germany in the second half of last year and because inflation in the pipeline will partly manifest itself at consumer price levels. That probably won't be the case in June, but keep in mind that the inflation rate could easily exceed 4% in the months to come. Although of course you actually have to look through those temporary basic effects.

Reported inflation figures may fall sharply again in early 2022, but the markedly higher inflation figures after June will undoubtedly present challenges for the ECB and financial market players in the coming months.

Don't expect a tsunami of bankruptcies
Business support measures will be extended for a further three months until the end of October. Further extension is not excluded. The question is whether there will be a wave of bankruptcies when that aid ends. When the crisis hit last year, the general expectation, including mine, was for bankruptcies to rise. Banks prepared for it by allocating more manpower to 'special management' departments, the department within a bank where loans to companies in difficulty are managed. Contrary to expectations, the number of bankruptcies did not increase. From June, a remarkable decline actually set in, as the chart below shows.

A calculation on the bottom of a cigar box suggests that up to and including April this year there has been an 'undermortality' of companies since the middle of last year of more than 1.100 companies. I assume that the number of bankruptcies would have developed at the same pace without a pandemic as in the period from 2017 to 2019. Those 1.100 companies would have collapsed without a pandemic and without support measures. When the support disappears, some of those companies will still collapse. Although there are undoubtedly companies that have successfully exploited the 'breather' to become viable.

Incidentally, the Dutch experience of a decline in bankruptcies is not unique. In this weekend's The Economist I found the following picture. It shows that in other countries there are also fewer bankruptcies and that this trend is in stark contrast to the experience of the crisis of 2008/09. The latter is also the case with us.

Furthermore, after the support has ended, there are companies that have to deal with changed preferences of their customers, to which they have not or have not been able to respond sufficiently. It is impossible to predict how many there are. Although a potentially large number of companies from the reported undermortality will still die, I am inclined to think that things will not be too bad with the bankruptcies. This probably also means that the rise in unemployment - which many are forecasting - may not materialize or at least remain very limited.

Recent research into the financial position of SMEs dfor Jasper de Winter and Maikel Volkerink of DNB I conclude that SMEs in our country have weathered the crisis reasonably well. Remember, the recession was unprecedentedly abrupt and deep. Of course, a number of companies have been hit hard. According to the DNB investigation, 9.300 companies have encountered liquidity problems and 3.700 companies have received negative equity. However, the differences between sectors are large. According to the DNB survey, the total solvency deficit created by the pandemic for these companies is approximately €2,1 billion, which is a deficit of €13.000 for the median company. Very annoying of course, but it could have been much worse.

When the crisis hit and the option to get tax deferral was introduced, many companies took advantage of that opportunity. At one point, the tax debt was reported to have amounted to €36 billion. But by the end of April, that had fallen to $16 billion. At that time, the Tax Authorities had granted a reduction of €4 billion and companies had apparently already repaid €16 billion. I find that last amount remarkably large. The experience at banks is similar. Last year, banks offered business customers a six-month delay on the payment of interest and principal. A majority of companies accepted that offer, but the majority of those deferred payments have since been paid.

It seems that, apart from some sectors, SMEs have weathered the crisis well. A number of other factors are also relevant for the expectations with regard to a possible increase in bankruptcies and unemployment. Thus, we are on the eve of an economic recovery, which is likely to be stronger than previously anticipated. Second, companies with tax debts do not have to start paying back this year, but only next year, and then they can take five years instead of three.

And third, bankruptcy laws have changed this year. That depends on the pandemic. From the beginning of this year, it will be easier for companies to force a small number of creditors, who prefer bankruptcy over restructuring, to participate in such a restructuring. In many cases, this prevents bankruptcy and makes a restart possible.

On balance, I conclude that the support measures have proved particularly effective in limiting the economic damage. Unfortunately, that does not mean that there is no damage. There is a good chance that the economic news in the coming quarters will be better than expected and that economists will adjust their economic forecasts in a positive way. Higher than expected inflation, resulting nervousness in financial markets and logistical disruption in the world are the main threats.

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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