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Economic developments and the letters of the alphabet

Economic developments and the letters of the alphabet
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ARTICLE TYPE
Research
TOPIC
Macro
PUBLISHED
February 25,2021
READ TIME
3 mins
AUTHOR
Serdar Kucukakin
SHARE
Back
ARTICLE TYPE Research
TOPIC Macro
PUBLISHED February 25,2021
READ TIME 3 mins read
AUTHOR Serdar Kucukakin
SHARE

With the Eurozone publishing its preliminary growth data for the last quarter of 2020 the three largest economies in the world have now published their full year growth results for 2020. It is stating the obvious that all economies were hit significantly last year because of the pandemic, though the magnitude of the hits and especially the following developments were diverse, not only between the three largest economies, EU, US and China, but also globally.

 

Since the start of the pandemic last year discussions have been all about what shape the economic recovery would have. Throughout these discussions quite a variety of letters of the alphabet have been used: V-shaped, U-shaped, W-shaped and K-shaped recovery, implying that some sectors are booming while others are collapsing, to put it boldly.

 

This is not the way I look at and interpret the economic developments the past twelve months or so. Let me explain myself. Entering the current crisis there were no apparent imbalances in Europe or globally for that matter that could cause a recession, let alone a crisis. The economy was moving along nicely across the globe. Our main concern at that point was the ongoing trade-war between the US and China and how that would continue to affect the global economy.

 

This, however, is an economic crisis by choice. We created this crisis because of ethical considerations: we choose to do the right thing by protecting our weakest in society and not to overload our medical system, by locking ourselves up and pausing the economy.

 

This policy measure of pausing the economy has of course a one-on-one relationship with economic developments. We knew already during the first lockdown that unpausing the economy would lead to a jump of activity, which has certainly happened. But we also knew back then that a second lockdown was coming around the end of the year (i.e. 2020), which we are experiencing currently in Europe. With negative effects on economic developments. Russia for example did not opt for a second lockdown. There is even talk about a third wave of infections but the difference here could be that there is now light at the end of the Covid-tunnel. There is a vaccine.

 

Now taking the above observation about the one-on-one relationship between (un-)pausing an economy and its influence on economic activity, “a real economic recovery” implies a healing process that corrects the imbalances in the economy.  At the same time, the policy-option-created-imbalances during the first lockdown are certainly not corrected as of today. On the contrary, in the Netherlands for example the government extended/broadened the scope of some measures, in an attempt to alleviate the pain for entrepreneurs during the current, second lockdown.

 

So looking ahead what could a “real economic recovery” look like? Answering this question requires looking into the crystal ball and as it was to be expected economist don’t have a  unanimous answer. They are even living up to a famous, old saying: put 10 economists in a room and you will get 11 views! Here is one of these eleven views. My crystal ball tells me that two potential developments could be elementary: first, will there be pent-up consumer demand and if so how much of this is effective demand once we have dealt with Covid-19? Consumers are currently forced to over-save so when restrictions are lifted some relief spending is to be expected. At the same time we should not forget that in many countries forced consumer savings are mirrored by growing government deficits. It remains to be seen how the interaction of these two opposing developments will affect economic developments down the road.

 

Getting the first question right is quite elementary because it directly feeds into the second question: how will companies deal with all these deferred taxes once they have to be paid? In the Netherlands for example companies owe more than EUR 13 billion to the tax authorities. A significant unleashing of the consumer pent-up demand could help companies,  but if this ‘unleashing’ of pent-up consumer demand is rather tepid, companies could experience significant difficulties at the end of this year. Time will have to tell which letter of the alphabet will prevail here.

More about the authors

Serdar Kucukakin Senior Sovereign Research Analyst

Serdar Kucukakin is a senior sovereign research analyst and is responsible for sovereign analyses of Central European countries and the Middle East.

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