Economy & Politics

ColumnThe four phases of the upswing

Container handling in the Port of Hamburg: Foreign trade is slowly recoveringimago images / Markus Tischler

The shock subsides. After the unprecedented drop in economic output by 20 to 30 percent within just two lockdown-marked months of March and April, the economy in the western world has recovered noticeably since May. As expected, the initially surprisingly pronounced pace of the recovery is now gradually weakening. With the renewed increase in new infections in Europe in August and September, the risk of setbacks has increased again.

But so far it looks like the buoyancy forces will prevail. Unless a new wave of hard lockdowns or political risks from the US weigh on the economy dramatically, the upswing is likely to develop in four phases.

Phase 1: Retail is catching up (May to July 2020)

With the gradual end of most of the restrictions and contact restrictions, large parts of the economy could be switched on again from the end of April or in the course of May. Accordingly, the economy has recovered strongly, supported initially primarily by a rapid increase in retail sales. Consumers took advantage of the opportunity to go to stores again themselves, in addition to making lively online purchases. Since June, the retail trade in most countries in the western world has even been selling slightly more goods than in the corresponding month of the previous year.

Phase 2: Industry and international trade in goods recover (August to around the end of 2020)

After the first catch-up effect ran out, the western world has seen a flatter course since July. The driving forces behind the upswing are also changing. Consumer spending on goods is likely to increase only moderately in the further course of the year. In Europe, with higher numbers of infections, retail sales could temporarily decline. On the other hand, the manufacturing industry and foreign trade are increasingly moving away from the bottom. The phase of destocking, in which shops sold more goods than companies produced, is over. The better economy in China, which recovered relatively quickly from the pandemic and, as usual, is also providing considerable support to its domestic economy, is contributing to the more industry-driven upswing.

Phase 3: More investment by business and government (2021-2022)

In uncertain times, companies hold back from investing. In the second quarter, for example, German equipment investments plummeted by 28 percent after a decline of 10.4 percent in the first quarter, which was already noticeably affected by the pandemic in March. In large parts of the world, equipment investments are likely to recover from the shock of the pandemic with some delay and only gradually. While investments will probably remain comparatively weak in autumn this year, they could then increase significantly again in the course of the coming year. This would then be a third phase of the recovery. Additional government spending will support the economy in the western world considerably in 2021 and in the years thereafter. Fiscal policy is turning more and more from the original cushioning of the downturn and pure survival aid for households and companies to classic economic policy with more government investments.

Phase 4: Further growth via trend (from around 2023 to around 2025)

Even after the return to economic output in late 2019, growth is likely to remain above the rate that was considered a trend before the pandemic for a few years. On the one hand, with unemployment still slightly higher at the beginning, the extraordinarily expansionary monetary and fiscal policy will drive the economy. In addition, companies will continue to invest more than usual in order to compensate for the pent-up demand of the current investment slump and to restructure their supply chains to make them more crisis-proof. Private consumers who have accumulated additional savings during and immediately after the crisis may also reduce their reserves in better times and at times even spend more money than normal. In this fourth phase of the recovery after the pandemic, a certain inflationary pressure could slowly build up. The European Central Bank could finally achieve its target of a price increase of almost two percent, while the USA could noticeably exceed the two percent mark with an even more aggressive monetary and, above all, fiscal policy.

Of course, the information about the possible length of the individual phases is only to be understood as a rough guide.

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