Now that the infections are on the rise again, things are getting exciting for the economy


It was the big caveat in all economic forecasts. Will there be a second corona wave? Now that the Covid-19 infections are rising again in the Netherlands earlier than expected, it is becoming exciting for the economy, for employment and for the health of the business community. Enduring one corona wave was already a struggle for financial survival for entrepreneurs and the self-employed. But a second blow?

As of Thursday, companies will be able to take advantage of a new, reduced support package from the government that will run until the summer of 2021. But that package with steadily decreasing wage subsidies and retraining money was devised a month ago. The question is whether this package is still sufficient now that the cabinet took new restrictive measures against the second wave on Monday evening.

Prime Minister Mark Rutte (VVD) said on Monday that the measures have economic consequences. That raises two questions. How is the economy doing now? And do these measures now make the earlier gloomy scenarios realistic?

Storm coming?

The economy now looks a lot like a calm that follows a storm, or a calm that can be an omen of new turbulence. Today’s crisis is not prevalent. The cause is not, as usual, in the economy itself. There was no overproduction, either stock market crash or high inflation to be tamed.

The crisis comes from outside, in the form of the corona virus. The consequences for the economy arise from restrictive measures by the government and from changed behavior of citizens – in their capacity as entrepreneurs, consumers or employees. In addition, there is unprecedented government support worth tens of billions of euros. In a sense, economics is also in intensive care. That makes the current situation somewhat unreal. Despite the unparalleled 8.5 percent contraction of the economy in the second quarter, is there actually an economic crisis?

The usual economic indicators have been showing conflicting signals for months. Take the number of bankruptcies of companies. They rise in a regular crisis. Slowly at first, then faster and faster, as consumers cut back and companies invest less. But now? In the week to September 19, 58 companies went bankrupt, according to figures from the Central Bureau of Statistics (CBS). Less than a year earlier. This year, 2,511 companies have since gone bust, 241 fewer than in the comparable period in 2019.

The consensus on the crisis approach: don’t cut corners, but spend

The unemployment. Another barometer that immediately breaks out when a crisis bites. That’s right: since March unemployment has risen by 1.7 percentage points to 4.6 percent. That is the level of three years ago. Being out of work is a personal setback for everyone, but if you look at the economy as a whole, unemployment is relatively low for a crisis. In 2013, the low point of the previous crisis, it was 7.9 percent.

Two more financial indicators. People save hard. In a severe economic crisis, consumers take money from the bank to maintain their spending. Then the stock market prices: the stock market indicator of medium-sized Dutch companies, a cross-section of the economy (construction company BAM, PostNL, dredger Boskalis) stands at 800 points. That is the level of a year and a half ago, when the business sector had a bright outlook. With the current ultra-low interest rate, some people choose not to save, but to invest.

Another apparently astonishing riser: prices of owner-occupied homes. They are only getting more expensive. In August, owner-occupied houses had increased in price by more than 8 percent compared to a year earlier. Incidentally, house prices continued to rise for a while even during the credit crisis that started at the end of 2008.

Indicators like the above confuse economists and policymakers.

Isn’t it bad then? Yes. The health crisis is hurting sectors and professions where people have close contact with other people. The new measures ideally affect them again. The catering industry. Congresses. Theaters. The tourist industry. But also public transport and aviation, such as KLM.

You can see the consequences of this in the number of hours worked by all employees and the self-employed together. According to Statistics Netherlands, this decreased by more than 6 percent in the second quarter. Another indication is the consumption of services, which is pre-eminently an activity between people. In the second quarter, consumption of services plummeted by more than 19 percent, the CBS reported. In July, when the catering industry was open again and the Dutch were en masse on holiday in their own country, it was still 15 percent lower than a year earlier.

Quickly in the right direction

And yet things quickly turned in the right direction in the course of the summer. According to sentiment, things are going quite well for a country in which things are going very badly.

Most economists found that the recovery after the first corona wave was successful, in a sharp V-shape. On the site of the Bruegel think tank, Paul de Grauwe and Yuemei Yi state that compared to two other mega crises, the one in the early 1930s and the financial crisis after 2008, the line up was found surprisingly quickly. The policy mistakes of the 1930s are no longer made. The flexible interest policy and the expansionary fiscal policy support the economy. And the banks don’t need to be helped up first. That also makes a difference.

But now that the second wave has arrived, and also earlier than expected, everything is changing again. When the Central Planning Bureau (CPB) presented the economic scenario with the national budget for 2021 two weeks ago, it also revised the medium-term scenario in a separate publication. This will run until 2025. This update also includes the forecast for a second wave. And that doesn’t lie. Not only is there a new loss of production and consumption in such a second wave. Long-term problems are also becoming more significant. Higher unemployment slows down labor migration and slows down productivity growth. The potential growth of the economy is declining.

Big consequences

This has major consequences. In the basic scenario of the CPB, in which the corona crisis is limited to one wave, the national debt will rise to 67 percent of the gross domestic product (GDP) in 2025. In the ‘deep-down scenario’ in which the corona crisis is much more drastic, the national debt stands at 84 percent. The budget deficit will then not be 1.7 percent but 3.7 percent. And unemployment does not rise to 4.5 percent but to 6.7 percent. All in all, the economy will not be back to the level it was before the virus until 2025.

Is the government already taking this scenario seriously? It’s all about it. Minister Wopke Hoekstra (Finance, CDA) wrote to the House of Representatives on Monday evening that the ‘second wave scenario’ will become relevant if ‘substantial new lockdown measures are taken and households and companies become more restrained in spending and other economic activities’.

The year 2025 in the figures of the CPB is no coincidence. It is the end of the next cabinet term. Political parties base their programs for the 2021 elections on it. And the current cabinet is already dealing with it. Their successors have to work with a scenario where the virus is defeated with the measures that are now being taken. Or they have to contend with a scenario in which the damage has become much greater. Politically, everything depends on the policy that will now be pursued.

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