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Kempen's Commentary: The virus versus the economy

29 May 2020


The virus versus the economy

The damage caused by the corona virus and the associated lockdowns is becoming increasingly visible. Millions of people in the US have become unemployed, and the economy in the eurozone has shrunk more than ever in the first quarter. In the Netherlands, it wasn’t as bad as in the surrounding countries, but here the worst is yet to come. In the meantime, stock markets have already recovered considerably. The massive support deals announced by governments and central banks give the investors hope. Just like the fact that the spread of the virus has reduced in most countries. The number of active cases has declined sharply in China, South Korea and Japan, and the downward trend is also undeniable in Europe. It is stable in the US, while the increase in countries such as Brazil, India and Russia is still worrying. In the Netherlands, there are hardly any new hospitalisations and the number of corona patients in the ICU is steadily decreasing.

Relaxation of lockdowns
With the stabilisation of the virus, the lockdowns are loosened: shops are opening again, service providers can get back to work and children return to school or day care. Outbreaks in a church in Germany and in a nightclub in Korea have triggered fears of a second wave, but this is still invisible in the aggregated data. As the threat of the virus diminishes, people also loosen up in complying with social restrictions. When the weather is nice, the parks in Amsterdam are full of people and the terraces will be too as of 1 June. In the one-and-a-half-meter society, people are looking forward to more social interaction.

Economic damage
The Wall Street Journal said in an editorial on March 19: “No society can safeguard public health for long at the cost of its economic health.” The coronavirus has caused unprecedented suffering and hit especially the elderly and people with underlying health problems. The impact on the economy is still accepted in the public interest, but cautious protests have already risen against the social restrictions. As the threat of the virus diminishes, the question of the extent to which especially vulnerable groups in society must be protected at the expense of the economy is becoming increasingly pressing. Bankruptcies, increasing unemployment rates and postponing regular care are causing major problems. Governments are now compensating a great deal, but how long can they keep up?

Economy gradually starting up
Fortunately, the economy can gradually start up again. This means that after an enormous contraction in the second quarter, growth can continue again in the third and fourth quarter. It will, however, take some time before we reach the pre-corona level again. But with the limitation of large events and in compliance with one and a half meters, improvement should become visible.

Stock markets too optimistic
Stock markets look at direction rather than at level. And as the trend shifts from contraction to growth, the investor mood has improved significantly. Even if it goes from an enormous contraction to just a bit of growth. Isn’t the level of growth important then? I do think so. After all, it’s still difficult to make a profit at low economic activity levels. In our investment policy, we are therefore still cautious.

The author

Joost van Leenders

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