This song released by R.E.M in 1987 has become famous again in 2020. Facing the coronavirus pandemic, people have recalled a theme that proclaims that “it is the end of the world as we know it”. In recent months, pessimism has gripped many people, some of whom have almost prophesied the end of the world. Nothing could be further from the truth. We cannot ignore the fact that COVID-19 has brought much suffering to our society, but there is always light at the end of the tunnel. Or, in this case, of the pandemic. And the global economy is already beginning to show it.
Excess of pessimism
In this uncertainty situation, it is recommended to be down to earth, but not in hell. An excess of pessimism regarding the economic situation can be counterproductive. To assess the level of excess optimism or pessimism in the economy, it is useful to use the Economic Surprise Index developed by Citigroup. This index measures the difference (positive or negative) between published official macro data and economists‘ expectations.
The Economic Surprise Index reached a recod of positive figures in the third quarter in 2020, once the global lockdown has passed. Although it has decreased in the last quarter, this is keeping higher than any other quarter in the last ten years. This means that the macroeconomic figures are much more positive (taken the serious situation into account) than the forecasts…what is thie difference due to?
Human beings tend to fear the unknown. Never before have we faced home confinement. Nor would it have occurred to us that governments would be forced to shut down businesses such as the restaurant industry. So when this has happened to us, the more doomsday predictions have been gaining momentum. However, as scientists, politicians and businessmen have learned the “new rules of the game”, the novelty has become the “new normal”. While everyone wants a return to total normalcy, economic activity is now much higher than when the pandemic got out of control in March.
Positive data in the United States
One of the countries with the biggest Economic Surprise Index is the United States, the global leading economy. Several factors explain why the economic recovery is going faster than expected there. The main factor is the nature of the crisis. Americans feared that this crisis could be equal to or worse than the Great Recession. However, they are not comparable.
While the last crises in the United States were the consequence of structural failures in the market, the current healthcare crisis is a one-off “shock”. A tough crisis, but with an expiration date, provided that a solution is found and effective economic recovery and digitalization policies are implemented. In this sense, the Pfizer vaccine has provoked an environment of hope, which has been translated into great increases in Wall Street.
Recovery by sectors
In order to analyze this economic recovery, we have to distinguish betwee three sectors: those who were not affected by confinement or social distance; those who were only affected by confinement; and those who continue to suffer the effects of social distance after confinement (awaiting vaccines).
In the first group, we find sector such as accomodation, financing services, food and other non-durable services. These have not suffered any negative effect, and the last two ones has even experienced a slight development in the first stage of the confinement.
Among the sectors that were only affected during the confinement were automotive, household appliances and clothing. After a decrease in consumption of between 20 and 50% in the second four-month period, these have recovered in the second half of the year. Some have even reached consumption levels higher than at the beginning of the year.
The last group is composed by sectors which will not recover their nomality until a reasonable inmunization level is reached thanks to vacciness. It can be in the second quarter in 2021. We can finde transport, leisure services, an energy among thiese sectors. In these cases, the consumption decrease came up to 60% during confinement. Currently, some services like leisure is found to be in levels lower than 30% than in 2019.
To sum up, the post-COVID economic recovery is not balanced, but faster than expected. While some prudence must be exercised in the face of possible new waves or delays in the vaccine, macroeconomic figures show that the overall economic situation is more positive than predicted. As with previous crises, there is light at the end of the pandemic.