Investments on the way
The world economy has recovered much faster from corona than from the Great Financial Crisis (GFC). In the US, it took four quarters for the economy to return to pre-corona levels. After the GFC, it was 14 quarters. In Europe, it took 7 quarters this time, after the GFC it was 29 quarters. The difference with the previous crisis is that the American consumer has saved no less than USD 2.7 trillion extra (equivalent to 12 percent of GDP). Add to that a substantial wealth effect from increased exchange rates. Even if only 3 to 5 percent of that is spent, that alone is good for economic growth of 6 percent. The corona crisis is sometimes compared to a war situation. In times of war, too, people save a lot, but after the war, the savings rate normalises. This normalisation alone is good for several years of above-average economic growth.
Given the importance of US consumers for the world economy (close to 20 percent), this extra investment provides a strong tailwind. Only rising inflation is (temporarily) throwing a spanner in the works. This lowers consumer confidence, but inflation also pushes consumption forward. The combination of rising incomes, high job security and the ‘feel rich’ factor is leading to greater spending. See for example, the increased baby planning.
Companies have also been able to save up to around 5 percent of GDP on balance. The need to invest is great. Investment as a percentage of turnover is at its lowest level since the 1980s, while profit margins have continued to rise. Stocks are low and more and more companies are reaching their capacity limits. Workers are hard to get, which means that it pays to automate and robotise. Security of supply is not optimal. Investments in more robust chains are needed. Unlike consumption, investment is normally a small part of the overall economy. At the same time, the beta (or multiplier) to GDP is a factor of five. Only governments are putting less money into the economy this year than they did last year, but that is more than compensated for by investment. Add to that the fact that post-Omicron the pandemic is likely to be behind us, and a euphoric mood will boost consumer and producer confidence.
