The financial media recently adopted an optimistic tone as industrial production in Eurozone countries for the previous month was made public. The strong recovery fuels the hopes for a comeback to pre-pandemic levels faster than initially thought.
If compared with the 2008-2009 Great Financial Crisis data, the V-shaped chart reveals a more ample crisis twelve years ago. However, before growing too optimistic, there are some things to consider.
A Different Type of Recession Ahead
Investing managers often use a benchmark to compare their performance. Also, analysts use a benchmark to estimate the risk premium required to calculate the cost of capital when interpreting a company’s financial statements. All in all, benchmarks provide comparable data for interpreting similar situations.
If we use the 2008-2009 Great Financial Crisis as a benchmark against which to compare the coronavirus industrial production, we notice how painful the 2008 crisis was. But that is only because we do not know when the pandemic ends and with what casualties.
In a recent article, the Financial Times pointed out that the industrial output in Eurozone economies comes back to almost pre-pandemic levels. However, traders and investors would be better off if such headlines are put into the general context.
For example, in Spain’s case, manufacturing is only 11% of GDP. A bigger and more important chunk of the GDP belongs to the travel, tourism, and hospitality sectors – they account for more than 20% of the economic output.
If we use how much the GDP shrank in the second quarter (i.e., almost 20%), it means that the three sectors mentioned earlier are ravaged by the coronavirus recession. Also, it means that unemployment is higher and more people are affected in sectors that contribute to the economic output more than the industrial production does.
In other words, while the V-shape rise in industrial production is good news, investors should take it with a grain of salt. By all means, it does not signal a similar recovery for the overall economy – just for that 11% part of the GDP. Unfortunately, it reveals the sluggishness of the economic recovery and implies a longer-than-initially-expected transition from economic contraction to expansion.
A more encouraging sign comes from the Euro area consumption figures. We have seen quite a rebound in June, and there is only one question left – is such a recovery sustained?
If yes, it matters more than the industrial production comeback.