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In an analysis titled “Nice Recession – Nasty Recovery,” Schmidt says that last year offered a unique economic crisis. Normally, economic crisis support measures do not fully compensate affected households and businesses.
“In 2020, this pattern was broken. The financial support measures in general more than compensated for the reduction in income and income due to the covid pandemic. The increase in household disposable income was greater than in years with real economic growth and many households now have very good finances, ”writes Nikolaj Schmidt.
“The support measures appear to have created a rather pleasant economic downturn that will be followed by an equally unpleasant recovery,” says Schmidt.
What is “unpleasant” about the recovery is, among other things, the fact that pent-up demand is currently significantly lower than after “ordinary” shocks.
“During normal recessions, the recession creates a pent-up need for capital goods and nondurable goods. But the massive support measures during this crisis mean that the pent-up need for consumption is less, “writes Nikolaj Schmidt and continues:
“The fact is that we are already booming today, and therefore the recovery in 2022 will feel shaky because it will not be supported by a great pent-up need,” Schmidt writes.
People have simply been able to spend money on capital goods, rare goods, renovations, and other things that are normally left behind during an economic crisis. Therefore, the consumption boom after the covid pandemic is not likely to be as great as after a “normal” crisis.
Now, however, the consumption party is not likely to be completely absent. As societies open up, Schmidt predicts that we will initially see people “let go of their animal desires.”
“People are social and after being locked in our houses for over a year, we learn to spend a lot of money on things that involve social interaction. I think the world’s economies will be booming during the second half of 2021 and in 2022, ”says Schmidt.
But when reality catches up with us and we get back to our jobs, it can be disappointing for many from an economic perspective. Especially since for some it may mean that disposable income will be lower than during the pandemic, says Schmidt.
In addition, there are several other risk factors that can cause recovery to fail. Among other things, mutations in the virus could delay the reopening of companies.
“The extended restrictions and social distancing could prevent the boom of the second half of 2021. If we also see new extensive closures, it could mean that companies that are currently fighting for their survival are not successful,” writes Schmidt.
Too soon, a tightening of support measures can also create chaos, says Schmidt.
“An early tightening of monetary policy, for example due to rising inflation, can create financial market turmoil and ultimately derail the recovery,” writes Nikolaj Schmidt.
