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Are we in for a stop-and-go economic development?

By Thomas Meier and Christos Sitounis

Who hasn't been there? In rush-hour traffic, things don't move very fast, you have to stop and start again: the classic stop-and-go situation. This nerve-wracking form of locomotion can certainly be applied to current economic developments.

The last three years have been marked by major changes, triggered by a series of crises. First, the coronavirus put the world into a kind of shock paralysis, bringing social and economic life to a virtual standstill. The consequences have been far-reaching. From empty offices and factory floors to deserted streets. A shutdown that led to significant adjustments across the economy: short-term layoffs, particularly in the US, order cancellations and capacity adjustments. While some industries benefited from the shutdown, the economy as a whole was hit hard. From full throttle to full stop, so to speak.

In turn, the concerted support measures by governments and central banks led to a surge in demand after the reopening of borders, which quickly emptied the stocks of producers and traders. They in turn tried to quickly ramp up production and replenish their stocks. In transport jargon, this would be called a "kickdown" or "cavalier start", and so these restarts led to significant dislocations. A prominent example is container freight rates, which recovered many times over in a very short time. At the same time, some regions, such as China, continued to struggle with Corona-related factory closures.

The result was sharply rising prices and massive delays in supply chains. These disruptions were exacerbated by changes in consumer behaviour caused by the pandemic. The logistical bottlenecks in turn led to massive delays, with some Christmas decorations produced in Asia not reaching customers until Easter. In general, companies tried to fill their warehouses quickly after the opening during periods of high demand. As if this were not enough of a challenge, the next shock came in the form of the war in the Ukraine, which again caused significant disruptions. In particular, the sharp rise in commodity prices, the paradigm shift in central bank policy and the sharp rise in interest rates led to a resurgence of economic concerns, especially in Europe. 

At the same time, late arrivals were met with another shift in consumer behaviour, causing major headaches for companies. In the post-pandemic period, many a container of kitchen utensils went unsold and, in some cases, products in out-of-demand categories led to multi-billion dollar write-offs at retailers such as Walmart and Target. As a result, corporate spending restraint is expected to remain high. Expectations of a weakening economy and consumer sentiment are also leading to caution. At the moment, companies are being cautious in their business reports, as inventories are still being adjusted and there is a lack of accurate information on demand patterns. The pitfalls of the current situation are also reflected in the fact that many fashion retailers, for example, are sitting on high inventories and reducing them, while people continue to have to wait a long time for a new car.

If the capital markets' current assessment of an economic slowdown this year is correct and there is no significant correction, contrary to the prevailing opinion, we can expect to see the foot quickly taken off the brake and the accelerator pressed down again, with all the complex consequences for economic and capital market players.

In general, these short-term and sharp fluctuations in economic behaviour are likely to continue. The era of longer-term cycles is likely to be over for the foreseeable future. The cacophony of challenges is likely to lead to only jerky progress, even in the medium term. The motto of the driver in a traffic jam therefore also applies to all capital market participants: Keep calm!

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