To forecast what will come in one month at a time of crisis is useless work that can resemble deceit. Economic forecasts based on sophisticated mathematical models have proved to be as reliable as a weather forecast for next year. That is why it makes more sense now to try to interpret the mood and atmosphere rather than hard data.
These show that we are currently witnessing one of the breaking moments of the crisis. At a time when the economy is going through the steepest free fall, people are at the same time regaining their confidence and optimism. This contrast can have an essential impact.
Bad news and good news
The world has released the worst news so far. The American economy fell by 6.1% in the first quarter of the year, the most in the past 51 years. Germany announced a fall by 6.3%. Berlin has not been in a worse situation since 1945.
At the same time, however, business and consumer confidence that the situation will improve is sharply rising. The German index Ifo has not been the only one to record a sharp rise. The index of economic sentiment published by the European Commission, was continuously falling since May 2007. Europeans had not gone through such a long and deep recession for 24 years. But this April the situation changed for the better.
Why is confidence returning now when the situation is the worst? People are tired of the crisis and bad news. They badly wish to see a turn; optimistic news is rare and as it is the case with everything that is rare it is being overestimated. Economic estimates also probably play a role. Even though they are often unreliable, especially when someone who is not too trustworthy tells us what we desire to hear, we have a tendency to believe them. And all economic prognoses show catastrophic scenarios with record falls for this year and, at first sight, an optimistic outlook for next year.
When we see that this year the Czech economy should fall by 3.5% but next year it should be growing slightly, we logically conclude that the worst is past us.
Disappointed expectations
The slowly returning confidence could shorten the crisis significantly. If people start shopping again and bankers start lending money again, the economy will recover. The optimism can also be an explanation for the fact that the bleak scenarios forecasting social unrests and the strengthening of populists with simple solutions are fortunately not being realised.
Nowhere in Europe has there been any significant strengthening of populist and extremist parties. People do not pin their hopes in those who condemn capitalism. In some countries the support of economically liberal parties is even strengthening.
In Germany where the big coalition of the Christian and Social Democrats is governing, it is logically the opposition parties who are profiting from the crisis. However, neither the Greens nor the leftist Linkspartei have been doing better. Both of them have fewer supporters than in the last elections in 2005.
On the other hand, the liberal FDP is strengthening: Four years ago it had 9.8% of votes, and now up to 16% of Germans would vote for the party. It has never had better results in the past 10 years as it has now during the crisis. It is advocating a small government, low taxes and as little regulation as possible.
Weimar and kidnapped bosses
However, premature confidence carries also a big risk of unfulfilled and disappointed expectations that the situation will soon be better. If people find out that they carried it too far with their optimism, they could start looking in the future with far greater scepticism than at the beginning of the crisis. The second wave of frustration could then soon be reflected in social unrests and in escape to populism.
There are many dangerous hints. In Germany the current recession is more and more often compared to the economic fall of the Weimar Republic that gave power to the Nazis. Representatives of trade unions are flirting with this parallel dangerously often.
The trade unionist leader Michael Sommer warns that mass layoffs will be perceived as “provocation of employees and trade unionists” and adds that social peace may end fast. The so-called bossnapping or capturing of bosses by employees who revolt against layoffs is spreading in France among radical trade unionists.
By all appearances – without regard to the gradually returning confidence – a big increase in unemployment is still expected.
Before it gets better, it will probably still be worse for some time.
