Opinion Han de Jong
Recession exaggerated, but economy is struggling
Last week I wrote a column in which I argued that the European economy might be heading towards a new recession, while we were expecting growth to pick up. I received quite a few reactions on that.
In short:
- Weak economic figures in the Netherlands…
- ...but European GDP figures better than expected
- Fed leaves interest rates unchanged…
- …even though the labor market weakens
- Dutch inflation disappoints
The factors on which an accelerating growth was expected remain unchanged. The two main factors are the improving growth of world trade and the improvement of purchasing power as wage growth exceeds inflation. However, you should note that the economic development disappoints. Last week, I showed a chart of volume figures of world trade, compiled by the CPB. These figures showed that Europe is significantly lagging behind the development of world trade as a whole. The same is evident from figures from RWI and ISL (two German institutions) that register container throughput in ports. The chart below speaks for itself. Of course, you can wonder why the European economy is so much weaker than the rest of the world.
It appears that the improvement in purchasing power is not yet leading to stronger growth in consumer spending in the Netherlands. This week, CBS published figures on retail sales in our country in June. That turnover was 0.7% lower than a year ago and in volume, 1.0% less was generated. You wonder what the consumer is waiting for. What is not there may still come.
Dutch industrial entrepreneurs are also not getting any happier. This week, both the CBS index of business confidence in the industry and the purchasing managers' index of NEVI in July declined. The latter has now fallen below 50.
The GDP growth figures for the eurozone in the second quarter were not even disappointing. In fact, they were favorable. According to initial estimates, the eurozone economy grew by 0.3% compared to the first quarter, equal to the growth in the first quarter. And with four quarters in a row of 0.3% growth, you end up at about 1.2%, which is not bad for the eurozone. However, there are significant differences between countries. The German economy shrank by 0.1%, while the Spanish economy grew by 0.8% (quarter-on-quarter). This raises the question of whether there is a specific German problem or if there is a broader issue. Dutch GDP figures for the second quarter will be released on August 14.
So, what remains of my suggestion that we are heading towards a recession? Perhaps that was exaggerated. The improving world trade and increasing purchasing power are not disappearing. They will at least provide a floor under the European economy. But many recent figures are disappointing. Above all, I think that we are making it difficult for ourselves in Europe by taking various measures that reduce growth dynamics. And then we try to solve that with expansive fiscal policy and very low interest rates. It worries me that the insight that we are causing the structural problems ourselves is hardly recognized.
American economic conditions weaken
The Fed left interest rates unchanged this week, although Chairman Jay Powell indicated that the labor market is weakening. It's a matter of semantics, you could also say that the labor market in the US is relaxing or that it is 'coming into better balance'. And all those qualifications are correct.
According to the JOLTS report, the number of job vacancies continues to decline. In March 2022, 12.2 million vacancies were counted, and by June 2024, the number stood at 8.2 million. The number of vacancies per 100 unemployed has also significantly decreased. As the following graph shows.
The number of initial jobless claims was 249,000 in the week of July 22. That was the highest number since August last year. Although these figures are volatile, it is clear that the trend is upward. This trend started after April. It should be noted that a similar development occurred last year, which did not persist.
A look at the number of ongoing unemployment benefits may provide more insight. The following chart shows that this number fluctuated around 1.8 million for a year, but a rise has been observed since May, and we are moving towards 1.9 million.
It's not a disaster, but it does indicate a weakening of the American economy. This was confirmed this week by the Institute for Supply Management's purchasing managers' index. The index for the industry dropped from 48.5 in June to 46.6 in July, the lowest level this year. By the way, the purchasing managers' indices in China also show a weakening in July.
You can win, lose, or draw
This week, there was something for everyone regarding interest rate decisions by central banks. The Bank of Japan raised interest rates, the Fed left interest rates unchanged, and the Bank of England lowered interest rates.
Fed Chair Powell made it clear that interest rates will be lowered if upcoming inflation figures do not disappoint. During the press conference, he was asked several times why the interest rate was not lowered this week. There was no convincing answer. Powell said that the policy committee needs a little more confidence that inflation will be fine. He also said that the current interest rate level is clearly restrictive. And that would have been an argument to adjust the interest rate, because even after a 0.25% cut, the level is still restrictive.
The only reason I can think of for the Fed to wait is that inflation unexpectedly rose earlier this year. They probably do not want to risk being confronted with unpleasant surprises again. Because the Fed completely misjudged the rise in inflation in 2022, its reputation, or in other words, its credibility has been damaged and now needs to be restored.
A rate cut by the Fed in September seems certain. The more exciting question is at what pace the Fed will further lower interest rates. If the economic slowdown continues and inflation is under control, things could move quickly.
United or divided?
A very remarkable difference between the major central banks at the moment is their internal unity or division. The Fed's decision to leave interest rates unchanged was unanimous. The interest rate cut by the Bank of England was on the edge. Five members of the policy committee voted for the interest rate cut, while four were against. From statements by ECB officials, I deduce that there is division within the ECB. Perhaps there is also division within the Fed, but they seem to successfully close ranks for the outside world, which enhances their credibility.
Unpleasant inflation surprise
Our inflation unexpectedly rose strongly in July: from 3.2% in June to 3.7% in July. The month-on-month increase was 1.5%. Since December, the price level has risen by more than 4%, although it should be noted that these are unadjusted for seasonality and that most inflation in our country falls in the first seven months of the year. This certainly does not make a decline in inflation in the remainder of the year any easier. In the last five months of 2023, the price level decreased by a total of 0.6%. As a result, the year-on-year inflation figure can only decrease if the price level in the next five months decreases by more than that 0.6%. Not impossible, but the likelihood seems limited to me. Companies are still facing higher (wage) costs and may still be able to pass them on almost entirely.
Rent and tobacco excise taxes were the main culprits of that high inflation, according to CBS. Unfortunately, CBS will only publish the full details next week.
In the rest of the eurozone, inflation was also not favorable, but our figures were clearly worse than elsewhere. For the eurozone as a whole, inflation increased from 2.5% year-on-year in June to 2.6% in July. Core inflation remained unchanged at 2.9%. This puts inflation still above the ECB's target, although the difference is not very large. The hawks within the ECB will use the inflation figures to temporarily prevent further interest rate cuts. I suspect that the doves will ultimately get their way, and a second interest rate cut may possibly be implemented as early as September, but certainly before the end of the year.
Conclusion
The strengthening of economic growth in our country is not going smoothly. Retail sales and business confidence disappoint. Even exports are underperforming. However, the improvement in purchasing power and stronger world trade can provide an impetus.
Elsewhere in Europe, except for Germany, things are looking up. Economic growth in the eurozone in the second quarter was stronger than expected. Especially Spain posted impressive growth figures.
The American economy is also weakening. This was particularly evident this week in labor market figures. However, the Fed left interest rates unchanged. They did announce more or less a first interest rate cut in September. I think that more interest rate cuts will quickly follow thereafter.
Inflation remains above the ECB's target. The inflation figure for July was slightly disappointing for the entire eurozone. The Dutch inflation figure was particularly disappointing, mainly due to rents and tobacco excise taxes.
Han de Jong
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