Opinions Hans de Jong
Exporters to China are running like a charm
The global economy continues to develop in fits and starts. Exporters to China are running like a charm. Dutch inflation is higher, but more difficult to interpret. The confidence of Dutch entrepreneurs is weakening and is increasingly diverging. US SME confidence is also declining, but financial conditions are stabilizing.
Some sectors are largely at a standstill, others are running like clockwork. The regional differences are also large. Asia continues to lead, although growth in China appears to have peaked. For the time being, however, the trading partners are still fully benefiting.
German exports to China, for example, were 11,6% higher in December than a year earlier. Exports from Korea and Taiwan to China were even 22% and 43% higher respectively than in January 2020. Now it should be noted that January figures in Asia can be disrupted by Chinese New Year, which changes from one year to the next. our calendar dances.
China was also hit by the pandemic and lockdown measures early last year, so the recent numbers may paint a flattering picture. Be that as it may, foreign trade figures look good for now. For example, Taiwan's total exports were about 37% higher in January than a year ago, and imports were 30% higher.
Bottlenecks lead to higher prices, but is that real inflation?
We also see fits and starts in various bottlenecks. The problems with sea containers that lead to very high freight rates are well known. But there is also a shortage in the semiconductor industry, causing sectors that use semiconductors to experience production problems. Not only does this slow down the economic recovery, it also leads to price increases.
This is most likely due to temporary and local abrupt price increases. The extent to which these influence the overall inflation figures remains to be seen. Central bankers and players in financial markets must assess to what extent any higher inflation rates are permanent and call for action.
Philly Fed boss Patrick Harker said this week that he expects a temporary spike in inflation, but he doesn't expect it to explode through 2% anytime soon. Given base effects and the price of oil and other commodities, that seems likely to me. At least for several months this year, although with Harker I think it's temporary. The first US figures of this year do not give cause for great inflation fears for the time being. The general price level in January was 1,4% higher than a year earlier, which was the same as in December. Core inflation, excluding food and energy, even fell from 1,6% to 1,4%.
Increasingly difficult to interpret Dutch inflation
In fact, inflation in Europe rose considerably in January. This week Statistics Netherlands also published the figures for January. Our inflation rate increased from 1,0% yoy in December to 1,6%. That is a decent increase, but it was still less than in many other countries in the eurozone. I have to say that the view of the numbers is starting to get a bit obscure.
About a third of the 1,6% rise in the price level came from the energy sector. Electricity was 9% cheaper than a year earlier, but that was still -40% in December. This has everything to do with the tax credit that is settled via the electricity connection. It has nothing to do with inflationary pressures in the economy. A further complication is that some products or services cannot be purchased at all due to the lockdown.
Statistics Netherlands had to make an estimate for these components. In January this concerned no less than 7% of the basket. As a result, the 'margin of error' around the figures has increased. Finally, in 2020 there has been a major shift in the consumption pattern, which means that this year the weights of the basket have changed more than usual. This also makes the interpretation of the figures more difficult.
We also see fits and starts in our own country with regard to activity. The industry is riding on the global upswing. In December, average daily production in the industry was 0,2% lower than a year earlier, the least bad figure since January 2020.
Sectors now diverge widely
In 2 other reports this week, CBS shows the differences between sectors and also how big the problems are in some sectors. Business confidence fell slightly in the first quarter of this year compared to 3 months earlier, but there is a clear divergence in confidence between sectors.
Builders are very optimistic. Entrepreneurs in transport and storage, manufacturing and wholesale also became more optimistic in the first quarter. Other sectors are minor. Especially in the catering industry, the already low confidence has been given a new blow due to the lockdown. Of the entrepreneurs in that sector, 5% say they will die within 2 months, while more than 40% say they will not be able to survive another 5 months under the current circumstances.
There are about 65.000 catering entrepreneurs in our country, although no more than 40.000 people work in more than 2 companies. As a sector, the hospitality industry represents about 2% of GDP and about 5% of employment. 85% of the catering companies have made use of the Fixed Charges Allowance (and its predecessor) and 60% of the NOW schemes.
When hospitality businesses go bankrupt, new hospitality establishments quickly resurface as restrictions on public life are lifted. From this point of view, the permanent damage to the economy as a whole is limited. However, this observation completely ignores the enormous personal suffering that lies behind the figures. Many catering entrepreneurs not only lose their business, they have also used up all their financial reserves and in many cases even their pension provisions. This is an unprecedented social drama.
US SME entrepreneurs lose confidence
Fits and fits can also be found in the US. Business confidence, as measured monthly by the ISM (Institute for Supply Management), is strong. Both in industry and in the service sector. The National Federation of Independent Business (NFIB) specifically measures entrepreneurial confidence in SMEs. That NFIB measure is clearly much weaker than that of the ISM.
SMEs are the backbone of the economy. Confidence fell sharply in March and April last year. Then came a recovery, but the revival of the coronavirus in the final months of 2020 has given SME confidence another push. January's 95,0 this year is the second lowest figure in recent years.
Although the number of new corona infections in the US has fallen sharply since the turn of the year, the number of deaths is not yet very convincing. More than 475.000 Americans have now died of corona. If I recall correctly from President Trump's daily press conferences some three-quarters of a year ago, authorities hoped to limit the death to 200.000. About 1 per 1.400 million Americans have now died from corona. In our country it is about 840 and then we are certainly not doing well internationally.
The improvement in the labor market situation in the US also appears to be stalling. The well-known measures for employment have diverged somewhat in recent months, but on balance there is little or no progress. The number of ongoing unemployment benefits exploded to just above 25 million in May. Then followed a rapid decline. In recent weeks, the number has dropped a bit further, but it is not going very fast.
Financial tighteningëConditions halted by the Fed
However, there is also something positive to report. Of course there is much criticism of central banks, which have gone out of their way to support the economy like never before. The price increase of the bitcoin shows that the necessary parties have little confidence in that policy. A key objective of the Fed is to prevent a tightening of financial conditions from causing serious economic damage. We know from experience that the economy will certainly be damaged when the credit process stalls. Especially the longer it takes.
An important indicator that the Fed looks at when assessing those financial conditions is whether or not banks are tightening their lending standards. The Senior Loan Officer Opinion Survey, which is conducted quarterly, provides information on this. The latest survey shows how successful the Fed has been in averting this danger in recent months. The last picture shows the net percentage of banks that say they are tightening credit conditions for companies.
Every recession over the last 30 years has been preceded or accompanied by a significant tightening of credit conditions. Still more banks say they are tightening credit standards than there are banks easing, but the latest observation is 11,4, which is not much above the average of 5,8 over the last 30 years. So at least it doesn't get much worse. I think the Fed is happy with that chart.
Hans de Jong
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