Global economy is sending conflicting signals

The global economy is sending conflicting signals. US construction and consumers are strong, but the job market is not. Japanese export figures summarize the situation nicely. The Dutch consumption pattern is changing and the strict lockdown is taking its toll. While producer prices in the US and Germany are showing signs of inflation.

The global economy is starting to give more and more conflicting signals. This is nicely expressed in the German ZEW series. ZEW publishes the results of a survey it conducts among analysts on a monthly basis. This includes questions about future expectations and an assessment of the current economic situation in Germany.

In February, the latter fell further: -67,2 against -66,4 in January. Expectations for the future actually improved: +71,2 against +61,8. In the chart below, I've subtracted both series from each other. The difference in assessment between expectations and the current situation has rarely been as great as it is now.

US construction and consumer strong, but labor market not
It is not difficult to find recent macro data that shows strength. For example, the building permits granted in the US. They recovered strongly after a short dip last spring. In January this year, 22,5% more building permits were issued than a year earlier. In December there was already a plus of +17%.

The American citizen was also not indifferent to his/her consumer purchases in January. Retail sales rose a whopping 5,3% month-on-month after falling for 3 months. In comparison with a year earlier, a plus of 7,4% was recorded (these are nominal amounts).

Perhaps the figures are distorted because shoppers forced to hold back for Christmas. The strong monthly increase may therefore be related to the seasonal adjustment rather than underlying strength. But if the figure is skewed by special circumstances, it's better to go up than down.

Japanese export figures nicely summarize the state of the global economy
I have written before about the cyclical strength in Asia being pulled by China. Unfortunately, it seems that the Chinese economy is losing some momentum, but for now other countries are benefiting quite a bit. The export figures for January speak volumes.

The total value of Japan's goods exports was 6,4% higher in January than a year earlier. But that was entirely due to Asia. Nearly 60% of Japanese exports remain within the region. That value increased 19,4% year-over-year. Exports to China (21% of the total) were even 37,5% higher in January than a year earlier.

There may be a base effect here (that the year-on-year change is positively impacted by an exceptionally weak month a year earlier), but when I look at the underlying numbers, it's not that bad. This time of year is always clouding the view of the Chinese economy due to the shifting timing of Chinese New Year. Moreover, base effects are increasingly going to strongly influence the year-over-year figures, making it even more difficult to keep a close eye on the economy. I just keep doing my best.   

In addition to positive figures, there are less beautiful ones. For example, the improvement in the US labor market appears to be stalling. The number of applications for unemployment benefits reached a temporary low in early November and has gradually increased since then. The absolute level (861.000 in the week of February 12) is still well above what was normal before the pandemic.

Dutch consumption pattern has changed, strict lockdown takes a toll
In our own country, too, the macro figures paint a mixed picture. Our economy shrank 3,8% last year. That is substantial, but a lot better than expected months ago (in December, DNB still expected a contraction of 4,3%). And also a lot less than in neighboring countries. The expected growth this year and next year is also correspondingly less for us. But yes, that makes sense.

Unemployment fell to 3,6% in January after 3,9% in December. Over the past 12 months, unemployment has moved within a range of 2,9 to 4,6%. The relatively modest percentage probably hides a certain 'hidden unemployment', but it mainly shows the success of government policy. The burden of the pandemic, at least so far, has not fallen heavily on workers.

As in other countries, the consumption pattern has changed significantly last year. Because several sectors were closed, consumers were unable to make some purchases. This was especially true for expenditure on the hotel and catering industry, sports, culture, and so on. According to figures from Statistics Netherlands, total private consumption fell by 2020% in volume in 6,6. But retail sales (incl. online) actually increased: +4,6%.

The graph below shows the changed consumption pattern nicely. It is also striking that retail turnover in December was lower than twelve months previously. Undoubtedly, this must be explained by the strict lockdown that has been in effect from mid-December. Since this is still ongoing and to which a curfew has even been added, you should not have high expectations for the Dutch economy in the first months of this year.

Signs of inflation
Fears of inflation are rising in financial markets. A common measure of inflation expectations in the US is the so-called '5yr/5yr forward swap rate'. It has risen considerably in recent months. In line with this, capital market interest rates have also risen.

Inflation fears are based on various considerations. The sharply increased budget deficits and the very loose monetary policy are an important factor. In addition, it is becoming increasingly clear that bottlenecks are emerging in the economy, with problems developing in production and supplies. In those situations, price increases are obvious. The big question is to what extent these are temporary or if they initiate a broader inflationary process.

There is not yet much to be seen of a clearly rising inflation in consumer prices. The situation is different now with producer prices. This is important, because it is expected that the effects of bottlenecks in the supply chains will be expressed first in producer prices.

In the US, it rose 1,3% in January compared to December and 1,8% year-on-year. That was certainly not due to energy prices. Excluding food and energy, prices rose 1,2% month-on-month and 2,0% year-on-year (1,2% yoy in December). The same development is occurring in Germany. There, the monthly increase in producer prices was 1,4% in January, while the year-on-year increase accelerated from 0,2% in December to 0,9%.

I am not an inflation pessimist. Normally, wages are an important link in the inflation process. Only when the rate of wage growth picks up and productivity clearly exceeds productivity is more permanently higher inflation likely. We don't see many signs of that yet. But I feel more uncertain about the inflation outlook than I've felt in years. 

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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