Economy on the eve of spectacular moves

The global economy is on the eve of some spectacular developments, although many figures paint a flattering picture for the foreseeable future.

The Chinese export value was more than 60% higher in February than a year earlier. After the Trump administration passed Congress as a $900 billion bailout package in December, the Biden administration is now adding $1.900 billion. And of course the ECB does not want to be left behind: they will increase their bond purchases 'substantially' (whatever that means).

First the Chinese trade figures. In February, the export value was no less than 60,6% higher than a year earlier and the import 22,2% (in US dollars). The numbers in that country are always difficult to interpret at the beginning of the year because of Chinese New Year. For example, January figures are not published. However, this year also has a significant base effect.

A year ago, China went into a strict lockdown in February and the export value fell sharply. That, of course, inflates the year-over-year growth rate. There is no doubt that China's international trade recovered spectacularly over the course of last year, but 60,6% is flattered. Several other indicators suggest a weakening rather than an acceleration in the growth rate in recent months.

Here comes another $1.900.000.000.000
The Biden administration has passed a new $1.900 billion bailout package through Congress, without a single vote from Republican, incidentally. A good $400 billion of this is made up of checks sent to citizens regardless of whether they need that money or not: $1.400 per adult earning less than $75.000 a year.

That's a lot of people and it's a lot of money. Two-income earners who both fall below the income limit, but together perhaps $150.000, will of course receive double. If they have children, they also receive tax benefits. This bailout package comes on top of December's $900 billion package. So say it's $2.800 billion. Now that money certainly does not all come into the economy at once, but it remains a big chunk.

Inflation fear contributions
When the pandemic broke out last year, the then government launched the so-called CARES legislation. That included about $2.000 billion in relief measures. What the Biden government is doing now seems very extensive in advance. A discussion has arisen about this, which has contributed to inflation fears, among other things.

But government spokesmen say you never know how much you have to do and that under circumstances like the current one it is better to do too much than too little. I also note that the economic background is different from that of a year ago. A year ago, the US economy already shrank by 1,3% (quarter-on-quarter, calculated in the European way) in the first quarter and by 9,0% in the second quarter.

Now there is no increasing but decreasing restrictions on public life, the economy grew by 1,0% in the fourth quarter. The Atlanta Fed's 'NowCast' projection now indicates over 2% growth (or 8,4% annualized) in the current quarter. So you now get a big boost in an economy that is running better.

Labor market improving
In the latter part of last year, the improvement in the labor market appeared to have stalled. The latest figures on unemployment benefits are clearly moving downwards again. That's consistent with other numbers. The picture that emerges is that economic growth in the US will remain reasonably stable and (even without a new support package) will pick up rather than weaken.

You wonder if the US economy really needs such a big boost. I don't think so, but my opinion doesn't matter. More important is the question of what the consequences are. There is no doubt that economic growth will provide a very strong further impetus this year gets. This is also reflected in economists' growth forecasts. Since unemployment is considerably higher than a year ago, the strong growth will initially return the economy at a fairly rapid pace to pre-pandemic occupancy rates and thus unemployment rates.

The question is what happens when we get there. It is likely that economic growth will remain above potential growth for a while. That can actually only lead to 2 possible consequences: higher inflation or higher imports. Or a bit of both. I think the focus will be on more imports so that the stimulus from the Biden package also helps the rest of the world.

Inflation fears have been an important theme in financial markets in recent weeks. The logistical disruptions in the world lead to bottlenecks that translate into higher prices. Increased commodity prices are also making themselves felt. Furthermore, base effects will push the year-over-year figures higher in the coming period. However, the US inflation figures for February were reassuring. Core inflation actually fell slightly: 1,3% against 1,4% in January.

Major federal deficits
Incidentally, the development of American public finances is simply spectacular. Under President Trump, public finances had already deteriorated sharply before the pandemic, while the economy grew considerably. A rather unusual turn of events. Since the outbreak of the pandemic, there has been a further deterioration, as is the case with us. But the US deficits are getting very large. For the 12 months to February this year, the federal deficit was more than $3.500 billion, or over 16,5% of GDP.

Interest rate rise is a brake
The rise in capital market interest rates does, however, act as a brake on the whole. The following chart shows that the rise in capital market interest rates has translated into an increase in mortgage interest rates DThis has subsequently led to a reduction in mortgage applications for the purchase of homes in recent weeks. A slightly higher interest rate therefore has an immediate effect on the housing market, although the effects on the entire economy are probably not great.

ECB will buy substantially more
The ECB has decided to buy substantially more bonds from today than until now. The ECB has decided to take this action because it wants to keep financial conditions in the eurozone very relaxed. During the press conference yesterday, Christine Lagarde was rather vague. She couldn't, or wouldn't say, what 'substantial' is. She also explicitly said that the ECB is not targeting a certain level of capital market interest rates, while the whole discussion has been fueled by some interest rate hike of late.

Instead, the ECB is concerned with 'financial conditions'.When asked how these can be judged, Lagarde again fell into vagueness along the lines of 'we look at everything'. In fact, I think the best way to understand generous financial conditions is that there is plenty of cheap credit available to those who want it. So it's about interest rates and the availability of credit. The ECB has only indirect influence on the latter.

When I try to look at the ECB with my common sense and not with my 'ECB watcher's visor' I wonder what this is all about. Savers crave a bit of interest and the ECB is alarmed and believes it must step in if the Dutch capital market rate rises from -0,5% to -0,25%.

Lagarde also said in the press conference that fiscal policy should provide a greater boost to activity. She praised the Biden administration's $1.900 billion bailout package. Let that support package be an important cause of the increased inflation fears that have set capital market interest rates in motion. Do you still get it?

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

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.