Global economy is recovering at a rapid pace, inflation is rising

Dutch producer confidence is at its highest level ever. German factory orders and imports are rising sharply. Eurozone retail sales are picking up, even without much easing. Chinese imports are growing fast and that's good for us. But the US labor market is disappointing in April, with inflation rising in the pipeline. What does all this mean?

The global economy is recovering at a rapid pace, it's actually quite exciting. There are certainly differences between the various countries. In the countries that are lagging behind, business confidence is improving to such an extent that you can assume that real, solid growth is underway.

Last week, CBS published its own measure (NEVI) of business confidence in the industry. It reached its highest level since early 2019. The NEVI's April measure followed this week, reaching the highest level in the index's 21-year history. Expectations with regard to production are particularly good. Entrepreneurs are also very satisfied with their orders, especially orders from abroad for capital goods. That is an important signal, because it indicates that business investment is picking up in many parts of the world. Entrepreneurs are also very positive about their own production and the production prospects. The first graph shows that this is very likely the harbinger of a growth spurt in production.

German factory orders continue to run out of production
In Germany, figures were released this week on orders and production in the industry in March. The volume of orders increased by 3,0% month-on-month and 27,6% year-on-year. Now the annual comparison doesn't say much, because activity fell so sharply last year. The high growth rate is therefore mainly a base effect. That base effect will be much greater in April (perhaps 75 to 80%).

The following chart simply shows the indices of orders and production. This shows the power of the orders. The gap between orders and production also widened again in March. Production grew slightly less quickly than orders: 2,5% month-on-month and 4,9% year-on-year. The gap between orders and production suggests solid growth in production is imminent.

What is difficult to estimate is the extent to which production is hampered by the logistical disruptions in the world. Germany's foreign trade figures suggest that German companies are making every effort to procure the necessary materials. For example, the German import value rose by 6,5% in March compared to February. Part of it is a price effect, but still… The following chart shows that German imports have grown strongly in recent months. The growth of the export value is lagging considerably behind this.

Don't be too careful, colleagues
I read comments from Dutch banking economists who argue that the recovery in private consumption may be disappointing. Their reasoning is that, although much more was saved than usual last year, it was mainly by people with higher incomes and the elderly. They are not going to spend a lot of money soon, when the restrictions on public life gradually disappear. Which can. But we have to recognize that we haven't experienced this before, so the past doesn't give us anything to hold on to here. Retail sales in the eurozone as a whole are already growing significantly, although not much easing is underway in most countries. In February and March combined, the volume of retail sales increased by approximately 7%. We'll see how this goes.

Incidentally, this is the time when year-over-year comparisons yield remarkable numbers due to base effects. The best thing I came across this week was the growth rate of car sales in the UK. These were 3176,6% higher in April than in April 2020. In Germany, the counter stood at a considerably more modest 90,0%.

Chinese imports continue to boost the rest of the world
China is an important driver of the global recovery. This mainly works through foreign trade, which is why I always look closely at Chinese import and export figures. Of course, the year-on-year comparison is also influenced by base effects for these figures. For example, the import value in April was 43,1% higher than a year earlier and the export value 32,3%. These kind of numbers don't really say much. It is therefore more interesting to look at the development of the value itself, in US dollars, as shown in the following chart. This graph also shows strength.

US labor market temporarily disappoints
The number rose by just 266.000 in April, much less than expected. And as more people entered the labor market (as much as 430.000 more), the unemployment rate rose from 6,0% in March to 6,1%. There were mainly setbacks in the construction and processing industry, but also in transport and temporary jobs. In March, the number of jobs increased by 770.000. The disappointing April figures are not at all in line with other figures.

Weekly unemployment benefits fell to 498.000 in the most recent week for which figures are available. That is a sharp drop from the 590.000 a week earlier. The downward trend of the last few weeks looks convincing. The various confidence indices also point to a strong labor market. And finally, the sharp increase in the working population indicates that people are more optimistic about their chances on the labor market. They usually have a good sense of how the chances are. Therefore, I think the April figure is a one-off setback.

The discussion about the inflation outlook in the US continues. This week, Treasury Secretary Janet Yellen gave an interview in which she said the Fed may need to raise interest rates at some point to get ahead of inflation. The stock market was shocked and immediately fell 2%. Later the same day, Yellen explained that it was not a forecast and that she certainly did not want to call on the Fed to raise interest rates. Then the market calmed down.

This week, the US ISM released monthly business confidence indices. That remained high in April, although both the industrial and services index flattened slightly. I noticed that the so-called 'prices paid' component rose considerably in both manufacturing and services. In both sectors, this sub-index reached levels not often exceeded in the past. The last chart shows the relationship between this service sector measure and the inflation measure the Fed sees as the most important, the Private Consumer Expenditure price index excluding food and energy. The correlation coefficient over the period shown is 0,53. That seems to me enough to be wary of higher inflation rates in the near term.

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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