The Netherlands expects strong growth in the second quarter

The Dutch economy was in recession in the first quarter of this year. We are now out of that. Gross Domestic Product (GDP) figures in this ongoing second quarter will be strong. World trade continues to pick up, but the US recovery is losing some momentum.

The GDP figures for the first quarter confirm that the Dutch economy experienced a recession in the last quarter of last year and the first this year. In Q1, GDP in volume declined 0,5% quarter-on-quarter, after contracting 0,1% in the previous 3 months. GDP in Q1 was still 1,9% lower than a year earlier and 3,4% lower than just before the pandemic.

The worsening corona figures and the strict lockdown pushed 'growth' of private consumption to -3,5% quarter-on-quarter. Foreign trade made a positive contribution to growth, albeit somewhat smaller than I expected. Business investment, on the other hand, surprised positively.

When the GDP figures were published, Statistics Netherlands had only released data for January and February for investments in tangible fixed assets. Based on that, I assumed that Q1 investment would make a negative contribution to GDP growth. But they actually grew by 3,7% quarter-on-quarter. As it turned out, that was through March.

In that month, investment surpassed that of a year earlier by 9,5%. This figure may have been slightly flattered by a base effect. After all, the pandemic had a clear impact on business activity in March a year ago. However, this applied to a lesser extent to investments, which apparently reacted with some delay.

A large base effect will occur in April and especially in May. Then the year-on-year figures 'explode'. The graph above also shows that the 'Economic Sentiment' that the European Commission compiles about our country is a good short-term predictor of GDP. The recent rise in that index therefore offers perspective.

Strong business investment hopeful signal
Back to investments. The fact that they were so strong in March is of course welcome and hopefully this positive development will continue, although CBS indicates that March had one more working day this year than last year, which is not corrected in these figures. Household consumer spending was also much stronger in March than in January and February. All that means the first quarter ended strong.

And we will see that reflected in the GDP figures for the second quarter in due course. For the numbers nerds (like me): there is probably a significant 'spillover effect'. Of course, all this is without prejudice to the fact that some sectors and a large number of entrepreneurs are struggling to take full advantage of the economic recovery, due to a lack of resources to make the necessary investments. Hopefully the government will come to the rescue here.

One sector that continues to face major challenges is aviation. The following picture shows that the number of flights and the number of passengers via Schiphol is not yet showing a clear recovery. With freight it is a different story and that is not surprising. There is no doubt that Schiphol's figures will improve significantly in the coming months.

UK grows vigorously, German industry struggles
The various IHS Markit reports on business confidence in May provide interesting insights. The UK economy is gaining momentum impressively. The vaccination process is way ahead of ours and it shows. Business confidence in the industry reached a record level in May (the series starts in 1992). Confidence in the UK services sector reached its highest level in 91 months.

Confidence also improved in the eurozone, both in the services sector and in manufacturing. But less than in the UK and there were notable differences between Germany and France. In Germany, confidence in industrial companies fell slightly, albeit from a very high level, but still… In France, confidence in industry actually improved.

Global chips shortage
The commentary in the press release about Germany makes rather emphatic mention of delivery problems. In the survey, 79% of German respondents reported experiencing late deliveries of inputs. That's a record for this series. Perhaps the difference with France has to do with the heavier weight of the car industry in Germany. According to the stories, that sector is suffering more from the global chip shortage.

German entrepreneurs have well-filled order books, but they are less positive about this in May than in April. According to Markit, customers place fewer orders because deliveries are delayed and they are therefore unable to produce in full. This is starting to look like a self-perpetuating mechanism. Under these circumstances, it is logical that prices are rising faster and faster. To what extent this translates into inflation at the consumer level and how long higher inflation lasts depends on several factors. The problems and dangers become more acute the longer the logistical challenges last.

World trade continues to grow
Meanwhile, the recovery in world trade is continuing. This week, Korea and Taiwan released their April foreign trade figures. Base effects resulted in year-over-year growth rates of over 40%. But that's not saying much. That is why in the next picture I show an index of the values, where I have set the average of 2018 at 100.

Chinese statisticians released April figures for a number of key economic indicators this week. Industrial production was 9,8% higher than a year earlier. Basic effects also play a role here, albeit to a limited extent. In April last year, growth was 3,9% year-on-year. So over 24 months, production was more than 13% higher. This is in line with the growth rate of more than 6% per year. It confirms that China has fully caught up with the production loss caused by the pandemic.

Chinese retail sales grew 17,7% in April compared to April 2020. Then the year-on-year change was -15,8%. Retail sales have therefore certainly not made up for the pandemic-related loss. It may be a permanent loss.

US growth solid, but momentum weaken
The US economy is in the throes of a double dip recession, as many European countries have experienced. This is undoubtedly largely due to the various stimulus packages, in which large sums of money have been given to families. However, the US economy is now losing some momentum. That is of course not surprising.

It was decided in December to send people checks for USD $600 per qualifying person and another check for $1.400 in March. This naturally leads to a direct spending impulse. Not that all that money is spent immediately, but a large part is. Two regional business confidence indices, the Philly Fed index and the New York Federal Reserve's Empire State index, fell in May, although they certainly continue to point to solid continued growth.

The Philly Fed had included some special questions about price increases in its monthly survey. The expected average increase in own prices during the coming 4 quarters is 5%. The same question was asked in February. Back then, companies expected to increase their prices by an average of 3%. That was already somewhat higher than the increase of 2,3% actually implemented in the previous 12 months. Companies now also expect their wage costs to rise by 4%. They have increased by 12% in the last 3 months. The uncertainty surrounding the inflation outlook continues…. To be continued…

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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