Dutch industry much stronger than German

The strength of the global economic recovery is waning. It had previously been clear that the Chinese economy was losing momentum, but it is now gradually becoming clear that the Delta variant of the coronavirus is a new inhibitory factor. Fortunately, the cyclical weakening cannot be compared with that during the outbreak of the pandemic at the beginning of last year. Yet …

In the Far East, new lockdown measures are being introduced in various countries. It is hoped that these will not exacerbate supply chain disruptions. But at the moment there is not much to say about it. It seems to us that people are less concerned about the virus in their economic behavior than last year. Then it turned out that the fear of the virus affected spending at least as much as the restrictions on public life. Now that seems to be less the case.

Netherlands-Germany 6-0
There is now a large gap between the industrial sector in the Netherlands and that in Germany. The first picture shows manufacturing indices in both countries. Normally we bump along happily with our eastern neighbours, but now the pattern is quite different.

The big difference is determined by the car industry, which is much larger in Germany than in our own country. Not that we don't have an 'automotive'. Many Dutch companies are suppliers to German car manufacturers. But the weight in total is much smaller with us. In recent months, the Dutch industry has been doing very well and not the German one.

Last week I wrote that things are going well with the order position in Germany and that a strong growth in production is imminent at some point. But when that will come is unclear. You also wonder how long Dutch industry can avoid the German trend. Fingers crossed.

The picture makes it clear that a gap between the two indices already started in 2018. And that was also the time when the German car manufacturers got into trouble. First there was the diesel scandal and then they turned out not to be well prepared for the new European emissions tests.

The latest problem is a shortage of chips. The following picture shows the monthly car production in Germany. Here too it is nice to see that the weakness already started in 2018. And while global demand for cars has recovered considerably since last year's trough, German automakers are unable to ramp up production accordingly.

US inflation stable, but broadening
The discussion about US inflation continues. Earlier this year, no one expected inflation to rise above 5%. Yet it happened. In June inflation was 5,4% and in July the same number was registered. Central bankers, who had not foreseen this at all (nor most other economists for that matter), keep saying that it is temporary.

The FD of Friday 13 August contains an article by Joost van Kuppeveld, a very good economics journalist, that begins with the sentence "The most recent inflation figure in the United States was not too bad". He points out that 'core inflation' was only 0,3% in July. It may well be that Van Kuppeveld is right and that the central bankers are right. What was striking in recent months was the strong increase in a limited number of goods and services. This mainly concerned second-hand cars (now about 45% more expensive than a year ago), rental cars, airline tickets and hotel stays. Undoubtedly, these prices will not continue to rise and certainly not at the rate of recent months.

Don't ring the alarm bell
The Cleveland Federal Reserve publishes a series that excludes the 8% most increased in price and the 8% least increased in price for goods and services. In this way, second-hand cars, etc. are therefore not taken into account. That series is called the '16%-trimmed mean CPI'. The following picture shows that inflation is now also accelerating. The story that higher inflation is only due to a limited number of goods and services is therefore not entirely true.

I really don't want to ring the alarm bells about the inflation outlook in the US, but I'm less convinced of the temporary nature of higher inflation than many others are. I will readily admit that the goods and services that have driven inflation up this year are not continuing to do so. But who tells me that other goods and services will not take their place?

House prices have been accelerating for some time now. However, they are not included as such in the inflation measure. But rents and rents imputed to homeowners do. Together these two have a weight of approximately 30%. The following picture shows that rents generally follow house prices with some delay. The picture makes it clear that the development of rents has actually slowed down inflation in recent times. But it seems likely that things will turn around at some point.

As far as I'm concerned, this issue is by no means settled. The danger that inflation will remain high for longer and that the Fed and/or the bond market will react to this has certainly not disappeared. In the short term, however, that risk seems small to me. However, it seems that at the next policy meeting next month, the Fed will lower the amount for which bonds are bought monthly.

Tight US labor market continues to grow
Ultimately, I remain of the view that wage developments are crucial for the evolution of inflation in the longer term. According to the monthly JOLTS (Job Openings and Labor Turnover) report, the number of unfilled vacancies increased again sharply in June. The following picture shows that the number of vacancies has grown to more than 10 million.

The next picture shows the monthly change. Since the monthly figures are quite volatile, I am showing a 6-month moving average.

A couple of American economist friends of mine warn that I should be careful with the interpretation. I tend to think that the figures point to a sharply increasing tightness in the labor market and that this will lead to an acceleration in wage growth. In turn, that acceleration will fuel inflation.

But my American friends (who, incidentally, are firmly in the camp of economists who believe that higher inflation is temporary) tell me that many companies post vacancies, but have no intention of hiring people. They only post these vacancies to get an impression of the labor market, it is argued. Who am I to say it isn't.

I can dig into the numbers a bit more though. The last picture, also from the JOLTS report, shows how many employees resign of their own accord. In my view there are quite a few and I still assume that people only resign if they are convinced that they will quickly find other suitable and perhaps better paid work. I am therefore inclined, despite the warnings of a few pals, to think that this latest picture confirms that the US job market is very tight.

All in all, the worldview doesn't change that much. The global cyclical recovery continues, but is losing some momentum, mainly due to a slowdown in growth in China and the Delta variant. Logistical disruptions are lasting longer than expected and in countries like Germany this is clearly slowing down the industrial recovery. This is not yet very dramatic for the world as a whole.

The discussion about the inflation outlook continues. I'm less convinced than many others that it will all work out very soon. On the other hand, unpleasant surprises in the short term do not seem likely to me either.

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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