Dutch labor market tight, keep an eye on China

The Dutch labor market is unprecedentedly tight and will remain so for the time being. The budget deficit in our country will fall sharply next year without new policy. In the United States, the Fed is going to 'taper'. And to keep an eye on: the Chinese economy is cooling down considerably. 

Unemployment in the Netherlands fell to 3,1% of the labor force in July (3,2% in June, 3,9% in December 2020 and peaked at 4,6% in August last year). The continuing decline was certainly not expected in the latter part of last year. The CPB, for example, forecast an unemployment rate of 6,1% for 2021 in November. And they were certainly not the only ones who expected a sharp rise in unemployment. Just before the pandemic, unemployment was even lower than it is today: 2,9%. So that doesn't matter much.

Statistics Netherlands also reported this week on the tension in the labor market. For the first time since such figures were reported in 2003, the number of vacancies in the second quarter exceeded the number of job seekers. There was 1,06 vacancy open for each job seeker, as the following picture shows. The previous record was set in the second quarter of 2019, when there were 0,93 vacancies per job seeker. The total number of vacancies rose by 82.000 to 327.000 in the second quarter. Both numbers are records.

The next picture shows the number of unemployed plus the number of jobs. The pandemic and the recovery have given the labor market a significant boost. Now that is common during a recession. People then 'disappear' from the labor market. This apparently also happened during the corona crisis. It will partly be about immigrants who have returned home and people who have given up working life.

Some of these people have been lost to the labor market. But some may come back, whether or not lured by higher wages. Labor migration will remain low for the time being, so that will not contribute much to the desired relaxation of the labor market. If you assume that the economy will continue to grow in the coming period - and possibly realize 'catch-up growth' (after all, our GDP is still slightly lower than before the pandemic) - then you have to conclude that the labor market will remain quite tense for the time being. The CPB expects a growth of almost 4% this year and more than 3% next year.

Dutch GDP grew by 3,1% in volume in the second quarter, largely exceeding expectations. Yet GDP was still 0,9% lower than just before the pandemic. All spending components contributed to the growth, except for investments. The latter is something to think about, because the desired increase in productivity must, of course, primarily come from investments.

American figures, for example, show that investments, especially in digitization, are increasing sharply there. Unfortunately, I do not have much insight into what exactly is happening in the Netherlands in this area. And the official bodies (CBS and CPB) don't seem to know exactly either. It may well be that the contraction in investment reported by Statistics Netherlands in the second quarter was mainly due to the depletion of inventories. It can therefore be a kind of 'noise' in the numbers.

Given the tight labor market, I think it is reasonable to expect that companies will increase their investments in the near future (if they have not already done so). The statistics on production by industry show that production in mechanical engineering and electrical and electronic equipment is increasing strongly. In the export figures, machines are also at the top in terms of growth. Surely our companies cannot ramp up production of machines because there is more investment everywhere in the world except us?

CPB adjusts estimates: little reason for severe cutbacks
Today the CPB published new growth estimates that form the basis for the final phase of the preparation of the Budget Memorandum 2022. The much better than expected figures for the second quarter contributed significantly to a sharp upward revision of the growth estimate for this year: 3,8 .3,2% against an estimate of XNUMX% in June.

The budget deficit is estimated at 5,3% of GDP for this year (from 5,9% in June). The economic recovery and the end of the support measures mean that the government deficit will automatically decline sharply next year: to 1,8% of GDP. The fear that the increased deficit could lead to serious budget cuts in the coming period therefore seems unfounded.

A new government must define its own fiscal policy. There doesn't seem to be much reason to cut spending. On the other hand, there does not seem to be much room for expensive new policies, without being offset by other revenues or reduced expenditure on other items.

Fed to 'tape'
The minutes of the most recent policy meeting of the US central bank confirm what we already suspected from all kinds of speeches from board members. The Fed is very likely to start with . in the latter part of the year 'tapering'. That is, the amount for which the Fed buys bonds each month is reduced.

The stock exchange reacted with shock to the minutes. However, it must be said that the stock market has already risen sharply this year. And so a correction or at least a breather was on the way anyway. I think the Fed is going to be very careful. Now USD $120 billion a month in bonds is being bought. There will be some sort of roadmap and I expect purchases to be reduced very gradually.

It doesn't seem to me that the stock market will be permanently hit hard by that 'tapering'. It is also interesting that US capital market rates barely reacted, but the dollar did. It got stronger. My interpretation of this combination is that markets are still struggling with the meaning of the 'tapering'.

China is cooling down, something to keep an eye on
Perhaps the most important news for the global economy this week came from China in my opinion. The Chinese economy has been the growth engine of the world for years. It is not always easy to keep a sharp eye on developments there and transparency regarding economic policy often leaves a lot to be desired.

The most recent figures show a significant cooling of the Chinese economy. Industrial production growth slowed to 6,4% yoy in July from 8,3% in June. Now the pace of more than 6% growth is comparable to that of before the pandemic, but the decline from one month to the next is significant. Retail sales growth fell even more sharply, from 12,1% in June to 8,5% in July. Car sales figures are also declining.

Why the growth is declining so markedly is a bit of a guess. The retail sales figures strongly suggest that the emergence of the Delta variant of the coronavirus and the strict lockdown measures that the Chinese government is taking as a result are clearly making themselves felt. The problem is that the vaccine with which the Chinese population is vaccinated is not very effective and apparently not at all against the Delta variant. And while Dutch citizens seem to be fearless about the Delta variant, Chinese consumers are much more cautious.

Closing
On balance, the figures confirm that the global economy is past its peak of growth. I don't see much cause for concern anyway. Growth will continue to falter in the coming quarters, albeit in a somewhat slower gear. We must, however, continue to monitor developments in China as closely as possible, because a sustained strong cooling of the economy there will be felt everywhere.

With regard to the Dutch labor market, I say: it will remain tense for the time being. Get used to that.

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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