Global economic growth is slowing down

It is becoming increasingly clear that the global economy is weakening. After the boost given to activity by the reopening of the economy and the stimulative policies in several countries, some downturn was to be expected. This decline is now further exacerbated by the delta variant and by the logistical problems in the world that do not want to know about any neighbourhoods. Higher than anticipated inflation also puts a brake on the economy because purchasing power suffers.

The next three pictures give an impression of the cyclical weakening in the various regions. The first picture shows business confidence indices in the Netherlands and Germany. That is still at a very acceptable level, but has fallen in the last month.

The same goes for consumer confidence in the US. US consumer confidence fell from 125,1 in July to 113,8 in August, according to the Conference Board measure. That is quite a significant decrease, which is mainly explained by the emergence of the delta variant. Concerns about high energy, gasoline and food prices also played a role, according to the press release.

The following picture shows the indices of Chinese business confidence according to the official statistics. It is notable here that the confidence of entrepreneurs, especially in the service sector, suffered a blow in August. Increasing numbers of infections and lockdown measures are the explanation here. This index has fallen back below 50 and the picture nicely shows that this is much lower than was usual before the pandemic. Business confidence in the industry also fell slightly in August.

How far?
The big question is whether and to what extent the economic downturn will continue. Of course, factors such as the delta variant play an important role in this respect, and unfortunately little can be said about this in advance. It seems to me a reasonable assumption that this influence will be negative for the time being.

For now, I don't think we need to worry. For the time being, economic growth is in any case reasonable. In addition, monetary policy remains unprecedentedly loose in many countries. While fiscal policy is being tightened as temporary stimulus measures expire, governments will react quickly with new measures if the economy were to sink too far.

In addition, families in many countries have accumulated significant savings. These will certainly not be converted into expenditure en masse in the short term, but they do form a buffer and part of it will certainly be used for expenditure.

Furthermore, order books at companies are usually well filled. A strong wave of 'catch-up activity' is released when the logistics world succeeds in remedying the disruptions.

Other developments at companies are also positive. The following picture gives an indication of the investment behavior of American companies. The monthly series of shipments of capital goods is used as a proxy for corporate investment in the national accounts. So far, business investment has continued to grow strongly.

The following picture shows the development of corporate profits as reflected in the national account. This applies to all companies, not just listed ones. Total corporate profits rose 9,2% in the second quarter compared to the first quarter, when there was also an increase of 5,1%. Compared to the second quarter last year, profits were up more than 43%, but that's not saying much because of the deep recession last year. Compared to the average profit level in 2019, profits in the second quarter were almost 18% higher.

This is all quite healthy and no reason to expect a dramatic economic development in the short term. Nevertheless, we must realize that since the outbreak of the pandemic we have been dealing with economic developments such as we have not seen before. Forecasting is therefore (even) more difficult than usual. If we slide into economic contraction, it will all be a different story. For now, we are a long way from that and it is unlikely that it will come to that. However, it is not impossible.

Eurozone inflation picks up
Eurozone inflation rose to 3% in August, from 2,2% in July, as the latest picture shows. Core inflation stood at 1,6%, after 0,7% in July. That sounds more alarming than it actually is. Base effects played an important role here. That is to say: in August last year, prices fell compared to July and they rose just this year. But those month-on-month increases were by no means exorbitant: +0,4% for headline inflation and +0,3% for core inflation. On the other hand, a monthly increase of 0,4% is of course not very low and the inflation outlook for the time being remains more uncertain than it was before the pandemic.

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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