Eurozone grows faster than the United States

If I can't think of any arguments in a discussion with which to convince someone else, my last asset is: 'Just believe me'. It's a desperate attempt to be right. It rarely works. Only people who go out of their way to love me ever heed such a desperate call. Probably more out of love than conviction.

For example, I try to like ECB President Christine Lagarde during her regular press conferences, but I can't. It is staggering how touching those displays are. She means very well, not about that. The fact is that the ECB's objective is to achieve and maintain price stability. The fact is that inflation is now above target. The most important fact is that inflation has picked up much more and will remain higher for much longer than forecasted by the ECB a few months ago. In other words, the ECB just doesn't know anything about it. Not that I know it all that well, but I'm not going to preach with a confident look what's going to happen next after such a goof. And the ECB does that through Ms Lagarde. At the press conferences she also uses the tone of a kindergarten teacher who is of course almost omniscient with regard to her students. Horrible!

Okay, that had to get out.

The ECB maintains that the high inflation is temporary and will decline next year, albeit perhaps not yet in the first quarter. Lagarde did indicate that the emergency purchase program, PEPP (Pandemic Emergency Purchase Programme), will probably end at the end of March next year. That seems reasonable to me because the economy will have recovered sufficiently from the pandemic.

However, interest rate hikes will have to wait longer. The market is now pricing in a first interest rate step in the latter part of 2022, but that is much too early, according to the ECB. The ECB has formulated three conditions for normalizing interest rate policy. First, the inflation forecast should reach 2% well before the end of the forecast horizon. Second, ECB economists should expect inflation to then remain at 2% until the end of the forecast window. And third, on underlying inflation, there must be enough progress to expect 2% over the medium term. So a lot depends on the predictions of the ECB economists, the ones who have been so hugely wrong this year…

I also understand that inflation is currently driven by temporary factors. But the longer high inflation continues, the more likely it is to hit inflation expectations and wage growth. In other words, the longer it takes, the more likely that higher inflation will become permanent. We don't hear Lagarde about that.

The Fed and Bank of England policy committees will meet next week. It will be interesting to find any differences with the ECB.

Inflation again exceeded expectations
In October, inflation again exceeded expectations by a rather large margin. Month-on-month, prices in the eurozone rose by as much as 0,8%. Year-on-year inflation rose to 4,1% from 3,4% in September. Core inflation (ie excluding food, energy, alcohol and tobacco) was 0,3% month-on-month and 2,1% year-on-year. Since the introduction of the euro in 1999, inflation has averaged 1,6% and core inflation 1,3%.

Economic growth is slowing down
Economic growth is rocking reasonably in the eurozone and in the US, although the industry is being held back by the logistical disruptions. In some sectors this is a bigger problem than in others. At the moment, this mainly affects Germany because of the great weight in that country of the car industry and the problems the sector is facing due to global chip shortages.

The French economy grew no less than 3,0% in the third quarter compared to the second quarter, according to preliminary figures. The Italian economy has also grown strongly: 2,6%. In Germany, growth was held back by the problems in the industry. The growth there came out at 1,8%. German statisticians reported that private consumption in particular contributed to the growth. For the eurozone as a whole, there is provisional growth rate of 2,2% for the third quarter. Unfortunately, we still have to wait for detailed figures.

They are already available about the US economy. Growth there (expressed in the European way) was only a narrow 0,5% quarter-on-quarter, clearly lower than ours. This has everything to do with the spending impulse that the Biden government handed out earlier this year and which has now been worked out. On an annualized basis, US growth was 2,0%. That was well below the 6,3% and 6,7% of the first and second quarters, respectively.

Last week I wrote here about the Atlanta Fed's GDPNow metric forecasting annualized growth of 0,5%. So the 2,0% was not that bad. It should be noted in this regard that a strongly reduced decline in stocks contributed to growth of 2,1%. Without the stock movement, the US economy would have contracted somewhat, although such reasoning is a bit oversimplistic because the growth contribution of international trade would have been less negative without the stock movement. The impact of inventory changes on GDP growth is a fairly technical story. On balance, you can say that the growth figure was flattering. Incidentally, in the third quarter companies were still heavily depleted on inventories (albeit much less sharply than in the second quarter). They can't and won't continue to do that, so the stock change will undoubtedly continue to be a positive contributor to growth in the coming quarters.

Most interesting figures on investments by companies
In my view, the figures on company investments (excluding those in inventories) are the most interesting of all. The first graph shows the growth contribution of investments in information processing equipment en in intellectual property products† When the pandemic hit and pushed the economy into an unprecedented abrupt recession, revenue models came under massive pressure. Companies reacted with a leap forward. Significant investments were made in digitization. This is reflected in the increase in the growth contribution of information processing equipment from the second quarter. With a slight delay, from the third quarter onwards, the growth contribution of investments in intellectual property products increased considerably. This makes me positive about the expected development of the productivity and profitability of companies in the future.

Business investment as a whole is now doing well in the US. It has been a theme that I have been following closely for some time. The following picture shows the value of the capital goods shipped in the US. In September, the amount rose to $75,9 billion, from $74,9 in August. The level was 2,7% higher than a year earlier (August 11,6%). This series is a proxy for business investment. However, it should be borne in mind that these are nominal amounts and that capital goods can also become more expensive in this time of shortages of materials, etc. Nevertheless, this picture strongly suggests that companies have seized the shock of the pandemic, including the supply problems and personnel problems, to increase their costs. to invest. That should be positive for productivity and profitability.

How smart are we?
We live in a cool country. And although the government is caretaker, we are doing well. We are growing faster than our neighbors and our inflation is lower. How smart we are.

Business confidence in Germany and the Netherlands respectively diverges. In Germany, the leading IFO index fell for the fourth month in a row in October and was below its long-term average. The index compiled by Statistics Netherlands on producer confidence among industrial entrepreneurs in our country actually equaled the highest level ever in October and has only weakened briefly in August in recent months. The following picture offers an interesting picture. Up to 2018, both indices are in line with each other. But in the course of 2018, German business confidence weakens much more than ours. This is undoubtedly due to the Dieselgate problems in the automobile industry that is so important to Germany. Also, the recent divergence between the two series is likely to be mainly related to problems in the automotive industry as it is hit by severe and ongoing chip shortages. Another explanation would be that Dutch entrepreneurs are smarter than German entrepreneurs and thus respond better to the disruptions of the economy supply chains† I wouldn't rule that out completely. The ability to improvise is generally somewhat higher in the Netherlands than in Germany. I say this based on my own experiences from the time I lived in Germany. But the most important is undoubtedly the problem of the car industry.

Oh yes, that of our lower inflation is of course a cynical joke. It is true that our inflation rate is lower than in many other countries, but that is mainly due to the government's restrictions on rents, which together make up 23% of the inflation rate.

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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