Opinions Hans de Jong
People are clearly drawing on their financial reserves
According to the CPB, the loss of purchasing power will amount to 6,8% this year. That is not wrong, even though the CPB predicts some recovery in purchasing power for next year: +0,6%. I hear on the radio today that everyone is shocked by that 6,8%. Where the hell have those people been these past few months? If inflation is 10% and the wage increase is 3% to 4%, then you really don't have to be Einstein to understand that there is a significant loss of purchasing power, even though the cabinet has taken some support measures. And don't forget that the reduction in excise duties on energy, VAT on energy and on some taxes have already reduced inflation by about 2 percentage points.
It is actually even worse: the CPB predicts that 9,5% of the children in our rich country will live in poverty next year. This is also stated in the draft EIA, the document that outlines the economic environment after which the cabinet is finalizing the budget for next year. The CPB piece is difficult to see other than a call-to-action.
This year, our economy is still growing by 4,6%. Two-thirds of this was already realized in the first half of the year. Next year the growth will still be 1,1% according to the CPB.
The skyrocketing inflation and the accompanying rise in incomes is eroding purchasing power in an unprecedented way. Despite this loss of purchasing power, private consumption is still growing by 5,7% this year, according to the CPB. People are clearly drawing heavily from their financial reserves. That is of course not sustainable. The CPB predicts a small improvement in purchasing power (0,6%) next year, but also a decline in private consumption (-0,3%). I actually still like that. If inflation remains higher than the 4,3% that the CPB predicts for 2023, the picture will naturally deteriorate.
The government has considerable financial scope to do something to restore purchasing power. Next year, if policy remains unchanged, the budget balance will be -1,1% of GDP (and the government debt at 47,1% of GDP). The Dutch Central Bank (DNB) warned this week against generic measures to compensate people for the loss of purchasing power. According to DNB, this will only make the inflation problems worse. After all, inflation is mainly caused by an imbalance between the supply and demand of goods and services in the economy. Large-scale generic purchasing power support will boost consumer demand and thereby exacerbate that supply-demand imbalance, exacerbating the inflation problem. There is little that can be said about this per se. It is a bit wry that the institution that has long spectacularly underestimated and downplayed inflation now suddenly knows exactly what to do and how not to do it.
The government should also realize that this year households up to 120% of the social minimum were helped once with an energy surcharge of €1.300. If this is not repeated, there is a risk of a considerable loss of purchasing power for this group in 2023.
The CPB has published figures on poverty for the first time. People live in poverty when their net income is below what they can meet their basic needs. This year 6,7% of the people in our country live in poverty, next year it will be 7,6%. This is even more unfavorable for children: 9,5% next year.
The needs are high, the causes are clear and the financial scope is available. I think that adds up to a decent package of measures on Budget Day. We shall see.
GDP growth explodes
The Dutch economy grew by 2,6% in the second quarter compared to the first quarter. That was much more than could reasonably be expected. Many details have not yet been published, but Statistics Netherlands reported that investment and foreign trade in particular had generated a lot of growth. When asked, CBS acknowledged that the figures on investments were flattered by the delivery of ships and aircraft. Our growth was well above that in many other countries. Germany recorded a minuscule minus, Belgium +0,2% and the countries that benefited from the tourism revival grew slightly faster, about 1% for Italy and also for Spain. The difference with Germany is getting bigger and bigger and is quite remarkable, as the following picture shows.
The unemployment rate in our country rose slightly for the third month in a row in July: 3,6% against 3,4% in June. The number of unemployment benefits fell slightly: -4.000 to 157.000. At the same time, Statistics Netherlands reports that the labor market tightened again in the second quarter. In the first quarter there were still 133 vacancies for every 100 unemployed, in the second quarter that number increased to 143 for every 100 unemployed. 38% of all entrepreneurs say that a shortage of staff is the main obstacle to their production or activities.
Total confusion in the US
Economic indicators in the US currently paint a very confusing picture. Clearly strong positive and negative indicators alternate. The housing market is quite sluggish. The National Association of Home Builders (NAHB) confidence index fell to 49 in August from 55 in July, marking the eighth monthly decline in a row. The NAHB talks about a housing market recession. This is caused by the increased mortgage interest and the increased construction costs. The fact that the latter factor is apparently starting to weigh heavily is evidenced by the fact that confidence continues to weaken, while mortgage rates have fallen slightly again in the past two months. The housing market therefore seems to have a little more emptiness than interest rates. The number of existing homes sold fell again in July and was about 25% lower than in January.
The Empire State index, which measures producer confidence in the Federal Reserve district of New York, fell sharply in August. In July, the index was still at 11,1, but in August it reached the fifth lowest level ever in the past twenty years: -31,3.
The fall was therefore the third strongest fall in a month. Only the decline in March and April of 2020 was greater. Now this is a confidence index measured in a limited regional area, so we have to be careful with the interpretation. However, this is a remarkably strong decrease.
Against this negative, a comparable confidence indicator related to the Federal Reserve district of Philadelphia actually improved in August: +6,2 from -12,3 in July.
Also positive in the US is that the industry is still able to expand its production. Manufacturing production rose 0,7% month-on-month in July, up 3,2% from a year earlier. That's not overly strong but certainly not a recession, not even close.
The US labor market also appears to be stabilizing. The number of applications for unemployment benefits was 250.000 in the week of August 13. The number of applications had increased in the second half of June and the first half of July, but that increase has now stopped.
Will the economy go into recession or not?
I've had several discussions lately about whether or not the economy is going to go into recession. For Europe – and the Netherlands – that chance seems very high to me, especially because of the enormous loss of purchasing power. The US has a slightly better chance of getting out of hand. It should be noted, however, that the yield curve in the US (ie the difference between the effective yield on ten-year and two-year government bonds) has been negative for some time now. In the last fifty years, every US recession has been preceded by such an inverted interest rate structure.
Is Russian inflation stabilizing?
There is no doubt that the Russian economy is suffering greatly from the war and sanctions. The policymakers in Moscow are obviously trying to manage the economy in the best possible way. I don't know if we can believe the published numbers. But my eye fell on Russian producer prices this week. In the following chart I have compared it with those in Germany and the US. The German figures look very bad. Until the beginning of 2021, these ran strikingly parallel to the American one, but that picture has changed significantly. European gas prices will undoubtedly play a major role in this. Furthermore, it seems that the Russians seem to be doing a pretty good job of controlling producer-level inflation, which is often seen as a harbinger of consumer-level inflation.
For what it's worth, of course.
It is inevitable that the cabinet will come up with an extensive package of measures on Budget Day to support the purchasing power of the most vulnerable groups.
Indicators about the US economy presently present a very diverse picture. While I continue to think that many countries will experience a period of real contraction between now and the end of next year, Americans have a better chance of avoiding the recession than we do.
Hans de Jong
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