The European gas price is a complete disaster

While all economists eagerly await the words that Fed boss Jerome Powell will utter at the Jackson Hole conference, the European gas price is steadily rising. The first image is a screenshot from Thursday, August 25, around 18.30:321 PM. €50 per MWh! In a month's time, the already high gas price has risen by more than 15%. Before the pandemic, €5 was a normal price and the gas price even fell to €21 in the first months after the outbreak of the pandemic. So the price is now more than 300 times as high as it was before the pandemic (on Friday morning, the price dropped to just under €XNUMX MWh).

The source I use gives a US gas price of $9,40 per MMBTU. The US gas price has also risen, but is now 'only' about three times higher than what was normal before the pandemic. If you convert MWh to MMBTU, it turns out that the European gas price is currently about ten times (!!!) higher than the American one. For large parts of the industrial production apparatus in Europe, this will killing become. Of course also for the gas and electricity bills of families, not to mention our greenhouse horticulture.

Very bad role of governments, for decades
Why don't I read anything in the newspaper about why that happened and who is going to do what about it? I am not an expert and the expert I normally consult for this, Hans van Cleef from ABN Amro, is on vacation. But what I understand is that European governments are afraid that we will run out of gas in the winter and have therefore ordered stocks to be replenished 'at any cost'. Speculation will also play a role and it cannot be ruled out that the price will fall back a lot at some point. But with a big buyer in the market who doesn't pay attention to the price, you automatically get a seller's market. I don't know exactly how it should be done, but clearly too little thought has been given to the consequences of the current policy.

I can't get over how wry this all is. Governments have made us increasingly dependent on Russian gas for XNUMX years by thwarting exploration, banning fracking, Nuclear phase-out in Germany etc. The same governments are now panicking and buying gas like a headless chicken, making it unaffordable. And when asked for compensation, it sounds harsh at first that we are all getting poorer. We are anxiously awaiting Prince's Day.

As far as gas is concerned, this gives us an impossible choice: either there is a shortage and we are in the cold, or there is no shortage, but no one can pay for the available gas and we are still out in the cold! Companies may not be high on the list to be compensated, but this is going to have a major and very negative impact on many industries. In this way, the economic consequences of the war and the mutual sanctions become dramatic for our countries.

Dutch consumer confidence fell again to a record in August: -54, compared to -51 in July. It was the fourth time this year that a new low was set. And in view of the above, it is very likely that more records will follow.

Preliminary results of S&P Global's monthly surveys of business confidence were released this week for a limited number of countries. In the table I have included the figures for the composite index, ie those for industry and those for the services sector combined. Of course, it is striking that confidence fell in all countries in August and is below 50 in all countries except the UK. As a rule of thumb, values ​​above 50 indicate economic growth, values ​​below 50 indicate contraction. However, experience shows that these numbers have to be well below 50 for a real recession to occur. Nevertheless, the picture is not pretty.

The German Ifo index fared slightly better, which has been measuring German business confidence for much longer than S&P Global. The Ifo index had already fallen sharply before and lost some ground again in August, but the damage was limited.

Higher interest rates in the US are already having very visible consequences
I'm afraid it won't get any better this week. Interest rates in the US have already risen considerably this year. The Fed has raised interest rates four times by 2,25% in total and capital market rates have also risen considerably. Although capital market interest rates are still low from a historical perspective, this interest rate rise is already having very visible consequences for interest-rate sensitive sectors. The following chart shows the number of mortgage applications broken down by applications for refinancing and applications for the actual purchase of a home. The low level of requests for house purchases confirms that the housing market is currently cooling down rapidly. The very low level of refinancing applications means that households are less and less able to improve their cash flow by refinancing their mortgage. This eliminates an important source that enabled consumers to maintain their spending despite the erosion of their purchasing power. This is therefore not a good sign for the development of consumer spending in the coming quarters.

Some better news
Despite all the troubles, American business continues to invest eagerly. I always focus on the monthly report on durable goods orders. In particular, I follow the series depicting the shipment of capital goods (excluding defense and aircraft). That range is a good proxy for corporate investment. As the following picture shows, the dollar amount continues to rise. Currently, the value of the capital goods shipped is more than 11% higher than a year ago. By the way, I immediately indicate the weakness of this series: it concerns nominal amounts. For years, capital goods hardly rose in price, but that has changed in the current inflationary chaos. I can't estimate exactly how much of the 11% increase is a price effect and how much a volume increase.

The revised US GDP growth figures for the second quarter also included some positive elements. First, growth was revised slightly upwards. Or rather, the contraction, which already was not much, became even smaller. But that revision was actually in the margin of error.

With the release of the first revision of US GDP quarterly figures, the first preliminary figures on corporate earnings are also released. This concerns the entire business community, including non-listed businesses. I track these gains from the national accounts as a counterpoint to what companies themselves report publicly. In my view, the development of corporate profits is a hugely underestimated economic indicator. Like it or not, the economy cannot run without corporate profits. The good news is that US corporate earnings did well in the second quarter. They were more than 8% higher than a year earlier and more than 6% higher than in the first quarter.

Slightly depressed from ever rising gas price
I don't get any happier. Especially the ever rising gas price in Europe makes me slightly depressed and I am amazed that so little attention is paid to it. In my view, governments have a lot to explain to citizens and companies here. First, governments have made us increasingly dependent on Russian gas, and now they are pushing the price up through their panic buying. I don't see how this can change any time soon. If it turns out that there is a larger speculative element in the price than I presume, then the price may also fall considerably again and my scaremongering is completely misplaced. However, I suspect and fear that the latter is not the case.

The global economy continues to deteriorate, although some bright spots can still be found here and there.

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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