Sharp fall in orders on the brink of recession

The volume of Dutch retail sales is firmly down. A new international theme: sharply declining orders. The US central bank Fed is far from stopping, but the US economy is remarkably robust. In addition, the Russian economy is now collapsing further.

The economy is weakening. This is clearly visible in large parts of the world and certainly with us. Statistics Netherlands reported that the retail trade recorded 5,3% more turnover in September than a year earlier. That seems like a nice figure, but it should be remembered that this is a nominal figure. In volume, retail sales were 3,5% less than a year earlier. These figures are volatile, so it may be better to look at quarterly figures. In the third quarter, the volume of sales was 3,6% lower than a year earlier and no less than 5,2% lower than in the second quarter (corrected for shopping days).

The picture below shows that there is a clear correlation between the volume of retail sales and economic growth. Quarterly figures are shown in the graph. The GDP figures for the third quarter are not yet available, which Statistics Netherlands will publish on 15 November. It seems likely to me that there will be a significant minus, although that is partly because the second quarter figure (2,6% growth qoq) was flattered by one-off windfalls that were probably not repeated in the third quarter.

The Dutch Purchasing Managers Index (NEVI) fell from 49,0 in September to 47,9 in October. October was therefore the second month in which the index was below 50, which strictly speaking indicates a contraction. In February, this confidence indicator was still slightly above 62, which indicated strong growth. The decline since then has been quite significant. Export orders in particular are developing badly, the sub-index came in at 39.7. The following chart shows that export orders fell faster only during the crisis in 2008/09 and just after the outbreak of the pandemic. It seems that the international economy has weakened rapidly over the past few months.

Sharp decline in orders, a new international theme
That picture is also reflected in figures from Taiwan, for example. Business confidence in that country has been weak for months. Although the purchasing managers index (the national version) rose slightly in October, it remained below 50 for the fourth month in a row. Also in Taiwan, export orders in particular are particularly weak. The export orders sub-index fell to 33,5 in October from 35,6 in September. With that, this sub-index reached the lowest value since this series was started in 2012. The drop since March is also the sharpest drop since the start of this series over such a period.

Weakness in orders also in Germany
The trend of sharply declining orders appears to be an international theme. In Germany, factory orders fell 4,0% mom in September after falling 2,0% in August. Foreign orders even fell by 7,0% mom in September. Orders from other EU countries were especially weak: -8,0%.

The next two pictures illustrate this. After a strong recovery from the collapse caused by the pandemic, there is now a new and strong decline. The absolute level of order intake at German industrial companies is now comparable to 2015.

In the year-on-year comparison, the counter stood at -10,7% in September, slightly less dramatic than the -11,1% in July. The following chart makes it clear that such fat minuses are not so common. In the last 20 years, only the 2008/09 crisis and the pandemic have seen worse numbers, albeit much worse.

A recession, how deep?
These are very unusual times. There is, in my view, no doubt that a recession is imminent, especially in Europe. Unlike in all previous recessions since the early 80s, central banks will do little or nothing to prevent, mitigate or accelerate the recession. In fact, monetary policy both in our country and in the US will certainly be tightened further. That should make this recession relatively deep.

But there is something to that. Firstly, consumer spending can be supported because many households still have buffers that they built up during the corona time. In addition, the government support packages will partly compensate for the loss of purchasing power. And thirdly, many companies that run into problems may be able to make a new start because there are many resources available from parties such as private equity funds that look for opportunities to put committed money 'to work'.

It is therefore not so easy to foresee on balance how deep the recession will be.

China: the 'stop-go' economy
The Chinese economy continues to be plagued by frequent local lockdowns. In fact, the activity there shows a wonderful stop-go cycle. In October, things were pretty wrong with the various confidence indicators. The central bank measures business confidence on a monthly basis, as is done elsewhere. The industrial confidence index fell from 50,1 in September to 49,2 in October, and the services sector fell to 50,6 from 48,7 in September. I haven't checked the numbers, but it's not often that both measures are below 50. Meanwhile, the real estate crisis continues. We should therefore not expect major growth impulses for the world economy from China in the short term.

US economy remarkably robust
The US economy is much more robust than most other countries. That is also logical. For example, energy prices, or rather gas prices, have risen much less rapidly than in the Netherlands and Americans are more or less self-sufficient in energy. Moreover, the war in Ukraine is of course much further away.

A feature that our country shares with the US is the tight labor market. Where, according to the most recent CBS figures, there were 143 vacancies per 100 unemployed in the US, this figure was 200 in the US a few months ago. There seemed to be some relaxation in recent months, but the number of vacancies rose again sharply in September: to 10,7 million from 10,3 million in August. In doing so, there were 186 vacancies per 100 unemployed in September.

Fed won't stop, surprises stock market
The Fed raised rates again this week by 0,75%. The interest rate over the last nine months has now been increased by 3,75% points in six steps. We are of course coming from an extremely low level, but since the early 80s the Fed has not raised official interest rates that much over such a period. So this is really historic.

The financial markets were seriously misled on Wednesday. The usual short written explanation of the interest rate decision was interpreted as a sign that the Fed will not hike rates much further. Stock markets bounced. In the press conference that followed, Fed chief Powell skillfully dashed the markets' hopes. The Fed will continue to hike rates "until the job is done," Powell said. The Fed will moderate the pace of rate hikes, but even that need not be the case in December. Disappointed, the stock market reversed and at the end of the day the signs turned deep red. The following picture shows how violent the price movement was from the start of the press conference. Since 1994, from the moment the Fed chief started speaking to the close of the trading day, the price loss has never been greater than last Wednesday.

Are sanctions starting to bite in Russia?
After the war broke out and sanctions were imposed against Russia, growth estimates for the Russian economy were immediately cut sharply. According to an initial estimate, GDP is expected to contract by 8% this year. The ruble went into free fall and the central bank raised interest rates sharply (from 9,5% to 20%). Restrictions on capital exports were also imposed. The measures led to a recovery of the ruble and a moderation in inflation after an initial shock. This enabled the central bank to cut interest rates again (now at 7,5%) and the Russian economy entered calmer waters. Meanwhile, the growth estimate for this year has been raised to about -3,5%, still a strong contraction, but much better than -8%.

However, the most recent indicators point to a new setback. Last week, Elvira Nabiullina, the president of the central bank, hinted at that. In September, unemployment rose to 3,9% (from 3,8% in August) and retail sales were 9,8% lower than a year earlier. In August it was still -8,8%. Confidence indicators are also deteriorating. The manufacturing purchasing managers index fell from 52,0 in September to 50,7 in October. In the services sector, it went down from 51,1 in September to 43,7, a very sharp drop that may have something to do with the partial mobilization. Figures for one month are not yet a trend, but all figures point in the same direction.

Closing
These are uncertain times. What do we know for sure? First, that the major central banks will continue to raise their interest rates. They also recognize that this makes a recession likely. Actually, they don't mind that much. It is also better to become unemployed when the labor market is tight than when there is already mass unemployment. The rise in interest rates is already historic.

We also see that all kinds of confidence indicators, especially in Europe, are deteriorating. It strikes me that especially the assessment of the influx of new orders suddenly becomes very negative, also outside Europe. The hard figures on orders in Germany confirm this picture. The development of the order inflow is an important indicator of where the economy is heading in the short term.

We should not expect anything from the Chinese economy in the short term due to the frequent lockdowns and the problems in the real estate sector. The US economy is stronger than ours and they still have a chance of avoiding a recession, but that chance is shrinking as the Fed feels compelled to raise interest rates more than previously thought.

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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