Trading partners are not yet benefiting from China

The Dutch industry is in the minus, while the German industry seems to be recovering. The Chinese reopening of the economy after the corona crisis is not going so fast, what is going on? And Jerome Powell, the president of the US central bank Fed, is being put to the test.

The Dutch industry has done much better than the German industry in recent years. This is remarkable, because the industry in both countries is traditionally in step with each other. There are at least two main reasons. The automotive sector, which weighs much more heavily in Germany than here, has been plagued by (partly self-inflicted) problems in recent years. First came Dieselgate. After that, the German car manufacturers proved slow to develop electric models. During the pandemic, production problems arose due to the global chip shortage. When the war broke out in Ukraine last year, this caused production problems because a lot of cabling was purchased from that country.

The Dutch industry has also been doing better than the German industry in recent years because our machine building industry has been doing much better. That is also remarkable, because our eastern neighbors are known as producers of very high-quality machines that are always in demand all over the world. I think we still outdid the Germans because German machine building is more dependent on China, but mainly because we are much stronger in the chip sector with companies such as ASML, ASMI, BESI and NXP. In fact, Germany does not offer much in return with Infineon alone.

However, the chart above shows that the odds seem to be turning. There is still not much growth in German production, but with us it has fallen by almost 7% since the peak in April last year. Now that the automotive sector seems to be putting the problems behind it, the Germans may be able to catch up.

The figures for January speak volumes and give cause for some concern. In Germany production grew by 3,5% month-on-month, our production decreased by 3,3%. Compared to a year earlier, the counter in Germany is now at -1,6% and with us at -2,9%. The European gas price, which exploded last year and fell again after August, has a major impact on the development of production. Destatis, the German CBS, has recently published figures on the aggregated production level of five sectors that they call the 'energy-intensive sectors'. Chemistry is the greatest of these. These five account for 76% of total energy consumption by industry, or more than a fifth of total German energy consumption.

As the graph above shows, production in the energy-intensive sectors has fallen sharply in the course of 2022. In December, production was almost 20% lower than in December 2021. However, it can also be seen that production rebounded strongly in January (+6,8% month-on-month), although the decline compared to a year ago is still is always about 13%. That recovery in January is undoubtedly related to the sharp drop in gas prices. If the gas price does not rise again, a further recovery in production is on the horizon.

Unfortunately, our picture is different. Perhaps a single month is not enough for a far-reaching assessment, but in our country production in the energy-intensive sectors fell further in January: the chemical industry (-5,5% month-on-month), the rubber and plastics industry (- 1,9%) and metal processing (-2,3%). Hopefully production recovery will also follow soon for us.

Energy-intensive sectors provide high-quality employment
There is still something to be said about the importance of the energy-intensive industry. I am discussing the German situation here, because Destatis conveniently provides that data. The energy-intensive sectors represent 21% of production in German industry and employ around 935.000 people, or 15% of industrial employment. (In Germany there are about 40 million jobs in total.) This means that productivity in the energy-intensive sectors is no less than 40% higher than in the rest of the industry. These are therefore high-quality, well-paid jobs that are really important for Germany's prosperity. If this activity moves to other countries due to the high European energy prices, this will be a serious blow to the German economy, while CO2 emissions in the world will not be less.

Consumption by Dutch households continues to increase
Household consumption in the Netherlands was 6,2% higher in volume in January than in January 2022. At that time, however, there were lockdowns in many sectors, especially the hospitality industry, etc. The picture below shows that consumers have recovered well from the pandemic. has come. Spending levels have been above pre-pandemic levels for some time and are even approaching the trend that might have followed without the pandemic.

Reopening China is not going that fast yet
The reopening of Chinese society this year will give an important boost to business in that country and thus to the business of the world as a whole. I follow the Chinese figures with interest. Business confidence indicators have skyrocketed in recent months, but the hard data suggests that the Chinese economy is far from getting off to a flying start. Unfortunately, the view of the Chinese economy in the first months of the year is always somewhat cloudy due to the changing dates of the Chinese New Year. The export value for January/February was 6,8% lower than last year. That was better than the -9,9% in December, but the figures were not very impressive. Import figures were even worse: -10,2% in January/February against -7,5% in December.

You can always check the Chinese trade figures against what other countries report on them. If the Chinese reopening in the country itself has already boosted activity, but the trading partners are not yet benefiting. For example, the value of exports from Taiwan to China in February was no less than 30,2% lower than in February 2022.

There is no doubt that the Chinese impetus will come. Apparently we have to be patient a little longer. Meanwhile, the mood among Chinese consumers remains very depressed for the time being, although there was a slight improvement in January.

This week, Fed Chief Jerome Powell appeared in Congress for the semi-annual presentation of his Monetary Policy Report. He was put to the test and Congressmen used the opportunity to present their own views on inflation. With the most recent inflation figure rather disappointing and other economic data pointing to continued growth, there is a growing likelihood that the Fed will tighten monetary policy more than previously assumed.

The labor market deserves the necessary attention in this context. The unusual tightness may contribute to wage increases remaining too high to drive inflation towards the 2% target. This week the so-called JOLTs report (Job Openings and Labor Turnover) was published. The number of unfilled vacancies fell in January, but less than expected and there are still almost twice as many vacancies as the unemployed. Yet another series in the JOLTs report indicates that tension in the labor market is easing somewhat. The number of people resigning on their own initiative fell to less than four million in January. That was the first time since mid-2021.

Closing
After our industry has performed remarkably better than the German one for several years, things now seem to be turning. Unlike in Germany, there are no signs yet that the fall in energy prices is boosting production in energy-intensive sectors. Hopefully that will come soon. Do not underestimate the importance of these sectors. They offer very high-quality employment and thus contribute to a country's material level of prosperity. The reopening of Chinese society has not yet led to a spectacular recovery in economic activity. And the trading partners have certainly noticed little or nothing of economic recovery in China. It is inevitable that such a recovery will come, but it is unclear when.

Financial markets are reconsidering their view of how much interest rates must rise to bring inflation down. Next week the ECB will undoubtedly raise the official interest rate by 0,5%. The following week, it's the Fed's turn. I bet they will do the same.

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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