Hard, soft or no economic landing at all

According to the final inflation figures for April, the increase in food prices is finally decreasing in our country. The first graph shows that food prices in our country even fell slightly in April compared to March. That was only 0,2% so you had to use a magnifying glass to see it. Yet.

In March prices were still up 0,4% (month-on-month) and in many of the previous months (as of December 2021) prices often rose by 1% or more. Hopefully the developments in March and April are the new trend.

The second picture shows the year-on-year increase. Our food price inflation is quite in line with the rest of the eurozone. In the US, food prices have risen much less than in the Netherlands and the moderation has also started much earlier. This has everything to do with the development of energy prices, which have a major impact on food prices, albeit with a lag. The price of oil peaked in early June last year and has been falling ever since. The gas price then continued to rise, but much more in the eurozone than in the US. At the end of August, gas in Europe was just €340 MWh, up from around €15 to €20 MWh before the pandemic. The price (for direct delivery) has now fallen to approximately €30 MWh, although the price for delivery in December is still slightly above €50 MWh.

As food prices have, as already noted, increased sharply on a monthly basis from December 2021 – with a few exceptions – the year-on-year increase will fall sharply in the coming period if prices continue to develop as in March and April. Given the energy prices and the prices of agricultural raw materials on the world market, this is quite likely.

Unexpected strong contraction of the Dutch economy
Dutch GDP contracted in volume by no less than 0,7% in the first quarter. That was a nasty setback. Many economists had actually raised their growth forecast for the year 2023. The reason for this was that the growth figure for the fourth quarter last year was much stronger than expected. Then you get what statisticians call "spill effects." You start the year at a relatively high level. However, Statistics Netherlands has revised the growth figure for the fourth quarter downwards, from +0,6% to +0,4%. Then you have less overflow and if you also start the year with -0,7% in the first quarter, all those increased growth estimates for 2023 can immediately go into the trash.

In March, the CPB still expected 1,6% growth this year. A few days ago, the European Commission raised the 2023 growth forecast for our economy from 0,9% to 1,8%. Based on those old figures, a quarterly GDP increase of 0,3% was needed to meet that estimate of 1,8% GDP growth. That certainly didn't seem impossible. With the new figures, our economy must grow by 1% in each remaining quarter to achieve the 1,8% target. That is excluded. It will be quite a challenge to achieve 1% growth this year in my view.

The disappointing growth performance in the first quarter can be attributed to foreign trade (exports contracted more than imports) and the fact that companies reduced inventories. Consumers took hold. Government consumption did increase, as did investment in fixed assets. The contribution of foreign trade is particularly important for an open economy like ours. That is why Dutch economists follow the development of world trade with even more interest than their foreign colleagues.

Remarkable and worrying
When the pandemic broke out and the global economy was hit by logistical disruptions, economists started paying more attention specifically to logistical flows. For example, I follow the figures on container throughput in ports as provided by ISL/RWI in Germany. The next picture is not very encouraging and raises a lot of questions.

Container throughput in seaports in our part of the world (Rotterdam, Antwerp, Hamburg, Bremerhaven, Zeebrugge and Le Havre) was about 30% lower in March than at its peak in 2021. In the first quarter of this year, container throughput was more than 15% lower than in the first quarter of 2022. The continuing, and even accelerating, decline in recent months is remarkable.  

When I e-mailed the compilers of the figures asking if they had any insight into what lies behind them, they replied that they have no idea. The drop attributable to the boycott of Russia should not depress the numbers too much by now, they said. I have inquired with the port authority of Rotterdam, but so far nothing interesting has come up. In a commentary on the figures for 2022, the decline in container throughput is discussed quite laconically and it is noted that the throughput of goods that does not go into containers has actually increased. Optimists can, of course, put a positive spin on these figures by saying that there is a lot of room for recovery.

Elsewhere in the world, too, things are not going completely crescendo with regard to freight transport. The next picture shows the development of incoming containers at the port of Long Beach, the largest or second largest container port on the US west coast. I suspect that the decline of the last twelve months is mainly due to the Chinese lockdowns. Since those are now over, you would expect a marked improvement here. We will see.

The various business cycle indicators published in recent days in the main countries still paint a mixed picture. For example, the debate among economists continues as to whether the global economy is headed for a soft landing, a hard landing, or no landing at all. Recent figures offer something for everyone.

China's recovery is not yet convincing
Production in the Chinese manufacturing industry was 5,6% higher in April than a year earlier. That was better than the 3,9% in March, but the figure was still disappointing. So did Chinese retail sales figures. Although they were 18,4% higher than a year earlier (in March still +10,4%), more had been expected here as April last year was a very weak month due to lockdowns. These figures confirm that the recovery of the Chinese economy is not yet very smooth. There is, however, some recovery in the housing market. House prices rose for the fourth month in a row in April.

In the US, the New York Fed district business confidence index fell from +10,8 in April to -31,8 in May, according to the so-called Empire State Index. That's a big dip. The comparable measure of the Philly Fed improved from -31,3 to -10,4, but remained below zero. Homebuilder confidence also improved, from 50 in April to 55 in May, the highest level since July last year. Since the beginning of this year, US homebuilder confidence has gradually improved. This is undoubtedly related to the mortgage interest rate, which, after the sharp rise last year, has remained more or less the same this year on balance.

American industry is not going through a heyday. In April, production in the manufacturing industry increased by 1,0% compared to March, but compared to April last year, a decrease of 0,9% was still recorded.

In Germany, economists and analysts' confidence about the state and outlook for the economy deteriorated in May. The expectations component of the ZEW index fell for the third month in a row to -10,7. The long-term average of this series is around +21.

Further fall in food price inflation
Food price inflation is finally coming down. In our own country, food prices even fell slightly in April, although this will not immediately lead to euphoria. In view of the development of European gas prices and world market prices for agricultural raw materials, a further and sharp further fall in food price inflation is expected in the coming months.

Our economy contracted unexpectedly sharply in the first quarter. This was partly due to foreign trade. A development that is as remarkable as it is worrying is currently taking place in container transhipment in the major seaports in North-Western Europe. There has been a significant decline for months. Container throughput in the ports on the American West Coast is also considerably lower than a year ago. It is not entirely clear what this should be attributed to, but it is certainly a sign of cyclical weakness.

The debate continues among economists about whether the global economy is heading for a soft landing, a hard landing, or no landing at all. The various economic indicators of the past week do not help us much in this respect.

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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