Inflation and world trade: it is not what it seems

According to Statistics Netherlands' 'quick estimate', inflation in our country was -0,4% in October. I have already explained why it is a nonsense figure. Let me not repeat that in full. CBS has an 'old series' for the price index figure and a 'new' one. The -0,4% inflation for October is the result of comparing the October 2023 figure from the new series with October last year from the old series.

If you use the new series for both months, inflation turns out to be 5,3%. That is a better indication of the development of living costs. Statistics Netherlands currently underestimates inflation. Last year the statisticians overestimated inflation. For October 2022, for example, 14,3% is in the books, based on the new series that was 'only' 9,1%. CBS, by the way, has quite a good reason for following the line they have chosen. Retrospectively revising the official inflation rate could lead to complicated legal processes in many parts of society. Nobody wants that. The difference between the CBS figure and actual inflation will decrease in the coming months and gradually disappear next year. Things will then run 'smoothly' over the period 2022 to mid-2024.

The Dutch economy is under pressure. Although business confidence improved slightly in October, it remains low, especially in industry. The NEVI purchasing managers index improved from 43,6 to 43,8 in October. A number below 50 indicates contraction and the index rarely rises above 60 and rarely below 40. According to this survey, production is currently falling rapidly and order inflow is not going well. However, orders from abroad appear to be improving somewhat and entrepreneurs believe that production will improve over the next twelve months. But they've been thinking that for a while.

Retail turnover in our country was more than 3% higher in September than a year earlier, but in volume it was about 3% lower. The next graph shows that those turnovers have skyrocketed during the pandemic. It is difficult to say whether the more recent decline is not just a normalization, but small businesses in the retail sector are certainly having a hard time, especially as they have to repay the government support they received and the tax debt they have accrued.

The problems for SMEs are exacerbated by the continued rapid wage increase. According to figures from employers' organization AWVN, the wage increase agreed in new collective labor agreements (on a twelve-month basis) is still above 7%. It is of course logical that wage increases lag behind inflation, as inflation has unexpectedly risen sharply since mid-2021, initially causing a significant loss of purchasing power. Partly because the labor market remains tight, employees are now able to command strong wage increases. Earlier this week I was involved in a discussion about whether or not wage increases are fueling inflation. It is an emotionally charged subject. I think it's simple though. The wage increase was certainly not the cause of the unexpected acceleration of inflation from mid-2021. But now that the wage increase is well above the productivity increase, it does contribute to inflation. It is a logical 'second round effect'. If current wage growth continues in the medium term, a return to 2% inflation is impossible. The question then is whether wage increases will ultimately moderate sufficiently. Someone pointed out to me this week that the collective labor agreements that are now being concluded are partly renewals of agreements from two years ago. These new collective labor agreements still contain significant compensation for incurred loss of purchasing power. So that wage increase may fall sharply in the course of next year when the collective labor agreements that expire at that time also contain compensation for the increased inflation. This does not necessarily make things easier for SMEs today.

The eurozone economy has been more or less stagnant for some time. According to the first estimate, eurozone GDP in volume contracted by 0,1% in the third quarter compared to the second quarter. Year-on-year growth has now fallen to 0,1%. That was still 0,5% in the second quarter. These figures contrast sharply with the more than 1% growth that the American economy achieved in the third quarter compared to the second.

I also do not see much reason for the European economy to expect a clear acceleration in growth. The ECB will not easily relax monetary policy and there is little room for stimulative fiscal policy. Hopes should be pinned on picking up global trade and easing geopolitical tensions that could potentially lower energy prices. But even if such positive developments emerge, the question is how much recovery power the European economy has now that unemployment is relatively low everywhere. Where do we get the people to realize the extra production? There seems to me to be a significant problem with labor productivity.

China and the US: confusion
Economic figures in China have improved in recent weeks. This offers hope that the economy will finally make a more convincing recovery, which will allow global trade to pick up. According to data from the German RWI-ISL, container throughput in Chinese ports has increased significantly in the past few months.

That is good news. The less good news for us is that throughput in the ports in our part of the world is actually shrinking further. Germany's export figures published this morning were once again very disappointing. The export value was 2,4% lower in September than in August. In the third quarter the export value was 2,2% lower than in the second quarter and 4,1% lower than in the third quarter last year. Please note, these are values. When prices have risen, the rates of change in volume are even worse.

The question is how to interpret those Chinese figures. According to the Chinese CBS, business confidence fell again in October. It may be that the increased activity at ports is merely a matter of clearing backlogs, while underlying demand remains weak. But it may also be that the decline in business confidence in October is nothing more than 'noise'. Fingers crossed! The graph does show that business confidence in both industry and the services sector is low in a historical perspective.

The US economy continues to send mixed signals. Growth in the third quarter was strong, employment is growing, the labor market is tight and inflation is falling. What's not to like? In his press conference after the Fed's policy meeting, Fed boss Powell expressed optimism. The Fed once again left interest rates unchanged.

However, there are some comments to be made about this story. For example, according to the Institute for Supply Management (ISM), the purchasing managers index in industry fell from an already frugal 49,0 in September to 46,7 in October. The orders component fell from 49,2 to 45,5 and the employment component fell from 51,2 to 46,8. That doesn't exactly indicate strength. But perhaps this is not much more than 'noise'. As someone said to me this week: Never underestimate the resilience of the American economy.

Another comment concerns the labor market. Unemployment is low as are the number of applications for unemployment benefits published each week. On the other hand, the number of continuous unemployment benefits has increased again in recent weeks. Perhaps a sign that the unemployed are gradually finding it more difficult to find a job.

As far as inflation is concerned, the question in the US, just like in our own country, is whether wage growth is consistent with 2% inflation in the medium term. The simple answer is that the current wage increase is still too high for that. There are various measures for the development of labor costs. A widely followed is the Employment Cost Index, which is published quarterly. The following graph shows that although there has been a moderation in wage cost increases, the increase is still much higher than before the pandemic. In the third quarter, labor costs by this measure rose 1,1% compared to the second quarter, which saw a 1,0% increase quarter-on-quarter. The question is whether the tight labor market will not stand in the way of sufficient further moderation.

And then there is the housing market. The increased capital market interest rate has dealt a blow to that market. Just like us, house prices in the US also fell at some point. But just like us, that has changed in recent months. The strong wage increases make it possible for families to take out a larger mortgage. The supply of housing is very limited. Not only has construction activity declined, but the rise in mortgage interest rates is also taking its toll. A homeowner who sells his house to buy another home is confronted with significantly higher mortgage costs because the existing mortgage usually cannot be included. The result is that homeowners simply stay where they are. More borrowing capacity among buyers, combined with a sharply reduced supply, pushes up house prices, although the increase is of course not too bad if you deduct general inflation. It remains to be seen how this will proceed. The higher prices and high mortgage interest rates make living a lot more expensive for home buyers. You get the feeling of this something will have to give.

Theme of this commentary
The theme of this commentary is: it is not what it seems. This applies firstly to the official inflation figures from Statistics Netherlands. They underestimated the increase in the cost of living after a significant overestimation last year.

Things are also not what they seem in world trade. Container throughput in ports worldwide is increasing, but this masks a considerable increase in China and a remarkably sharp decline in Northwestern Europe. And in the case of China, you may wonder whether those good figures are indicative of the underlying activity or whether there is some kind of catch-up effect.

Finally, in the US, the economy actually looks fine at first glance. However, several weaknesses can be identified. I'm afraid those will gradually prevail as time goes by, but I could be wrong.

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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