Three in a row: how serious is the recession?

Our economy shrank for the third consecutive quarter in Q3: -0,2%, while the figures for the first and second quarters have been slightly adjusted downwards, to -0,5% and -0,4%. How serious the recession is is a matter of debate.

A small contraction in a situation where the labor market is still tight is something to live with, especially since inflation is gradually falling in this situation. In fact, in October unemployment fell by another tenth of a percent and the number of jobs is still growing; over the period August to October with an average of 11.000 per month. You could say that it isn't too bad.

Maybe I'm becoming a curmudgeon, but I would like to add some comments about this. It's really less beautiful than you might think. Firstly, the contraction in GDP in the third quarter was slowed down somewhat by rising government consumption and because the import volume fell faster than the export volume. Those are not growth engines to build on.

Secondly, the third quarter ended remarkably weak and there is therefore a good chance that our economy will contract again in the fourth quarter. Just think: in September the volume of household consumption was 1,9% lower than a year earlier, the lowest figure since the beginning of 2021. The volume of goods exports was also weak in September: almost 5% lower than a year earlier , the lowest figure since May 2020.

Third, I am not very enthusiastic about the combination of a shrinking GDP and an increase in the number of jobs. This indicates declining productivity. Of course you have to be very careful when interpreting productivity figures, but this is simply not a nice combination. The CBS business survey, in collaboration with the Chamber of Commerce, the EIB, MKB-Nederland and VNO-NCW, shows that a lack of personnel is still the most important obstacle for companies, although the number of companies reporting insufficient demand as the main obstacle is also increasing. . Now that we already have a shortage of workers, we should not use them where productivity is low. I saw enthusiastic messages on social media that there are now more jobs in renewable energy generation than in the fossil sector, although I can't find it and I don't know which geography that refers to. I would be less enthusiastic about it. If it is true that there are now more jobs in the field of sustainable energy generation than in the fossil sector, this means that jobs in sustainable energy generation do not have more than approximately 20% of the productivity of fossil jobs, since fossil fuels still provide in more than 80% of the energy needs. Creating a lot of low-productivity jobs is a problem because workers naturally want to earn an income comparable to other jobs.

By the way, this week I compared a number of election manifestos with regard to the labor market. What do the different parties say about the labor shortage? And what are they going to do about it? Well, that was really disappointing. Most parties keep it very vague and do not go much further than: "Work must pay." The VVD wants extra reward for people who work more. The allowances must disappear for many parties, and the minimum wage must increase for a number of parties. The administrative burden for SMEs must be reduced according to various parties. Where have we heard that before? What I found most bizarre at a time of labor shortages was the PvdA-GroenLinks plan to shorten the working week to 32 hours, while maintaining income. It is added that staff shortages in education and healthcare must not increase. But it is not clear how exactly. The same party also wants to make all employees members of a trade union of their choice in exchange for a mandatory fee that employees must pay to be represented in collective labor negotiations.

Care
I'm concerned about our economy. So far we are experiencing a mild recession. The problem is that we have so little recovery power. Inflation will not fall so quickly that the ECB will cut interest rates again any time soon. And there is actually no room for stimulative fiscal policy. Then there also seems to be a trend that job growth occurs where productivity is low. Nevertheless, recovery of growth is of course not impossible. Stock building at companies can provide an impetus, although this is not yet in sight. Improvements in purchasing power can boost spending and world trade can also pick up, giving us a boost. It is obvious that purchasing power will improve in the coming quarters now that wage growth is falling less quickly than inflation. It remains to be seen how strong the spending impulse will be. And world trade, well, it can indeed pick up.

China helps
The Chinese growth recovery this year has been severely disappointing. Now it seems to be slowly becoming visible. In October, production in industry was 4,6% higher than a year earlier. In September it was still 4,5%. These are, by the way, low figures for China. Before the pandemic they were around 6%. Retail sales growth is also accelerating. In October they were 7,6% higher than a year earlier, after 5,5% in September. Before the pandemic, growth of around 10% was common, but consider that inflation in China is now around zero. So perhaps the growth recovery in China is starting to take shape and we will also benefit from it.

American inflation continues to fall, party on the stock market
Stock and bond markets responded enthusiastically to the US inflation figures for October. The price level was more or less unchanged compared to September and year-on-year inflation fell to 3,7% from 3,2% in September. Core inflation stood at 0,2% month-on-month, falling from 4,1% to 4,0% year-on-year. The feeling is starting to take hold that the fight against inflation has more or less been won. In that view, it is a matter of time until the Fed's objective is achieved. No further action is necessary. The American capital market interest rate (10 years), which was recently just above 5%, has fallen rapidly to approximately 4,5% now. Inflation in the UK also fell sharply in October: from 6,7% in September to 4,6%.

Closing
Our economy is in a recession. It has been mild so far and the labor market remains tight. In my view, most economists and commentators are too positive about this. The shrinkage may be limited, but so is the recovery power. I foresee major economic problems and political tensions when this reality dawns on everyone.

Chinese industrial production and retail sales suggest that the long-awaited Chinese growth recovery is underway.

Better-than-expected US inflation figures have many optimistic that inflation has been defeated. No wonder both stock and bond prices soared. The great enthusiasm seems a bit premature to me.

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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