There is hope for the Dutch economy

According to Statistics Netherlands, inflation in November was 1,6%. That was higher than October's -0,4%, but the figure was still not too bad and I maintain that inflation has actually fallen. As is known, CBS compares the figures of their corrected price index series with those of the old series a year ago. The correction was necessary because Statistics Netherlands overestimated how energy prices for households developed last year.

If you take the more correct approach and use the new series for both years, inflation appears to have fallen from 5,3% in October to 2,4% in November. That was lower than I expected. It is of course a coincidence, but according to Eurostat, inflation in the eurozone also amounted to 2,4% in November, compared to 2,9% in October. And the eurozone figure was also better than expected.

This appears to bring inflation in our country and in the eurozone close to the ECB target. However, we should not celebrate too early because without energy our inflation was 4,1% according to Statistics Netherlands. For the eurozone there is a figure of 4,3%, compared to 4,9% in October. Core inflation in the eurozone, i.e. excluding energy, food, tobacco and alcohol, fell from 4,2% in October to 3,6% in November.

The good news is that the few components for which Statistics Netherlands published figures all show a decrease in inflation. Food was 7,3% more expensive in November than a year earlier, compared to 8,7% in October. The prices of services were 4,0% higher than in November last year, while this was still 4,7% in October.

The lower inflation is good news for purchasing power because wage increases are now clearly above inflation. Last week, consumer confidence suddenly increased more than expected in November and CBS reported this week that retail sales in October were more or less the same in volume as those of a year earlier. This has been firmly in the negative in recent months.

There is also a downside to the increase in wages. If the extent to which wage growth exceeds inflation is higher than productivity growth, then that wage increase could give new impetus to the inflation process. After all, companies will try to pass on this cost increase to customers.

Eurozone 'Economic Sentiment' Improves
We also see the positive developments in our economy elsewhere. This resulted in a slight improvement this month in the 'Economic Sentiment' index for the eurozone, which is compiled by the European Commission. That index is a sum of business and consumer confidence. The next chart shows that sentiment is bottoming out. It is also relevant to note that although the level is still below the long-term average, it is well above the lows in the recessions of 2008/09, 2011/12 and 2020.

It's not like there's no problem anymore. For example, the French economy unexpectedly shrank in the third quarter. Monetary developments in the eurozone are also certainly not positive. Outstanding bank lending is shrinking, especially to companies. More is therefore being repaid on existing loans than new ones are being taken out. A growing economy requires a growing credit volume, although the relationship is certainly not one-to-one.

The November figures on business confidence in China were also disappointing. According to the Chinese CBS, the confidence of entrepreneurs in both industry and the service sector fell. It's not all that dramatic, but it is still disappointing.

Closing
The decline in inflation in our country continues, even though Statistics Netherlands reports an increase in November. Wage increases now exceed inflation, which increases purchasing power, which leads to improved confidence among consumers and stimulates spending. Those pieces of the economic puzzle fit together neatly. This offers hope that economic growth will pick up somewhat in the coming quarters. That is by no means certain. There are plenty of risks that can throw a spanner in the works. Higher energy prices could have a new impact on the economy. And now that wage increases are above inflation, they could easily lead to a new upturn in inflation. Furthermore, world trade can always be disappointing and geopolitical tensions can put a brake on global activity. But: so far, so good.

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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