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Opinions Hans de Jong

Trade in Asia is picking up, industry remains under pressure

12 January 2024 - Han de Jong

My esteemed BNR colleague Bas van Werven usually challenges me to identify positive developments in the constant stream of macroeconomic data. I think that's a good approach, but it's not easy at the moment. Yet there is some positive macroeconomic news this week.

World trade developed weakly in 2023, but according to figures published by the CPB just before Christmas, the volume of world trade grew for the third month in a row in October. The last time world trade grew for at least four months in a row was at the end of 2020/beginning of 2021. It is not very fast, but a child's hand is quickly filled...

The improvement is led by Asian countries. This week, Taiwanese statisticians published their trade figures for December. These figures suggest that the strengthening of international trade in Asia is continuing. The Taiwanese export value (in dollars) was 11,8% higher in December than a year earlier. In November it was still 3,8%. There is also an improvement on the import side, although it lags considerably behind exports. The import value was 6,5% lower in December than in December 2022, compared to a drop of as much as 14,8% in November.

Source: Macrobond

In the eurozone, the mood also seems to be improving slightly. The European Commission's 'Economic Sentiment' index rose for the third month in a row in December: 96,4 compared to 94,0 in November. This index is still below the long-term average.

Source: Macrobond

The slight improvement in Dutch household consumption in November compared to November 2022 was also good news. In volume, spending increased 0,3% compared to a year earlier. Negative losses were recorded in the four previous months. You can hope that the decreased inflation has improved purchasing power, allowing spending to increase in volume. But because these types of figures can be volatile, caution is required when interpreting them.

Less uplifting
That pretty much wraps up this week's positive macroeconomic news. There was also less encouraging news to report. Despite an improvement in the mood in the eurozone in the last few months, the hard data on industrial production is little to cheer about. Both in Belgium and in our eastern neighbors, production in the processing industry fell in November. In Germany the decline was 0,4% compared to October and 4,5% compared to November 2022. In our country, production fell by 0,8% month-on-month and by 10,0% year-on-year year.

Source: Macrobond

If I am still looking for a bright spot, it is worth reporting that production in the five most energy-intensive industrial sectors in Germany grew just over 3% compared to October. Production in those sectors is still more than 20% lower than the peak a few years ago, but the November figure suggests that the fall in energy prices is leading to some production growth. I've written it many times. The energy-intensive industry is of great importance to the German economy. Now that, despite the decline in recent months, energy prices are much higher than a few years ago and also higher than in many other countries, the question is what part of production is likely to be lost forever to Germany.

Source: Macrobond

The number of bankruptcies in our country increased sharply in 2023 compared to 2022. However, the following graph makes it clear that the number of bankruptcies has fallen sharply during the pandemic. This was undoubtedly due to the corona support. Now that this support has stopped, companies have to repay tax debts and the economy is weak, the number of bankruptcies has returned to pre-pandemic levels. You have to assume that a number of companies that under normal circumstances would have collapsed in recent years but have remained afloat thanks to the support, will still collapse. It is difficult to estimate how many of these types of 'zombie companies' there are, but I estimate it to be somewhere between 1.000 and 3.000. Therefore, assume that the number of bankruptcies will continue to rise in the near future.

Source: Macrobond

One of the big questions that will have to be answered in 2024 is whether inflation will come under control quickly and without cyclical pain or not. In our own country, Statistics Netherlands had already reported a week ago that inflation in December was 1,2% and that for the year as a whole the counter was 3,8% (2022: 10,0%). Excluding energy, inflation was 6,5% in 2023. This week, CBS published all the details.

The conclusions I drew earlier still apply. Falling energy prices are currently putting pressure on inflation. But that oppressive effect soon disappears. Partly as a result, the total inflation rate for January will be much higher than the 1,2% of December.

Food price inflation follows energy prices, albeit with a lag. That food price inflation has reduced sharply over the course of 2023 and in fact prices have remained more or less unchanged since April. The decline in year-on-year food price inflation will undoubtedly continue in the coming months, but is likely to stop after April.

Prices for labour-intensive services are still rising rapidly because they are strongly influenced by the still strong wage increases, although some weakening can also be detected here. Industrial goods inflation has already fallen sharply and that is not likely to change any time soon.

On balance, the prospects for inflation in our country are not bad. There are three uncertain factors. The first concerns wage increases. I'm repeating myself here too. At current wage growth, it is unlikely that our inflation will be limited to 2% in the medium term.

Second, the tax increases that took effect in January could boost inflation in the short term. In December, the government was already the main cause of inflation. In fact, tax measures pushed the general price level up by 1,4%. The government was therefore responsible for more than the overall inflation rate of 1,2%. Without those tax increases, inflation would have been -0,2%. That in itself is understandable. In 2022, the government had temporarily reduced various taxes, thereby reducing inflation for the benefit of purchasing power. These reductions will be partially reversed in 2023. However, I fear that the government's contribution to inflation has increased further in January.

And thirdly, the maximum rent increase in 2024 is higher than in 2023. In 2023, the rent of social housing was allowed to increase by a maximum of 3,1%, rents in the private sector were allowed to increase by a maximum of 4,1%. As of January 1, the latter may increase by 5,5% and as of July 1, social rents may even increase by 5,8%. The actual average rent increase will undoubtedly be lower, but higher than in 2023. Because rents have a weight of approximately 20% in the inflation basket, this could have a noticeable impact on the coming inflation figures.

US inflation higher than expected in December
US inflation turned out slightly higher than expected in December. The general price level rose 0,3% compared to November and year-on-year inflation rose from 3,2% in November to 3,4% in December. Core inflation also stood at 0,3% month-on-month. Compared to a year earlier, core inflation fell slightly: 3,9% in December compared to 4,0% in November.

This setback is important for investors because players in the financial markets assume that the Fed will cut interest rates significantly this year. However, if inflation remains stubbornly above the Fed's target, the chances of this happening are slim.

Source: Macrobond

The patterns visible in our inflation statistics are also visible in the US. Food price inflation has almost disappeared in the US, but price increases for labor-intensive services are still significant. Like us, wage increases remain crucial for medium-term inflation. And just like us, wage growth in the US is currently higher than the level consistent with 2% inflation. My favorite indicator for wage growth in the US is the 'Atlanta Fed wage growth tracker'. Before the pandemic, it fluctuated around 3,5-4%. The 5,2% of recent months is clearly above that. If you look at the graph, you have to say that the stability of the last few months is remarkable. A bit suspicious even, as if those numbers couldn't be right.

Source: Macrobond

An indicator of the development of inflation in the shorter term can be found in the monthly survey among SMEs that the National Federation of Independent Business (NFIB) conducts. This asks, among other things, whether companies plan to increase their prices or not. The latest chart this week suggests that inflation will certainly not fall in the short term. That would be a disappointment to market participants who expect quick and significant interest rate cuts from the Fed.

Source: Macrobond

Closing
There seems to be some revival in international trade in Asia. Hopefully that is a harbinger of a broader recovery in global trade. In addition, the decreased inflation probably offers room for an increase in consumer spending. For the time being, however, activity in the industry remains under pressure.

The US inflation figures for December were disappointing. In my view, the room for a further decline in US inflation is very limited for the time being. I therefore do not see the Fed lowering official interest rates anytime soon, and certainly not aggressively.

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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