ECB President Lagarde is once again inimitable

I once again watched ECB President Lagarde's press conference with amazement. Admittedly, I'm biased, but what she sometimes manages to get out of it is inimitable to me. What an embarrassing display. At one point she talked about 'seasons' and 'episodes'. I asked other economists, but no one could make sense of it. She also proudly reported that the accuracy of the ECB's economic forecasts has greatly improved recently. I hadn't noticed that, but if that's the case you could also say that they didn't make much of it until recently.

Then the consideration of inflation. Lagarde expressed satisfaction with how things are developing. She did make a comment about that. There is one element in inflation that is not yet doing what the ECB would like. It sounded like a small, unrelevant detail. We were curious. Then the one less positive element in the inflation picture turned out to be 'domestic inflation'. Well, total inflation is of course a mixture of what comes from outside and what is generated in the own economy. If the latter is a concern, the ECB cannot be satisfied. Monetary policy of course has much more influence on the inflation generated within the own economy than on what comes from outside. Very curious that she downplayed it so much.

Lagarde spoke emphatically about the wage increase, and rightly so. This is even higher than is consistent with 2% inflation. She also referred to declining productivity. That decline is very remarkable. Labor productivity is rising in the US. Declining labor productivity in Europe can be a major obstacle in the process of decreasing inflation.

Anyway, it is clear that interest rates will not be lowered in the short term. The meeting in April is still too early. Lagarde's motivation for this is that an insufficient amount of new information will become available between now and that meeting to decide on an interest rate cut. In contrast, a lot of new information will become available between now and June, she said. Well, that's a truism. Even more information will become available between now and December. It sounded like an interest rate cut in June is likely, especially since Lagarde suddenly said that it is not the case that the ECB is not in a hurry. Also a very strange comment. If you want to wait at least until June, I don't think you're in much of a hurry. Then there was a very curious other sentence from Lagarde: "We have just begun dialing back of our restrictive stance." I assume that sentence means that interest rate cuts were discussed for the first time during yesterday's meeting. But I don't know for sure.

Powell in Congress
Fed Chairman Jay Powell, who, like Lagarde, is a lawyer by training, but with much more affinity for economics and monetary policy, was a guest in Congress this week, a semi-annual event. He confirmed that the economy is developing as the Fed wishes. Inflation is falling without a recession proving necessary. Players in the financial markets thought some time ago that the Fed would cut official interest rates at least six times this year. That is clearly not the case. Because economic growth continues to bump along happily in the US, there is little urgency regarding interest rate cuts. Moreover, there remain parts of the American economy with persistently high inflation. In the past it has become apparent that a process of decreasing inflation does not occur in a straight line, but in waves. That is why the central bank must be careful and certainly not cut interest rates too early.

Inflation figures appeared this week in Korea and Taiwan. The graphs show that the process of disinflation in these economies is currently stalling. Inflation remains at a level higher than what was usual before the pandemic. That could be a harbinger of what awaits us.

Come on, try harder
Dutch household consumption in volume was 0,8% higher in January than a year earlier. That is quite poor, also from a historical perspective, as the following graph shows. This year, a significant increase in private consumption is expected, driven by a significant improvement in purchasing power. Everyone will have to try a little harder.

The German industry has been a source of concern for a long time. With a little good will we can perhaps say that a bottom seems to have been reached. Production in the manufacturing sector increased by 1,0% in January compared to December. Production in the five most energy-intensive sectors even increased by 2,8% month-on-month. However, the production level for both series was still approximately 5% lower than a year earlier.

Before we get too excited, it should be said that there are still plenty of signs of weakness. For example, production in the automotive industry has increased by about a third from the spring of 2022, but that increase appears to be stagnating. In each of the months of December, January and February, fewer cars were produced than a year earlier.

Orders (volume) in the industry were not doing so well in January. In December, a number of orders for large objects (trains, aircraft) had increased the total order volume by 12,0%. These orders were not repeated in January, causing volume to decline by 11,3%. The index thus reached its lowest level since the pandemic. Excluding the pandemic, order volume was the lowest since 2013!

Meanwhile, the American labor market continues to relax. The monthly Job Openings and Labor Turnover Survey shows that the number of vacancies is declining. Although there were still 8,9 million vacancies in January, that is still a decrease of 3,3 million compared to the peak in 2022. The number of people who resign of their own accord is also decreasing. In January there were still 3,4 million, clearly lower than the 4,5 million in April 2022. Apparently people have less confidence in easily finding another, and hopefully better, job.

Chinese exports are growing again
Because Chinese New Year does not fall on the same day every year on our calendar and even Chinese statisticians follow our calendar, the celebrations have a distorting influence on economic statistics in China. Import and export figures for January and February are always combined. That makes it less clear what exactly is happening. Yet it seems clear that the value of both Chinese exports and imports is increasing. This is consistent with what we see elsewhere in Asia. That is not to say that China will overcome all the challenges it is grappling with. But at least some cyclical improvement appears to be taking place.

Closing
It's probably just me, but I can only watch ECB President Lagarde's press conferences with curled toes. In my view, she simply does not understand enough about the economy and monetary policy to lead a central bank. In addition, the staff is not happy with her management style. Moreover, it oversees a gradual politicization of the central bank. Be that as it may, an interest rate cut will not be decided until June at the earliest. It's quite simple. The wage increase is higher than is consistent with the 2% inflation target. The decline in labor productivity is also a very worrying development that is bad for the desired further decline in inflation.

In Korea and Taiwan, inflation has recently remained at levels higher than before the pandemic. That could be a harbinger of what awaits us.

Our economy will grow faster this year than last year. But then the increase in purchasing power must translate into higher consumer expenditure. That was quite disappointing in January. Fortunately, there is still plenty of time in the rest of the year.

Industry in Germany produced more in January than in December. The energy-intensive sectors even significantly more. German industry seems to have reached a bottom. It must immediately be said that orders went in the wrong direction in January and the growth of production in the automotive industry, which is important for Germany, has certainly gone in the wrong direction in recent months.

The American labor market is relaxing further, which offers hope that wage growth will moderate further. Finally, Chinese exports and imports are showing some improvement. If this continues, the rest of the world will benefit.

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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