Not very convincing, but the economy is improving somewhat

The economy is improving somewhat. It's not all very convincing yet, but the various pieces of the puzzle are starting to fit together and paint a consistent picture. This week, the Dutch Central Bank issued a message entitled 'Economics has taken an upward path'. That message is based on a bit of hocus pocus, but someone who pays attention to it.

DNB compiles a so-called 'business cycle indicator'. That is a combination of five variables (hence I call it hocus pocus) that have proven to be a bit ahead of the actual economic situation. Consumer confidence and the assessment of companies about their order receipts are part of it. The index is constructed in such a way that it indicates turning points in the economic cycle. The indicator says nothing about the level of growth.

As the picture shows, the red line has changed direction. This turned around in March and that means that we have started to accelerate growth. We already knew that the Dutch economy will grow again in the fourth quarter of 2023 after three quarters of contraction. So it is actually a bit strange that DNB puts the turning point of the economic cycle in March 2024. Must be a matter of definition.

Strong consumption growth
Moreover, the GDP growth estimate for the fourth quarter has been revised slightly upwards. There is now +0,4% quarter-on-quarter on the books compared to +0,3% at the first estimate. Private consumption in particular grew strongly: almost 2% compared to the third quarter. That is exceptional. Consumption growth was helped by the fact that the energy allowance that many low-income families received in 2023 was largely only paid out in the fourth quarter. Economists from ABN Amro have determined that this money is spent quite quickly, which is not surprising. A quarter of the consumption growth in the fourth quarter was said to have been caused by this. Even if you were to correct for this, consumption growth in the fourth quarter is strong. This has everything to do with the wage increase, which is currently clearly above inflation.

Another piece of the puzzle of the improving economy consists of the figures for German business confidence as recorded by the Ifo Institute. Their index improved from 85,7 in February to 87,8 in March. Economists prefer to look at the expectations component. It rose from 84,4 in February to 87,5 in March. That is quite a remarkable and significant jump. Business confidence increased in both industry and the services sector. The S&P Global purchasing managers index shows something different. According to that survey, German purchasing managers' confidence in the services sector improved in March, but confidence in industry actually declined. The index for industry came to a very poor 41,6 in March. In February it was 42,5.

The European Commission compiles a monthly index called Economic Sentiment. This is a comprehensive figure that takes into account the confidence of consumers and entrepreneurs across all sectors. In March this index stood at 96,3, a slight increase from 95,5 in February.

Container handling
A series I like to follow is published by RWI/ISL, two German institutions. They keep track of container transhipments in seaports throughout the world. That is, in a sense, the pulse of the global economy. A very unfavorable picture has been emerging for Europe for some time now. The number of containers handled in the seaports of Northwestern Europe has been declining for some time, while things are clearly improving in the rest of the world. But according to RWI/ISL commentary, the downward trend in our part of the world is currently reversing. The index for Northwestern Europe rose by 3,0% in March compared to February. The index for the world as a whole also rose in February, although the increase was much more moderate at 0,8%. This was mainly due to China, where the index fell by 2,5%. It is not clear whether this has to do with Chinese New Year or with underlying problems in the Chinese economy.

By the way, when I look at the graph for Northwestern Europe I obviously see the increase in February, but I would conclude that that increase could also be normal volatility in a downward trend. Because many other economic indicators point upwards, we should also give this index the benefit of the doubt for the time being.

House prices
Finally, some comments about house prices. In February, house prices in our country increased by 1% compared to January and by more than 4% compared to February last year. When mortgage interest rates rose sharply in 2022, this led to a drop in house prices. That decline was short-lived and limited. Early in 2023, the monthly price drop turned into an increase again. This is driven by the increase in wages, which allows people to take out larger loans, and the scarcity of housing.

Over the course of last year, I noticed that the development of house prices in our country was very similar to the price development in the US, although they are two completely separate markets. Perhaps that wasn't so surprising, as both markets are driven by factors that have aligned in recent years. Mortgage interest rates in the US also rose in 2022, even more than in our country and also slightly earlier. Falling house prices were also the result there. Just like in the Netherlands, the downward trend quickly reversed. In the US even slightly faster than here. The increase in real wages will have played an important role in this. However, a weakening is now visible. There are several benchmarks for home prices in the US. The month-to-month increase is currently declining on all these measures. The benchmark I have included in the following graph even shows a slight decline in house prices in February compared to January. The question is of course whether this is a new trend. Another question is whether house prices in the Netherlands will show the same picture in the coming months.

Closing
Falling inflation and robust wage growth lead to an increase in purchasing power. This fuels spending and is an important cause of the improvement in the economy. Furthermore, the inventory cycle may play a role in industry. Companies have been consuming inventories for a long time, which is negative for the short-term economy, but that process will eventually come to an end. A whole series of economic indicators are now showing an improvement. Based on this, we can conclude with some confidence that economic growth will pick up slightly in the near future. I don't think we should expect strong growth. This growth also does not eliminate a number of existing structural problems, such as the housing shortage, bottlenecks in healthcare and labor shortages.

The increase in American house prices is slowing down. In fact, the price increase seems to be over. Since the development of house prices in the US and ours has shown great similarities in recent years, with the US slightly ahead of us, the question is justified as to whether the price increase in our country will soon diminish as well. Most Dutch economists don't think so.

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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