CPB's calculation of the outline agreement is surprising

The Central Planning Bureau (CPB) has calculated the outline agreement of the intended new government coalition in the Netherlands. This produces quite striking results. Compared to the so-called basic path, i.e. without the policy as provided for in the main lines agreement, purchasing power improves (mostly for families with low incomes), economic growth is higher and poverty decreases. The budget deficit is also slightly lower than in the baseline. Of course you can always say that it could have been an ounce more on all these parts, but that's always something.

I think that the four parties involved were pleased to take note of the calculations. There has been some criticism of the outline agreement because the financial underpinnings are fragile. For example, the new coalition hopes to achieve a lower EU contribution and the national government will have to significantly reduce its workforce. The CPB believes that some of the coalition's austerity goals will prove unattainable. The CPB has taken this into account in the calculations by calculating lower amounts in those cases. In the eyes of the coalition, this will probably give the CPB results a little more shine.

Fed Minutes
The minutes of the latest Fed policy committee meeting have yielded some surprises. Chairman Powell has said lately that interest rate increases are unlikely and that it is a matter of 'please be patient' before current interest rates fall below inflation. But the minutes show that a number of committee members doubt whether the current interest rate is restrictive enough. This thinking has of course been encouraged by the disappointing inflation figures in the first months of this year and the relatively high growth of the American economy. The further idea is that the economy may be less interest rate sensitive than assumed.

This only had a short-term impact on the financial markets. Stock prices fell briefly, but quickly recovered. That also seems understandable to me. It is not clear how many committee members doubt the adequacy of the current interest rate. Moreover, the inflation figures in January, February and March were disappointing, but this was not the case or at least much less so in April. I therefore conclude that it is best to follow Powell's words that an interest rate increase is unlikely.

As I have written before, it seems certain to me that the ECB will cut the official interest rate on June 6. ECB President Christine Lagarde has regularly spoken in press conferences recently about strong wage developments as the main risk factor for achieving the inflation target. This week the ECB published figures on wage agreements made (negotiated wages). In the first quarter they were 4,69% higher than a year earlier. In the fourth quarter of last year that increase was 4,45%.

The graph shows that there has not yet been any moderation. In a blog on the ECB website, two ECB economists express optimism that wage increases will weaken sufficiently in the foreseeable future to achieve the inflation target. They attribute the current persistently high wage increase to catch-up effects and one-off payments in wage agreements. What I miss in that analysis is commentary on the tightness of the labor market. You have to wonder whether the tightness on the labor market will not lead to higher wage increases for a somewhat longer period. I obviously hope that these ECB economists are right, but I am less sure than they are.

The provisional purchasing manager indices for the current month show a consistent picture for the industry. In all countries for which these provisional figures have been published, an improvement was recorded in May compared to April. In the US, Japan and the UK, the industry index has risen above 50,0. This is not the case in Germany, France and the eurozone as a whole, although the index rose here too. The indices for the services sector show a more varied picture. In all countries mentioned, except France, the confidence index in the services sector was above 50,0 in May.

Consumer confidence is falling slightly
Dutch consumer confidence fell by a point in May: 22 compared to 21 in April. The slight decline follows eight months in which confidence improved. Consumers were more negative about the economic climate, but their willingness to buy was slightly higher. It stands to reason that consumer confidence will resume its upward trend in the near future, driven by an improvement in purchasing power.

We already knew that production in the Dutch industry is not going well. The production level has been below the level of a year earlier for months. It is equally problematic with turnover. In the first quarter of this year, it was 5,5% lower than in the first quarter of 2023. However, the graph below shows that this decline implies an improvement compared to the previous three quarters. I expect this improvement to continue in the coming quarters as the purchasing managers' index for manufacturing has been rising for some time and global trade is picking up. fingers crossed.

Closing
The calculation of the outline agreement is probably more positive than expected. However, doubts remain about the feasibility of some of the planned cuts. Time will tell.

Although some members of the Fed policy committee doubt whether interest rates are currently high enough to curb inflation, I think the likelihood that interest rates will be raised further is slim. The next step will definitely be a reduction. September seems to be a serious candidate for this.

The ECB will undoubtedly take action sooner. Expect an interest rate cut in the eurozone on June 6, although relatively high wage increases will remain persistent for the time being.

Purchasing managers in industry became more or less negative in May in all major countries. That is good news. Our industry is currently in a downturn, but the increasing optimism elsewhere will hopefully help us too.

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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