Global economic growth is disappointing

I'm back and the global economy certainly doesn't look any better than it did a month ago. Confidence indicators in Europe fell in June. In our own country, the NEVI purchasing managers index took an unexpected dip in June: 50,7 compared to 52,5 in May. This index was actually on the rise, but somewhat ahead of the CBS confidence index. This improved slightly further in June. But elsewhere in Europe, industry confidence indices fell in June, as did NEVI.

Of course there are always bright spots. For example, the recovery in Southern Europe is stronger than in our region. Spain, for example, received 11,5% more foreign tourists in May than a year earlier. In the first five months of the year the counter is 13,6%. In absolute numbers this is a record. Foreign tourists contribute about 12% to GDP. So that increase in tourism already results in more than 1,5% GDP growth.

The industry in Europe remains a weak point. In our own country, for example, production in the manufacturing industry was more than 3% lower in May than a year ago. In our eastern neighbors, the level of industrial production in May was even 6,7% lower than in May last year. The next picture shows that the increase in automotive production has come to a complete standstill in Germany.

As ECB President Christine Lagarde pointed out during her latest press conference, corporate credit demand continues to decline. This is evident from the Bank Lending Survey, a survey that the ECB conducts every quarter among commercial banks. An observation below zero in the following graph means that there are more banks that say credit demand is falling than there are banks that are experiencing rising credit demand. However, the degree of decline has been decreasing for several quarters.

China isn't good either
The Chinese economy has been disappointing for a year and a half and the recent figures do not justify optimism. Chinese GDP grew by only 0,7% in the second quarter compared to the first quarter. That's not much for China. Year-on-year growth fell to 5,3% from 4,7% in the first quarter. That is below the policy makers' target. Moreover, in June, year-on-year growth in retail sales and industrial production fell. It's a well-known story. The proven growth engines of the Chinese economy, the real estate sector and exports are faltering considerably. The real estate sector is struggling with high debts and exports are under pressure due to the weakness of global trade. Increasing protectionism does not suit China either.

US a bit better
Things are looking a little better in the US. In any case, the industry is still making gains there. In May and June together, production in American industry increased by approximately 1,5% and year-on-year the counter is +1,6%. That is not spectacular, but much better than in Europe. Retail sales also continue to grow at a satisfactory pace.

Confidence indicators also point to a weakening of the economy there. For example, the homebuilder confidence index fell for the third month in a row in July and is now at its lowest level this year.

What is also striking is how weak consumer confidence is. The University of Michigan benchmark fell for the fourth straight month in July. The following graph shows that consumer confidence is remarkably low compared to the increased, but still low unemployment.

An explanation for the poor confidence among consumers may be inflation. Surveys show that the high inflation of the last few years has caused a lot of dissatisfaction. Things are not getting much better now that inflation has fallen. No wonder inflation plays a leading role in the election campaign.

Trump promises to end inflation quickly. 'Make America affordable again' is one of his slogans. Of course he blames Biden for high inflation. That may be a bit of an exaggeration, although the very loose budget policy under Biden has certainly contributed to the high inflation.

Trump promises to boost oil and gas production, which may lower energy prices. He also promises tax cuts. Corporate tax should go from 21% to 15% and employees 'massive tax cuts' foreseen. Who wouldn't want that? He also promises to raise import tariffs, restrict immigration and deport a large number of illegal immigrants from the country. Deregulation is also part of his plans.

All in all, Trump's plans may be comparable to those of Reagan and are in line with what the followers of the 'school of supply-side economics' advocate. Critical economists point out that Trump's plans will fuel inflation. Tax cuts lead to more demand. According to the theory, additional import tariffs lead to higher prices in the home country and reducing immigration depresses the labor supply and therefore production capacity.

I wonder whether these economists are not too influenced by their dislike of Trump. The economy was doing well under Reagan. And during Trump's presidency, import tariffs proved to have little inflationary impact because companies exporting to the US largely absorbed the import tariffs by limiting their profit margins. There are differences of opinion about the influence of immigration on inflation. Of course, immigration increases production capacity, but those people also spend their incomes again. In fact, it seems that immigration primarily contributes to high inflation because the migrants obviously have to live somewhere and thus push up housing rents. Over the past year and a half in the US, it has been precisely rent increases that have contributed to inflation and those rent increases have also proven to be remarkably persistent.

With that inflation, things might not turn out so bad under Trump. Perhaps he will also be lucky that inflation will fall back anyway. Trump will undoubtedly claim that as his merit. That's just the way he is and he is not the only politician who will claim such success. It remains to be seen whether Trump can win the elections if the Democrats put forward another candidate. According to rumors, that could happen this weekend.

ECB leaves interest rates unchanged, but further cuts are coming
As expected, the ECB's official interest rate remained unchanged this week. I think that the ECB will decide on a second cut in September. During her press conference, Lagarde confirmed that the current interest rate level is still restrictive. She did not in any way try to downplay the fact that the economic recovery is currently in danger of stalling. However, she said that inflation is still too high and admitted that wage growth is still higher than what is compatible with 2% inflation. But she did her utmost to make this wage increase more nuanced. For example, she explained in detail that the process of wage setting in Europe simply means that wage increases lag behind in the event of an unexpected increase in inflation. Today's wage increases are still a compensation for the previous loss of purchasing power. She further emphasized that today's high wage increases are at least partly absorbed by declining profit margins. And finally, she repeated several times that surveys suggest that wage growth will fall sharply next year.

If you combine the fact that the ECB is confident that inflation will be fine next year, that economic growth is currently in danger of coming to a standstill and that the current interest rate level is restrictive, then it is obvious to assume that further interest rate cuts are on the way. Since interest rates are considerably higher than what you can call a neutral level, it does not make much sense for the ECB to wait long. That is why I think that the policy meeting in mid-September is an obvious moment for another interest rate cut.

Closing
Contrary to what I previously expected, the global economy appears to be weakening. Confidence indicators in Europe show a deterioration in June, while the 'hard' data on production, exports, etc. for the preceding months were generally disappointing. Industry in particular is not showing any recovery.

The industry in the US is clearly doing better than in Europe. And consumers also seem to want to increase spending. Yet the American economy also shows weaknesses. Various confidence indicators are declining and consumer confidence is remarkably low, despite the fact that spending is apparently fluctuating reasonably well. The housing market is also under pressure.

The Chinese economy is not doing well either. The headwind is so strong that it will require significant policy impulses to boost the economy. Policymakers do not seem willing or able to do this.

Many economists are very critical of Donald Trump's economic plans. I think that criticism is only partly justified. It also remains to be seen how many of his plans he will be able to implement if he is elected president. That is of course uncertain. When the Democrats put forward a candidate other than Biden, it all becomes extra exciting, uncertain and interesting.

The ECB left interest rates unchanged this week, but further interest rate cuts are coming. I think that a second interest rate cut, after the one in June, will follow in September.

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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