Dutch entrepreneurs slightly less gloomy

According to the CBS index, the confidence of industrial entrepreneurs in our country has improved slightly in September. There is no hosanna mood at all, the index is still slightly below the long-term average of -1,7 at -1,9 (August -1,3).

I had expected a decline. Earlier this week, various figures showed that business confidence in Germany had actually fallen considerably, and that country is and remains our most important trading partner. Moreover, the purchasing managers index in Dutch industry has been falling for a few months. Incidentally, the Nevi figures for September will not be released until next Tuesday.

The number of entrepreneurs expecting to increase production in the coming months was greater than the number predicting a decrease in production and this sub-indicator has improved every month since March this year. On balance, entrepreneurs were negative about the order position and also slightly more negative than in August.

As mentioned, this CBS figure deviates from what is observed in Germany. The leading Ifo index that measures business confidence in Germany (all sectors of the economy) fell from 86,6 in August to 85,4 in September, the fifth consecutive month of decline. Entrepreneurs in German industry in particular are gloomy.

The cause of the difference between the Netherlands and Germany is anyone's guess, but it seems to me that the sectoral composition plays a decisive role here. German industry relies heavily on the automotive sector and energy-intensive sectors such as chemistry. These sectors are of course also present in our country, but they have a lower weight here. We have a considerably greater weight in high-tech, which benefits from developments in the field of artificial intelligence. With companies such as ASML, ASMI, BESI, and NXP, we are doing quite well. What I want to get off my chest is that these companies all originally emerged from Philips, which is not to say anything short of the achievements of the current management of these companies. But it does show how great and long-lasting the influence of courageous, innovative, and creative entrepreneurs can be. We must cherish them.

China's central bank announces strong stimulus measures
The Chinese central bank is giving the economy a major boost. The announced measures form a fairly broad package. For example, various interest rates are being lowered and more liquidity is being pumped into the financial system. The reserve requirements of the banks are also being reduced so that they can provide more credit. The regulations on buying a second home are also being relaxed. Furthermore, a fund is being considered that should focus on stabilizing the stock market.

The stock market reacted enthusiastically, the main stock market index in Shanghai rose by around 12% this week. Whether this will work is the question. The Chinese growth model is broken. Over the past twenty years, construction, both of housing and infrastructure, and exports have been the drivers of Chinese growth. But the housing market is in crisis because too much has been built and local governments that play a major role in the construction of infrastructure are struggling with high debts. Chinese exports are under pressure due to increasing protectionism in the world. The announced measures do little to change that. Inducing more lending does not seem to me to be the solution. But perhaps I am wrong and the measures could certainly boost business activity in the short term. That plan to intervene in the stock market seems to me to be an extremely bad idea. Let the market do its work, why would the authorities know better what the prices should be than the collective intellect of all investors together? Incidentally, that plan does not seem to be very concrete yet.

US economic direction still unclear
Where the US economy will go in the coming period is still a point of discussion. Quite a few conflicting signals are emerging. Take the labor market. The number of applications for unemployment benefits remains historically low. In recent weeks, that number has even fallen again, after an increase earlier this year.

On the other hand, the number of available jobs is decreasing. According to the monthly survey of consumer confidence by the Conference Board, fewer and fewer respondents say that the number of jobs is plentiful is, although this sub-index is still slightly above the long-term average.

According to the national accounts, business investment in the US is doing quite well. Investments in 'equipment' were 2,4% higher in volume in the second quarter than a year earlier and investments in 'intellectual property products' were 4,0% higher. The next picture, on the other hand, shows that orders for capital goods (excluding defense and aircraft) have not grown at all or hardly at all for some time. And these are nominal amounts. Moreover, the boom in investments in commercial buildings, which was mainly driven by subsidies under the Inflation Reduction Act, now seems to be over.

The American housing market is a different story. Just like in our country, there is a housing shortage. There is also currently little flow. Despite the sharply increased mortgage interest rate, house prices are therefore high and rising. Unlike in our country, American homeowners cannot take the mortgage on their house with them when they move. The following graph shows that the mortgage interest rate in the US rose from around 2020% to 2023% between 3 and 7,5 and even higher for a while. That is not bad. If you then move and have to take out a new mortgage at those much higher interest rates, your housing costs will of course increase sharply. In fact, that increase is prohibitive for most people, they stay put. But if everyone stays put, that limits the supply of homes and the housing market will lock up.

Meanwhile, mortgage rates have started to fall. The US mortgage and housing markets are very interest-sensitive. The number of refinancings is skyrocketing (although historically this number is still at a low level), which is helping people improve their cash flow situation. This lower interest rate is also making moving less unattractive, which is why more homes are currently coming onto the market.

A strange paradox, but good news for inflation
We know the term pent-up demand, in Dutch 'pent-up demand'. Now that the falling mortgage interest rate promotes the flow because moving becomes less financially unattractive and more people put their homes up for sale, in the US people are talking about pent-up supply, or 'catch-up supply'. This additional supply could become very large and that could put pressure on prices. This could lead to the paradoxical situation that lower interest rates do not lead to higher, but actually lower house prices. That would be good news for inflation, because the most persistent part of inflation is in rents, which are strongly related to house prices.

Closing
According to the CBS, Dutch industrial entrepreneurs have become somewhat less gloomy in September. We will see what the Nevi purchasing managers index will tell us next Tuesday. It is clear that things are not going well in Germany at all. That is unfavourable for us, although our economy has become considerably less dependent on Germany in recent years due to the high-tech sector.

The Chinese economy is in dire straits, in the sense that growth is disappointing. The housing market is in crisis and the advancing protectionism in the world is certainly not helping China. I wonder whether the measures announced by the Chinese central bank this week offer the solution. In any case, that announcement did give the Chinese stock market a boost this week. Stock markets elsewhere probably benefited from that as well.

The signals from the American economy remain confusing. In my view, the labor market is weakening, quite conspicuously even, but you cannot say that the market is already downright weak. The fall in mortgage rates in recent months is giving the mortgage and housing market a boost. While you would think that this would lead to a further increase in house prices, it could well be that the lower mortgage rates make it less financially unattractive for many people to move. That could provoke additional housing supply, which could actually depress prices, perhaps only temporarily.

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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