Concerns about economy persist

The mood in Dutch industry deteriorated noticeably in October. The CBS index of producer confidence in industry fell from -1,7 in September to -3,2 in October, the lowest level since April. And while the German industrial purchasing managers index had actually risen in October – albeit from an exceptionally low level – the Dutch index fell from 48,2 in September to 47,0 in October. That is the lowest level of the year.

I certainly do not like the tone of the accompanying press release from NEVI. It is the same tone I heard this week in a conversation with some Brabant entrepreneurs. They said that the order intake has recently fallen sharply, especially from Germany. But they also reported that the poorer state of affairs at ASML is making itself felt. According to the NEVI survey, production is higher than the order intake and if that does not change, companies will be forced to reduce production after a while. According to the survey, the number of jobs in the sector is falling.

The entrepreneurs are still optimistic about the future. They think they will expand investments and production in the future. To be honest, they always expect that and it is perhaps no more than the optimism characteristic of entrepreneurs, but in this case perhaps wishful thinking.

Germany's limited improvisational capacity
Anyone who follows the news from Germany cannot be very optimistic. The automotive sector there is fighting for its survival. I lived in Germany. A nice country to live in at the time. Well organised, which made life pleasantly predictable in many respects. But when things don't go as planned, the ability to improvise proves limited. Then Germans get grumpy, the elbow mentality head up, people speak with raised voices and it is 'na, it was gibt's but niece!' not from the air.

The FD wrote on Tuesday that Chancellor Scholz had convened an industry summit this week to talk to representatives of the automotive, chemical and steel sectors about measures to tackle the malaise. Not a bad idea and not too early, but Finance Minister Lindner of the FDP was not invited and therefore convened his own summit. Minister Habeck of Economic Affairs (Greens) had already launched a plan last week without any coordination to boost investments. That is how I know our German friends: total panic and chaos in a crisis situation. Not that we are so much better, but a little better…

The European Commission’s broad confidence index, Economic Sentiment, which combines business and consumer confidence, deteriorated from 96,3 in September to 95,6 in October. The picture clearly shows the difference between the Netherlands and Germany.

GDP in the eurozone performed unexpectedly well in the third quarter. According to preliminary figures, GDP grew by 0,4% quarter-on-quarter. Compared to the same quarter in 2023, growth of 0,9% was recorded, better than the 0,6% in the second quarter. Of the countries for which preliminary figures are now known (CBS will not release ours for another two weeks), Ireland is the leader, with a quarter-on-quarter growth of 2,0%. We must be careful when interpreting Ireland's growth figures, as they are extremely volatile and are often disrupted by the activities of American multinationals active in Ireland. Of the more relevant countries, Spain recorded growth of 0,8% quarter-on-quarter. That country is benefiting from, among other things, the continued improvement in tourism. Unfortunately, the recent natural disasters will not only cause a great deal of human suffering, but also cause a great deal of economic damage and have had a negative impact on business activity.

In Germany, GDP grew against expectations, namely by 0,2% quarter-on-quarter. It should be noted that growth in the second quarter was revised downwards from -0,1% to -0,3%. Further details are not yet available. I will not immediately become very optimistic about the prospects for the German economy. Those who are looking for bright spots can point to the improvement in purchasing power this year, the recovery of world trade and the likely fall in interest rates.

Germany's relationship with China is complex. The country has proven to be a lucrative sales market for German companies, but that has now come to a standstill. In addition, German manufacturers are increasingly experiencing competition from China. According to the purchasing managers' indices for October, Chinese business confidence is currently improving. Whether this is positive or a threat to Germany is difficult to estimate, but let's assume the former.

Inflation in our country rose to 3,6% in October, from 3,5% in September. That was somewhat disappointing. The month-on-month increase was 0,5% (almost even 0,6%). Energy and fuel prices depressed inflation less in October than in September. Inflation appears to be quite persistent in the other components that CBS announced in the 'rapid estimate'. Inflation in industrial goods accelerated from 0,4% to 0,5%. 'Food, beverages and tobacco' was 6,0% more expensive than a year earlier. This was also the case in September. However, this high level is mainly due to the increased tobacco excise duty. Tobacco prices are around 35% higher than a year earlier. Despite the low weight of tobacco in the inflation basket, it contributes around 0,6 percentage points to our total inflation. The price increase of food (so excluding beverages and tobacco) has been below 2% for almost the entire year. Finally, services inflation fell slightly from 5,6% to 5,4%, but that also remains a high level.

The following figure shows the price increases since the beginning of the year. Although we are reasonably satisfied with the lower inflation, prices have already increased by 4,7% this year. As is known, the rent increase and the increase in tobacco excise duty play an important role in this. It remains striking that of the years depicted, the current one is the year with the most inflation up to and including October after 2022.

In the other eurozone countries, inflation is generally lower, but the trend is similar. In the eurozone as a whole, inflation rose from 1,7% in September to 2,0% in October. Core inflation was 2,7%, compared to 2,6% in September.

For the ECB, I think that means that there is no reason to cut rates in larger steps than so far. So for now, just assume a cut of 25 basis points per meeting. If inflation figures continue to disappoint in the coming months, the ECB can reduce the frequency of rate cuts.

US labor market continues to relax
The US economy grew by 0,7% in the third quarter, more or less as expected. More importantly, the labour market is easing further. The number of vacancies fell again in September. At the beginning of 2022, the number of vacancies peaked at 12,2 million. That has now fallen to 7,4 million. That makes a difference. To me, that still implies the possibility that the US economy will weaken considerably, although the elections are of course a source of uncertainty. The easing of the labour market is also leading to a reduction in the rate of increase in wage costs. The so-called Employment Cost Index rose by 0,8% quarter-on-quarter in the third quarter. That is approximately the upper end of the range in which the rate of increase in this series moved before the pandemic.

I think the relaxation of the labor market and the moderation of wage growth will be enough reason for the Fed to continue the process of cutting rates.

Closing
Although the German GDP figures for the third quarter were much better than expected, the economic outlook in that country remains precarious. And we notice that too. Industrial entrepreneurs have become clearly more pessimistic in October. This is evident from both CBS figures and the NEVI purchasing managers index. You hold your breath.

Inflation was a bit disappointing in October, both in our country and in other eurozone countries. That will prevent the ECB from taking bigger steps in the process of lowering interest rates. If inflation continues to fall short, the ECB could reduce the frequency of interest rate cuts, but I suspect that interest rate steps of 25 basis points per meeting will continue for the time being.

The US economy is growing steadily. However, the labour market is relaxing and the rise in wage costs is moderating. In my opinion, there is every reason for the Fed to continue cutting interest rates, albeit slowly. The elections are creating a lot of uncertainty. Let me not speculate on the outcome and its implications.

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

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.