Industry production decline is starting to hurt

Donald J. Trump's second term as US President is casting its shadow before it. Many are shocked by his victory, but on financial markets the 'Trump trade' is unfolding. That is to say that US stocks, US capital market interest rates, the dollar and bitcoin are rising. Stock markets in countries that are likely to be hit by US import tariffs are falling.  

Fed chief Powell's press conference this week was particularly interesting. The Fed cut the official interest rate by 25 basis points, as expected. Powell also made it clear that the rate is still above 'neutral'. This means that we can expect further rate cuts unless the outlook for growth and inflation changes significantly. The Fed is in no hurry to cut rates, because the economy is strong.

Powell made some interesting points about inflation. It is still above the Fed's target, but Powell explained that this is not new inflationary pressure. Instead, past inflationary pressures are now causing price increases, but those inflationary pressures have now dissipated. The price increases they caused will therefore gradually fade away. It's a wonderful distinction between inflation and inflationary pressure. It's a treat for economic-theoretical connoisseurs, or 'nerds' like me. For normal people, the message is: inflation has more or less been defeated.

He was cautious about Trump's upcoming policy and its consequences. Only when it is clear what policy is being pursued can the Fed take that into account in its interest rate decisions.

The relationship between Powell and Trump is very tense. Asked whether he would step down as chairman if Trump asked him to, he said 'no' in a curt and icy yet determined tone. When asked if he would elaborate, he said 'no' again. He was also asked whether the president could strip him of his chairmanship of the Fed. Powell said curtly: "Not permitted by the law."

Afraid of dogs
As a child I was afraid of dogs. My mother said that dogs sensed that, enjoyed it and then became even more aggressive towards me. So I shouldn't show it, she said. Easier said than done. With all due respect to Powell, but he seems afraid of Trump and that is noticeable in everything: his facial expression, his choice of words, his body language, his short answers etc. My advice to Powell is: don't show that you are afraid of Trump, he enjoys that and it only makes him bark louder. In any case, Powell's answers suggest that he had the Fed's lawyers investigate where he stands with the president. Incidentally, Powell aroused Trump's displeasure in his first term in office by raising interest rates. At the moment the Fed is actually lowering interest rates. Perhaps that will please the incoming president a little more.

Inflation Taiwan and Korea
I like to follow the economies of Korea and Taiwan because they are early cyclical. What happens there often happens later in our country. Just like in our country, inflation in these countries has fallen recently. Korean inflation has now fallen to 1,3%, the lowest level since January 2021. Earlier this year, inflation was still above 3%. Before the pandemic, Korean inflation fluctuated between 1% and 2%. That is where it is now. I wonder whether the decline in inflation will not continue in the coming period to an uncomfortably low level. We see a similar picture in Taiwan. Inflation there fell to 1,7% in October. It is far too early to talk about the danger of deflation, but we must continue to monitor this development.

The Chinese economy is under pressure and the government is trying to stimulate business activity. This week, the country released some encouraging figures, at least at first glance. Business confidence in the service sector improved in October. The Caixin purchasing managers index for the service sector rose from 50,3 in September to 52,0 in October. The growth in exports in October was nothing short of spectacular. The value of exports was no less than 12,7% higher than a year earlier. Such strong growth had not been recorded in years. Unfortunately, we must suspect that this is anticipation of higher import tariffs in the US and Europe. The Chinese import value was actually 2,3% lower in October than a year earlier. This suggests that demand for goods in China is still weak.

Meanwhile, the government has launched a new plan to relieve the finances of local governments. It would involve an amount of almost $800 billion. That is not bad. It is too early to judge the effectiveness.

German government falls
With the dismissal of Finance Minister Lindner (FDP) by Chancellor Scholz (SPD) and the departure of other FDP ministers, the German government has effectively fallen. It is not clear what will happen next. Early elections, but not for a few months, are obvious. The opinion polls suggest that a new broad coalition of CDU/CSU and the SPD will be the most obvious option in terms of numbers. But whether the SPD is interested in that remains to be seen.

Germany has three problems: energy prices, energy prices and energy prices
It is all a very sad story. In my opinion, our German friends have done their own economy a terrible amount of damage. I am an advocate of solid government finances, but with their extremely conservative budgetary policy, our eastern neighbours have done their own infrastructure, including the digital one, no favours. The most catastrophic, however, is the completely failed 'Energiewende'. You cannot have a competitive economy if you saddle your own country with much higher energy costs than elsewhere. Of course, there are other issues, such as the problems in the car industry, but the energy costs are the most important. Let's hope that this lesson is learned, not only in Germany, but also in the rest of Europe, including here. But I fear the worst.

Dutch industry remains in a minor key
Production in our industry was 3,3% lower in September than in September last year and 3,0% lower than in August this year. These figures can be quite volatile, but we have been posting negative figures since mid-2023. The transport equipment industry in particular is in dire straits. Production there was 26,0% lower than in September 2023. The problems in the German automotive industry will probably play a major role. Production in the repair and installation of machines is also falling sharply: -19,6% year-on-year and mechanical engineering itself recorded a production loss of 4,3% in September compared to a year earlier. The food industry was on the right side of the line with a plus of 2,2%. Surveys among entrepreneurs suggest that we should not expect a clear improvement in the short term, although one would hope that base effects will soon help the year-on-year figures.

Closing
What political turmoil! Trump wins a resounding victory and the German government falls. Fed boss Jay Powell is preparing for a confrontation with Trump. He is not backing down yet, but it is clear that he is not looking forward to a second term for Trump. In the meantime, the Fed has cut interest rates again and will continue to do so in the coming months.

Recent Chinese figures and a new policy plan to support local governments offer some perspective.

Inflation in Korea and Taiwan continues to fall. Will this decline stop soon or are these countries heading for deflation? If the latter, will it happen to us too?

Production in Dutch industry continues to decline. This is starting to become painful.

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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