Financial markets must keep Trump in check

The Dutch economy grew surprisingly strongly in the third quarter: 0,8% compared to the second quarter. Back then, quarterly growth was even higher: 1,1%. If the economy grows by almost 2% in two quarters, you can speak of a growth spurt. It was about time, because in the seven quarters before that, there was a bit of a slump, with our economy shrinking slightly on balance.

In the second quarter, the strong growth was driven by the export of goods, but in the third quarter, the consumer contributed. Household consumption expenditure grew by 0,8% quarter-on-quarter and by 1,5% year-on-year. It was about time, because purchasing power is increasing considerably this year. Until now, the consumer has kept a tight rein on spending. Figures on consumer confidence still do not point to an exuberant mood.

Government consumption also grew by 0,8% and fixed investment grew by 0,7% quarter-on-quarter. Foreign trade made a slightly negative contribution to GDP growth as import growth (0,6% quarter-on-quarter) exceeded export growth (0,4% quarter-on-quarter).

Of course, we will not be able to maintain this growth rate for long, but if the consumer keeps up the pace, the fourth quarter could also yield a nice growth figure. In the MEV 2025 that the CPB published in September, the accountants predicted a growth of 2024% for 0,6 as a whole. The latest figures suggest that the actual figure will be higher. That will undoubtedly be favourable for government finances.

Our growth in the third quarter put us among the top performers in Europe. Ireland (2,0% qoq) and Cyprus (1,0% qoq) grew faster and Spain just as fast as we did. But these kinds of figures are volatile and we also underperformed many other European countries for a while.

Highly dependent on Germany
Ultimately, we will of course remain highly dependent on Germany. The mood there is not improving. The uncertainty that has now arisen due to the fall of the Scholz government is certainly not helping; apart from the challenges that the German economy was already experiencing. The ZEW index, a confidence index that is measured among economists and analysts, fell in November. The index that shows an estimate of the future came to 7,4, after 13,1 in October. This sub-index is therefore slightly, but not too much, below the long-term average of around 20. The index that shows the assessment of the current situation fell from -86,9 in October to -91,4 in November. It cannot be much lower.

European industry has been doing less well for a while now. The following graph shows that our production has clearly lagged behind that of the US over the last year and a half.

American SMEs slightly more positive
Although the US small business sentiment indicator (the National Federation of Independent Business, NFIB) has been below its historical average for almost three years straight, there was some improvement in October, to 93,7, up from 91,5 in September. Staff shortages and high costs continue to dampen sentiment.

US inflation rose slightly in October to 2,6% year-on-year, up from 2,4% in September. Month-on-month prices rose by 0,2%. Core inflation remained unchanged at 3,3%, while the month-on-month increase was 0,3%. I think these numbers are a disappointment for the Fed. Some further decline towards 2,0% would have been nice. The underlying picture remains 'unsettled'. For example, used car prices rose by 2,7% month-on-month. Despite the small weight of these cars in the inflation basket (1,87%), that still added up.

The increase in rents is gradually decreasing, but it is happening slowly. In October, rents still increased by 0,4% month-on-month and by 4,9% year-on-year. 

The combination of an economy that is growing very reasonably and inflation that is coming down gradually but not quickly suggests that the Fed will not be in a hurry to cut rates. With rates above 'neutral', the Fed will continue to cut rates, but at a moderate pace.

Who will keep Trump in check?
Some by president-elect Trump's announced appointments of top officials are being criticized by my American friends wacky mentioned. Especially the proposed nomination of Matt Gaetz (Republican member of the House of Representatives) as attorney general raises eyebrows. I've never heard of the man, but he apparently has little to no experience as a practicing lawyer, and his strongest point in Trump's eyes is likely his loyalty to the president-elect. Whether Gaetz can make it through the Senate confirmation process remains to be seen.

If Trump appoints mostly loyalists to top positions, the question is who will keep the new president in check. The American system of government is known for its checks and balances that the founding fathers so brilliantly conceived. But if the president's party has a majority in the House and the Senate, and the majority of the justices on the Supreme Court are also from the same party, then it would be nice if top officials could provide some pushback against ideas that are too wild. That chance does not seem great at the moment. However, members of Congress from the swing states push back, because they risk losing their seats in the next election if their policies are too radical. In November 2026, elections will be held again for all 435 seats in the House and 33 of the 100 Senate seats.

Another possibility is that the financial markets will keep the president in check. Too radical policies in the financial and economic field can lead to distrust, unrest and volatility in the financial markets. It is unlikely that what happened to the short-lived British Prime Minister Liz Truss will happen to Trump, but do not underestimate the power of the financial markets. For the time being, it is all guesswork, but the capital market is on its toes. The effective yield on ten-year US government bonds has risen from around 3,6% to almost 4,5% in one month.

Personally, I think that a large part of Trump's announced policy agenda is sensible (focusing on economic growth, tax relief for companies, curbing immigration, deregulation, less woke, etc.). But with a person like Trump, there is certainly the danger of taking too extreme initiatives. Anyway, never a dull moment.

Closing
The Dutch economy has grown well above expectations in the last two quarters. In the third quarter, the consumer woke up. That is good news, although the news from Germany continues to cause concern.

The decline in US inflation is not yet very convincing. In fact, inflation actually rose slightly in October. Ultimately, I think it will be fine and I also think that the Fed will continue to cut rates, but it will not do so at a rapid pace.

All eyes, including those of the players in the financial markets, will be on Donald Trump in the coming period. He is forming his team to make a flying start with his radical policy agenda after taking office. It will be a test for the famous checks and balances in the American political system, where financial markets can also play a role in preventing overly radical policies.

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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