Consumer pessimistic, but spending is rising

The Dutch consumer is starting to suffer from schizophrenia. In the third quarter, consumer spending still pushed GDP growth up to a solid 0,8% compared to the second quarter. Not surprising given the sharp improvement in purchasing power this year.

However, according to consumer confidence surveys, consumers remain remarkably pessimistic. In November, the index came in at -25. Not only was that well below the long-term average (-4,7 since 1990), it was also significantly lower than the -22 in October and the lowest level since February. In November, consumers became particularly negative about the state of the economy and the economic outlook.

While it's a bit of an apples and oranges comparison, the first graph suggests that consumers are noticeably more pessimistic than business owners.

Consumers in other eurozone countries are certainly not much happier. For the eurozone as a whole, consumer confidence also fell in November and the index is well below the long-term average. But the following graph suggests that Dutch consumers are still relatively more out of sorts than consumers in the eurozone as a whole. You can speculate yourself about why this is the case.

Unemployment in our country remained the same at 3,7% in October. In the explanation, the CBS writes that more than 3,6 million people in the age category of 15 to 75 years old are not working. That is 376.000 unemployed and the rest pupils, students, pensioners and others who for whatever reason are not looking for work. The number of people who are 'standing on the sidelines' has increased by an average of 20.000 in the past three months. That is a considerable acceleration compared to previous months. It is not clear what the cause of this is. The result is that the participation rate decreased in October. In an international perspective, our participation rate is very high. On the other hand, the number of people who work part-time is also very high internationally. This decreasing participation rate is not good news, although the decrease could be a temporary aberration. Still, it is important to pay attention.

ECB warns about government finances
The ECB published its annual Financial Stability Review earlier this week. It points to increasing volatility in financial markets and also to the problematic outlook for public finances in several countries. High inflation in recent years has pushed debt ratios down somewhat, after ample support during the pandemic had caused debt ratios to rise sharply. But in most cases, these ratios are now higher than before the pandemic. Moreover, budget deficits in some countries are higher than they should be, there is no urgency to do something about them and economic growth is meager, making it difficult for countries to grow out of their debt problem.

Eurozone wage growth accelerates in third quarter
Inflation is currently mainly driven by the increase in wage costs. In itself this is logical, because the sharp increase in inflation was unexpected, which initially caused wages to lag behind considerably and then started a process of catching up. The ECB has developed a new benchmark that resembles figures from the AWVN on the wage increase agreed in new collective labour agreements. The ECB may even have been inspired by the AWVN.

In contrast to the AWVN figures, the ECB series for the eurozone is not monthly but quarterly. In the third quarter, the negotiated wage growth to 5,42%, from 3,54% in the second quarter. This is a setback for the ECB. The series is based on data from a limited number of countries and in the third quarter wages in new collective labour agreements in Germany rose particularly strongly: 8,8%. For the 'hawks' within the ECB this could be a reason to pause for the time being with further interest rate cuts, but I suspect that the 'doves' are in the majority and they will argue that the strong wage increase in new German collective labour agreements is not a trend but an outlier.

US labor market remains strong
While the U.S. unemployment rate has risen overall this year, the labor market remains strong. The number of jobless claims has been on a notable downward trend in recent weeks. The week of Nov. 11 saw 213.000 claims, the lowest number since April.

However, there are also signs of weakening. For example, the total number of unemployment benefits has actually increased recently, as the following graph shows.

I'm going to
I am one of those economists who have long expected the US economy to enter a recession. The main reasons for this are that the expansionary fiscal policy has led to unsustainable growth, that the financial position of households is fragile and that rising interest costs are becoming an increasingly heavy burden for companies.

If you hold on to the idea that a recession is inevitable long enough, you will eventually be proven right. But it is nice to get the timing right. It is a tricky business to change your mind and 'turn around', because that could be just before the recession hits.

However, it seems to me increasingly unlikely that a recession will occur in the foreseeable future. Recent developments in the labor market suggest that the American economy, as so often, has more growth dynamics than you would think. The old adage was never bet against the Fed, but maybe never bet against the US economy also a sensible principle.

The election results of November 5 are also a consideration for me to change my mind. I think the new government will make a flying start with a fairly pro-business policy.

Closing
Dutch consumer confidence is remarkably weak, both compared to consumer spending and compared to producer confidence and even compared to consumer confidence in the rest of the eurozone. But hey, it's better to have low confidence and strong growth in spending than the other way around.

The ECB rightly points out the risks surrounding public finances in various euro countries.

Wage growth in the eurozone accelerated unexpectedly in the third quarter. This is mainly due to Germany and is probably an outlier. Nevertheless, the ECB will cut interest rates again in December.

The US labor market remains strong. I think a recession is unlikely in the foreseeable future, especially since I expect the Trump administration to jump-start pro-business 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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