Global economy divide increasingly apparent

The divergence in the global economy is becoming increasingly clear and glaring. Things are going well in the US and in the technology sector, but much less well in Europe and China. Germany is the weakest link in Europe in economic terms. The German economy has to rely on 'old' sectors, although the Germans are masters in this and also quite innovative. But high energy prices, the suffocating regulatory burden and competition from China are putting considerable pressure on business activity.

Just as for the Netherlands, exports are of great importance to the German economy. Monthly trade figures are volatile, so we have to be careful with the interpretation. But a decrease in the value of German exports in October by 2,8% compared to September is bad news. Exports to the US were 12,2% lower, to China 3,8% lower and exports to Russia fell by 9,4%. The decrease to other euro countries was still not too bad: 0,7%. The value of exports in October was the lowest in three years. Over the first ten months of the year, the decrease was 1,2% compared to the same period last year.

Incidentally, the German trade surplus remains large. In October, the export value exceeded the import value by €13,4 billion. In the Netherlands, there is little attention for our own trade surplus. I must admit that I never write about it. But our trade surplus in October was almost as large as that in Germany: €13,0 billion. Over the first ten months of the year, our surplus amounted to €125,9 billion compared to €108,2 billion in 2023. That may sound nice, but it is actually absurd. We produce a lot more than we consume. We have been doing so for a long time. You wonder why we want to live so far 'below our means' for so long.

Chinese growth model has been focused on exports for several decades
In China too, problems are piling up. Even more than Germany, the Chinese growth model has been focused on exports for decades. With the threat of an increase in import tariffs in the US, that model is under increasing pressure. In November, the value of Chinese exports was still 6,7% higher than a year earlier, but that was less than expected. Chinese exporters will undoubtedly do their best to sell as much as possible to customers in the US before import tariffs are raised.

Policymakers in China have already implemented a policy several years ago that should lead to growth being driven more by domestic demand. The import value of China was 3,9% lower in November than a year earlier, which according to the explanation was mainly caused by weak domestic demand. The government has announced new stimulus measures.

As mentioned, things are going better in the technology sector worldwide and in the US. Taiwanese exports are also going very well. They are dominated by electronics. In November, Taiwan's export value was 9,7% higher than a year earlier. The Taiwanese mainly exported more to Korea (+40,3%) and to the US (+10,6%).

A notable sign of optimism came from the US. The NFIB index, which measures the confidence of SMEs in the US, jumped from 93,7 in October to 101,3 in November. That was the highest level since June 2021. In the explanation, the NFIB reports that the optimism was mainly fueled by the election of Donald Trump as president. Expectations are high that the new president will implement a policy that is good for companies, in this case SMEs.

However, the economic news from the US is not all positive. The labor market is tight, but easing. In the last week, 242.000 new unemployment claims were filed. That is still a low level, but there have only been four weeks this year when the number of claims was higher.

Inflation in the US is more persistent than in Europe. While inflation in the Eurozone is currently 2,3%, in the US it is 2,7% for November. Core inflation is 3,3%. Month-on-month, prices rose by 0,3%, both in terms of overall inflation and core inflation. For the Fed, this is undoubtedly a reason not to be too hasty in cutting interest rates. Given that the official Fed rate is still well above 'neutral', it stands to reason that the Fed will cut rates again next week.

ECB cuts interest rates for third time in a row
The ECB did the latter this week as well. It was the third interest rate cut in a row and the fourth this year. In the explanation that the ECB always publishes, it has long been stated that the ECB will keep the interest rate at a 'sufficiently restrictive level for as long as necessary' to get inflation under control. That sentence has disappeared this time. In her oral explanation, Lagarde said that the interest rate is still at a restrictive level - even after the announced cut - but that is apparently no longer necessary. Lagarde also said that the ECB does not yet consider the fight against inflation as mission accomplished considers, but that inflation on track to reach the target is. It actually sounded as if people in Frankfurt think that the battle has been won. Regarding the risks, Lagarde said that they are now balanced with respect to inflation. In other words: there are upward as well as downward risks of inflation. For economic growth, Lagarde foresees the risk that it could disappoint. And the forecasts for growth are not particularly high.

All this implies that the ECB will simply continue to cut rates. If economic growth disappoints in the first half of next year, it is very likely that the ECB will increase the pace of rate cuts somewhat. Although Lagarde also said that there had been no discussion during the meeting about the level of the 'neutral rate', it is clear from the comments of the various central bankers that there is a difference of opinion about the question of how far the ECB should cut rates. The 'doves' believe that disappointing growth argues for rate cuts below 'neutral', while the 'hawks' are not ready for that yet. But that is a concern for later. I think that the 'doves' will win this discussion and that we will see an ECB deposit rate below 2025% in the course of 2,0.

Our Minister of Finance, Eelco Heinen, said it very aptly this week when he was a guest on BNR for an hour. Interest rate policy primarily influences the demand side of the economy. However, the lack of growth dynamics in Europe is mainly on the supply side. Interest rate cuts with the aim of stimulating growth can be quite successful and support growth in the short term, but they do not solve the underlying problems. I completely agree with him and therefore hope that policymakers will take measures on the supply side (think of lower energy costs, less regulatory pressure, etc.). But I fear that this will not happen and that the ECB will then feel called upon to continue with interest rate cuts.

Closing
The divergence in the global economy is becoming increasingly clear. There is optimism about the American economy and – globally – about the technology sector. Europe and China are doing much less well. I do not see what will change that in the short term. The Chinese growth model is broken and policymakers have not yet succeeded in making a new growth model a success. Perhaps they are also being too cautious. In my opinion, the seriousness of the situation is simply not (yet) recognized in Europe. We are currently in blissful denial.

The Fed and ECB have cut rates this year and are likely to continue doing so. The ECB could pick up the pace of cuts in the first half of 2025 and go significantly further than the Fed, which will take it a bit easier.

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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