Opinions Hans de Jong
Economy to muddle through into 2024
I don't get very cheerful when I look at the latest macro figures. On the other hand, they are not very negative either. According to the figures from RWI/ISL on container handling in ports, things are gradually improving in North-Western Europe (the ports of Hamburg, Bremen/Bremerhaven, Rotterdam, Antwerp, Zeebrugge and Le Havre).
In November, transhipment increased by 1,2% compared to October and by 14,3% compared to a year earlier. The dip that can be seen in the figures from 2022 did not occur in Chinese ports, but transhipment is currently falling there. In November by 0,8% month-on-month. Compared to a year earlier, there is a small plus of 1,7% in the books.
The preliminary figures for the purchasing managers’ indices for December paint a mixed picture. In the EU, there was a slight improvement. The composite PMI for the eurozone rose from 48,3 in November to a preliminary level of 49,5 in December. That is not great, but not a disaster either. The improvement is entirely due to the services sector. The purchasing managers’ confidence index in manufacturing was unchanged from November. What was striking was that in France and Germany, the PMI in manufacturing fell. In France, the index fell from 43,1 in November to a dismal 41,9 in December, the lowest level since May 2020. Germany did not fare much better. There, the index fell from 43,0 in November to 42,5.
Other confidence indicators show the same, albeit with some interesting nuances. The ZEW index for Germany, which measures analysts' confidence, improved in December in terms of expectations, but fell further in terms of the assessment of the current situation.
The benchmark Ifo index fell to 84,7 in December. In November, the reading was 85,6. The level in December was the lowest figure since May 2020. Here, it was precisely the expectation component that depressed the overall figure.
There is a lot of talk about the deplorable state and prospects for European industry. And rightly so. We often hear about companies moving their production to the US. You might think that the industry there is doing great. That is not the case. In November, the production level in the US industry was 0,9% lower than a year ago. For the manufacturing industry alone, the decline is 1,0%.
Early regional confidence indicators for December also hinted at weakness in the US, although such figures are often volatile. The Empire State index, which measures business confidence in the New York Fed district, fell to 31,2 in December from 0,2 in November. The comparable Philly Fed Index came in at -16,4 in December, down from -5,5 in November. The December figure was the lowest since April 2023.
On the other hand, the labor market remains fairly robust, with the number of applications for unemployment benefits remaining modest.
The Fed cut its official interest rate by 0,25 percentage points this week. That was as expected and the third rate cut in a row. The Fed and the ECB have now both cut their rates by 100 basis points this year. Unlike the ECB, the Fed now appears to be pausing. One of the presidents of the regional Fed banks voted against the decision to cut rates. Beth Hammack of the Cleveland Fed would have preferred to leave rates unchanged. More importantly, the so-called 'dot plot', a graph showing, among other things, the expectations of all members of the interest rate committee regarding the level of interest rates at the end of next year, showed that not many rate cuts are expected next year. Two rate cuts received ten out of nineteen votes. Four members think that fewer than two rate cuts will be implemented next year and five members more. In September, most members expected three rate cuts. The financial markets saw this change and the explanation given by Fed chairman Powell as more hawkish than expected. As a result, the dollar and bond yields rose and stock prices fell.
Powell also said that the Fed has done a lot of research on the effects of possible tariffs and/or tariff increases on inflation. In other words, he was saying, "President Trump, we're ready for you." The first rate meeting in 2025 is ten days after the inauguration of the new president. By then, Trump will probably have made all sorts of executive orders have signed. I wonder what the Fed will think about that.
Dutch consumers are not happy. Consumer confidence fell for the third month in a row in December: -26, compared to -25 in November. That is well below the long-term average and the lowest level since February. In the meantime, wages have caught up with the price increases of recent years and purchasing power is increasing this year due to all kinds of measures. Why consumers remain so dejected is a bit of a mystery. One explanation could be that consumers are still bothered by the increased prices, even though their incomes have increased just as much in most cases. The turbulent political situation in our country and the war in Ukraine may also play a role.
Labor productivity in the Netherlands fell by 2023% in 1,4. That's not good. Our prosperity depends on labor productivity and the number of hours worked. Since not many people feel like working more hours, the increase in our prosperity depends on the increase in productivity. Now, when it comes to productivity, you shouldn't really look at the short term, but at trends in the somewhat longer term. Not that we're happy about that. In the nineties and up to the financial crisis of 2008/09, productivity increased by 1-2% per year. Over the past ten years, the average increase has only been 0,6%. That makes a difference.
There are all sorts of nuances to these figures. For example, we have significantly reduced our gas production. That is a sector with high labour productivity. If less is produced in a sector with high labour productivity, the average productivity in the economy as a whole falls. That does not mean that we should downplay the weak figures. The money that is earned in such a sector then flows into the rest of the economy and other sectors also benefit from that.
The most positive observation is that productivity in business services has increased the most. Perhaps that is a harbinger of what AI will bring us.
In an American economist I follow, John Cochrane – he calls himself the grumpy economist – I found another interesting post about deregulation. The Argentine president, Javier Milei, who has been in power for a year now, has strongly focused on deregulation. The experiences of the Argentines are interesting. Cochrane wrote this week: "Argentina's deregulation czar, Federico Sturzenegger…[has] discovered a rough rule of thumb: Where deregulation happens, prices decline in the range of 30%. He has seen it in textiles, logistics and some agricultural products." That means in the case of Argentina that the economic benefit of deregulation is very big. Maybe we should think about that too.
Closing
We live in a 'muddling through' economy. There is little growth, but also no shrinkage. Industry in Europe is weak, but in the US, surprisingly, not that much stronger. Container handling in ports in our part of the world has been improving lately. Perhaps a positive sign.
The Fed has cut interest rates again, but capital market interest rates actually rose. This was because the Fed was still slightly more hawkish was than expected. The ECB will probably continue to cut rates unabated in 2025, the Fed seems to be hitting the pause button. Ultimately, I do think the Fed will cut rates further.
Dutch consumers remain gloomy and labor productivity in our country will have fallen considerably in 2023. When it comes to productivity, you have to look at the longer-term trends. They are not encouraging. Over the past ten years, the average increase in productivity has been about 1% lower than in the period 1990-2008. Perhaps AI will help us in the coming years. The experiences in Argentina this year under President Milei show that deregulation can lead to spectacularly positive results.
This is my last weekly macro commentary of 2024. I wish readers happy holidays and a happy 2025! Thanks for your support. See you next year.
Hans de Jong
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