Light at the end of the tunnel for the industry?

Dutch industry produced 0,1% less in November than a year earlier. Certainly not something to get euphoric about, but it is the best figure since mid-2023. Earlier in 2024, minuses of 5% were recorded. And if you look at the month-on-month development, November showed a nice +1,3%. October now shows +0,1%. The last time production increased for two months in a row was a year ago and the last time production increased for three months in a row was at the end of 2021.

Given that the confidence indices of the CBS (producer confidence industry) and the NEVI (purchasing managers index industry) have shown a slight improvement in recent months, we can hope that production figures will improve further in the coming months.

Of the large sectors, the transport equipment industry posted the largest minus: -16,3% year-on-year. This was mainly due to the subsector cars and trailers where production was 24,8% lower than a year earlier. This is undoubtedly due to the termination of VDL's car production in the first quarter of 2024. This implies, however, that the year-on-year figures after the first quarter of 2025 will probably show a clear improvement.

The energy-intensive chemical industry remains in a minor key. Production there already fell by almost 2022% in 2023 and 15 and in November 2024 the production level was again 4,5% lower than a year earlier. The equally energy-intensive rubber and plastics industry now shows a small plus of 0,8% year-on-year. That is perhaps a sign that this industry has prepared itself for the higher energy prices.

All things considered, the November figure was quite good for me and I conclude that there seems to be light at the end of the tunnel for the industry. Of course, we will see what happens if the new US president quickly imposes all kinds of import tariffs and increases existing tariffs.

German industry can also hope for a somewhat better 2025, although it must be said that order intake in November was very disappointing: -5,4% compared to October, while order intake in October had already fallen by 1,5% in volume compared to September. But German industry is characterised by a few sectors where they manufacture very large products. Outside the subsector 'aircraft, ships and trains', 0,2% more orders were booked in November. And if you look at the three months from September to November and compare them with June to August, there is +1,7%.

German industrial production increased by 1,5% month-on-month in November, following a decline of 0,4% in October. Compared to a year earlier, German industry produced 2,8% less. In October, this was still -4,2%. The energy-intensive sectors also seem to have more or less adjusted to the high energy prices in Germany. The graph below from Destatis (the German CBS) shows that the production level in the energy-intensive sectors has more or less stabilised in 2024. In November, a plus of 1,5% month-on-month was recorded.

According to the European Commission's monthly survey on broad 'Economic Sentiment' in the eurozone, sentiment actually deteriorated in December. The index fell from 95,8 in November to 93,7 in January. This was mainly due to industry. The sub-index for industry fell in December to its lowest level since July 2020! Consumers also became more pessimistic, but business confidence in the services sector actually improved. This picture is consistent with the purchasing managers' indices for the services sector in the various countries.

AI pulls the cart
Taiwan’s export value (in US dollars) was 9,2% higher in December than a year earlier. For the whole of 2024, the export value increased by 9,9%. The export value of electronic products was 8,6% higher in December than a year earlier and ‘information, communication and audio-video’ even recorded a plus of 16,0%. I like to look at these kinds of figures because Taiwan has an early cyclical industrial structure and the Taiwanese figures suggest that the technology sector is going crescendo, especially in AI.

Inflation continues to rise
According to the CBS's 'rapid estimate', our inflation has risen from 4,0% in November to 4,1% in December. Only a limited number of details are published in the rapid estimate. All other details will be announced on Tuesday 14 January. The sectors for which figures have already been published show a very remarkable picture. Energy including motor fuels was 1,4% more expensive than a year earlier. Food prices including tobacco were 6,7% higher than a year earlier, after a plus of 6,2% in November and the price increase for services increased from 5,5% in November to 5,8% in December. The December figures are all quite considerably higher than in November. Total inflation would undoubtedly have been significantly higher than 4,1% if inflation for industrial goods had not fallen sharply: from +1,3% in November to 0,0% in December. I must add that the higher year-on-year inflation in December was partly caused by a 'base effect'. In December 2023, the price level remained unchanged compared to November 2023. In 2024, the month-on-month increase was 0,1%. That was not too bad.

Eurozone inflation accelerated as expected from 2,2% in November to 2,4% in December. Core inflation remained unchanged at 2,7%. I think these inflation figures will not prevent further rate cuts by the ECB.

Fed braces for Trump, heads for rate pause
Minutes from the Fed's December policy meeting suggest that the U.S. is done with rate cuts for now. Downside risks to growth have diminished and upside risks to inflation appear to have increased. The Fed also says it stands ready if tariffs and deportations of illegal immigrants push inflation higher this year.

Incidentally, there are apparently considerable differences of opinion within the Fed about inflation. Fed director Chris Waller gave a speech last week in which he expressed confidence that inflation will continue to fall. In recent months, this has not been going very well and some believe that inflation is currently even increasing slightly. Waller explains that part of the inflation figures are based on assumptions. This is the case with categories of goods and services whose price cannot be directly observed. If you leave that out of consideration, the inflation figures look much better according to him. I suspect that Waller is taking a minority position within the Fed for the time being, but this discussion is certainly interesting.

The minutes also make clear that the Fed still considers the absolute level of the policy rate to be "restrictive." Since that no longer seems necessary, further rate cuts over the course of 2025 remain on the Fed's agenda.

Incidentally, the capital market interest rate has been moving in opposition to Fed policy in recent months. While the Fed has lowered its rates by 100 basis points, the capital market interest rate has actually risen by about the same amount. This is extremely unusual. The usual pattern is that the capital market interest rate falls in the first phase of a process of rate cuts. Only when the Fed has been doing this for a while, the capital market interest rate often rises again. You could say that such an increase during the process is a message from the market to the Fed that these rate cuts are more or less over. The increase in the capital market interest rate in recent months is probably due to concerns about inflation and government finances. In fact, the market is telling the Fed that rate cuts are no longer appropriate at all. It looks like the Fed is indeed putting rate cuts on hold for the time being.

The rising US capital market interest rate is also putting some upward pressure on European capital market interest rates and a significant brake on the rise in share prices.

Closing
The latest figures on Dutch industry indicate some improvement. It will undoubtedly not be super strong, but some improvement is in the offing. Hopefully that also applies to Germany.

Taiwanese trade figures suggest that developments in AI are continuing at a rapid pace.

Inflation in our country rose in December, as it did in the eurozone as a whole. The preliminary December figures show some remarkable movements, which we can only interpret properly when CBS publishes all the details next Tuesday.

The Fed is currently pausing on rate cuts. The capital market has already anticipated this. However, rate cuts remain on the Fed's policy agenda because the interest rate can still be described as restrictive. The rise in capital market interest rates in recent months suggests that there is a major difference of opinion between the Fed and the players in the financial markets. We will see who is right. I think the markets are more often right than the Fed, but in this case I put my money on the latter.

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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