Optimism among US business owners about Trump is growing

The details of the Dutch inflation figure for December confirm the previously published 'rapid estimate'. In December, the price level was 4,1% higher than a year earlier. In November, this was still 4,0%. Month-on-month, the price level rose by a modest 0,1%. As I wrote earlier, there are striking shifts behind the total figure. Energy prices (including fuel prices), food prices and prices for services pushed the inflation figure up, while prices for industrial goods actually slowed inflation down considerably.

Partly, as with fuel prices, it is mainly a matter of 'base effects'. The price of petrol, for example, was unchanged from November, but in December 2023 prices fell by 4,0% month-on-month. Incidentally, the price of petrol in 2024 was on average 3,2% more expensive than in 2023. That was entirely due to the government. Without government measures, petrol would have become on average 1,4% cheaper.

The acceleration of food price increases is worrying. In the summer, food inflation seemed to have more or less disappeared. In June, the price increase was 0,4% year-on-year. In December, it had increased to 2,2%. I think that this is mainly due to higher prices on the world markets.

What also surprised me is the sharp fall in inflation for industrial goods. Many of these goods are getting cheaper in absolute terms. For example, household appliances were about 6% cheaper than a year ago. That is probably still a correction for the sharp price increases caused by logistical disruptions during the pandemic. It is good that such price drops suppress inflation, but those prices will not continue to fall at the current rate.

On balance, inflation of 4,1% is of course not good. But we know how it happened. The enormous increase in tobacco excise duty last year contributed around 0,6 percentage points and the substantial rent increase around 1,5 percentage points. In December, holiday bungalows also appeared to count significantly. There was a lot of interest in holiday bungalows, which were 26% more expensive than a year earlier. That contributed 0,3 percentage points to inflation. In other words, if you don't smoke, live in your own home and haven't stayed in a holiday bungalow in December, then it's not too bad. Due to the continued strong wage increase, inflation in labour-intensive services remains high. For example, rates at men's hairdressers rose by 0,3% month-on-month and 8,0% year-on-year. For the year as a whole, Dutch inflation came to 3,3% compared to 3,8% in 2023

Dutch exports on the rise
Our goods exports were 4,2% higher in volume in November than a year earlier. That was the best figure since March 2023. In particular, more food and luxury goods, chemical products and machinery were exported. Hopefully this trend will continue and give business a boost this year.

Our labour market remains strong. Unemployment remained unchanged at 3,7% in December. In the three months up to and including December, the number of people with paid work increased by an average of 12.000 per month. There are approximately 9,8 million jobs in total. Our labour participation rate was 73,1% in December, which means that 73,1% of 15 to 75 year olds were working. This is very high in international terms. On the other hand, many more people work part-time here than elsewhere.

US inflation moderate in December – good for bond market
The past few months, the decline in inflation in the US has not been going very well. That is why players on the financial markets assumed that the Fed would not be able to lower the interest rate any further. As a result, the capital market interest rate rose, which was annoying for the stock markets. But the December figure was better than expected. The total inflation figure did rise from 2,7% year-on-year to 2,9%, but the core inflation, excluding food and energy, actually fell from 3,3% to 3,2% and was therefore better than expected. The capital market interest rate then fell by more than 10 basis points, which is quite considerable in one day.

There seems to be a lively debate within the Fed about which inflation measure provides the best insight. Well-known distinctions include the distinction between 'headline' and 'core', between CPI and PCE, and more obscure measures such as 'median inflation' or '16%-trimmed' inflation occasionally crop up. Now a growing number of Fed officials seem to be focusing on 'market-based' inflation. When statisticians compile inflation figures, there are goods and services for which they cannot read the prices on a price tag but for which they have to estimate something. 'Market-based' inflation ignores these goods and services. It therefore consists only of goods and services with a real price tag. This 'market-based' inflation turns out to be more moderate than the total inflation figure. Proponents of this measure conclude that the underlying inflationary pressure in the economy is less than the total inflation figure suggests. They would therefore be more willing and ready to ease monetary policy further by lowering interest rates. We shall see.

The US economy continues to give mixed signals. For example, industrial confidence in the New York Fed district fell in January, but rose in the Philly Fed district. The New York Fed’s Empire State index fell from 2,1 in December to -12,6 in January. The so-called Philly Fed index rose to its highest level since April 2021: 44,3 in January, from -10,9 in December.

The National Federation of Independent Business (NFIB) small business confidence index jumped sharply in November after Trump’s election. In December, the index rose further. From 101,7 in November, the index rose to 105,1. That is the highest level since October 2018. The press release states: "Small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year."

China benefits from a final sprint
The Chinese economy grew by 1,6% in the fourth quarter from the previous quarter and by 5,4% year-on-year. Growth in the third quarter has been revised from 0,9% to 1,3%. That is quite a large upward adjustment, but it suits the authorities, because now they can claim that their growth target of 'around 5%' has been met exactly in 2024. It is of course a little suspicious.

The fact that growth picked up towards the end of the year seems to be quite true. Not only have policymakers launched various stimulus measures, exports have also picked up after Trump’s election. It seems that companies are trying to export as much as possible to the US before import tariffs are raised there. The value of Chinese exports to the US was 15,6% higher in December than a year earlier.

Industrial production growth also improved in China. In November, it was 5,4% higher than a year earlier, and in December, it was 6,2% higher. We will see if this is a trend or just a temporary boost to get ahead of Trump’s tariffs.

Is Russia yearning for an end to the war?
Our sanctions against Russia have not succeeded in quickly bringing that country to its knees economically. Nevertheless, the pressure on the Russian economy is clearly increasing. For example, inflation has risen from 8,9% in November to 9,5% in December, the highest level since February 2023. The central bank's target is 4%. Various other economic indicators, such as the weakness of the ruble, also point to increasing pressure on the economy. The central bank has now raised interest rates to 21%. That is even higher than the 20% immediately after the start of the war, when the sharp decline of the currency had to be combated. Hopefully, the challenging economic conditions will encourage the president to put an end to the war quickly.

Closing
Our inflation is high, but that is partly due to special factors that will lose their force. US inflation was not too bad in December and several Fed officials are focusing on 'market-based' inflation, a measure that suggests that inflation in that country is not too bad.

Our exports are picking up and the labor market remains strong. Many American entrepreneurs are optimistic because they expect a lot from Trump, but there are also weak spots in the American economy.

Chinese growth in 2024 was exactly as high as targeted, but the future does not look great. The Russian economy is increasingly under pressure. An end to the war would also be welcome for economic reasons.

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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