Economic situation can be described as chaos

The current economic situation is hard to describe other than as chaos. Donald Trump is lashing out with import duties, which he then postpones for a while. He persists in the rhetoric that these duties will make the US 'great' again. That is not what stock investors think, it is not what CEOs of American companies think and in fact it is not what the vast majority of economists think. Not everyone is very pleased with Trump's peace initiatives regarding the war in Ukraine either.

Europe is so shocked by the spectacle that it has decided to spend huge sums on defence, that the budget rules will not apply to it (for the time being?), that a Franco-British peace initiative is now being developed and the Germans are so upset that they are effectively abolishing their 'debt brake'.

I have been watching developments in Europe with concern for some time now. But yesterday I attended a meeting where it was strongly argued that all this is the kick in the ass that Europe desperately needed and that will lead to a much stronger European economy. I hope so, but I am not convinced yet. The euphoria surrounding the taking on of larger government debts in particular surprises me. Is the lack of dynamism of the European economy really due to overly restrictive budgetary policy? Admittedly, Germany could have invested a bit more in infrastructure, both physical and digital, but that is not the only problem, is it? What are they going to do about the high energy prices, suffocating regulation, the expanding government and the disadvantages of 'green growth'?

In that meeting it was argued, among other things, that Putin has helped us break our addiction to cheap Russian gas and Trump is helping us break our dependence on the US. We must become completely independent in the field of energy. For the time being, we are still mainly dependent on American LNG, but if we continue the energy transition, we can put an end to that in the foreseeable future. It seems an illusion to me. Look at the Netherlands. Approximately 45% of our electricity is now generated by wind and sun. That has led to sky-high prices. And that 45% may sound nice, but of the total primary energy consumption, only a small 12% is still generated by wind and sun. We are still dependent on fossil fuels for approximately 88%. Further electrification is running up against the overload of the network and it will cost us immense amounts of money and a lot of time to make major steps here. Even if we succeed, we will saddle ourselves with structurally higher energy costs than in the rest of the world. How we can become a strong economy from that is not clear to me, but I hope I am wrong.

Economic reality bites
According to the so-called GDPNow indicator of the Atlanta Fed, the American economy is shrinking in the first quarter. The GDPNow indicator is a 'real time' measure of economic growth that is updated very regularly with the latest macro figures. The graph shows that the estimation of economic growth according to the GDPNow system has fallen sharply in the course of this quarter. While the first macro figures apparently still indicated an annualized growth of around 3%, more recently this has collapsed to a contraction of around 2,5%. The economists at financial institutions, summarized in the Blue Chip consensus, are currently predicting a growth of just over 2%.

The cause of the apparently sudden contraction: Donald Trump and his import duties. The threat of these duties has led to a sharp increase in imports. Apparently, companies are still trying to get as many goods as possible from abroad before the duties come into effect. In December, the value of American goods imports was already 12% higher than a year earlier. In January, this had increased to 23%. Imports are a negative item in the GDP calculation. It is possible that this negative contribution is compensated by stock build-up. But we will see.

In his speech to Congress, Trump said that the import duties could lead to disruptions in the economy, but: "We are OK with that. It won't be much." That remains to be seen. The duties increase prices and lead to major problems in the production chains. The uncertainty caused by the erratic policy does not help either. The weekly magazine The Economist points out that Trump is in this way antagonizing most other countries against America. The magazine shows, using historical events, that disturbed relations in this way can continue for a long time, which is also unfavorable for the US in the long term.

Incidentally, it should be said that other components of the Atlanta Fed GDPNow indicator also point to a weakening of the American economy. I am very curious to see how Trump will react if the economy weakens further and the disruptions that he apparently also expects from his policy are larger and longer-lasting than he now assumes. My impression is that critical self-reflection is not his strong point.

Dutch purchasing managers more positive
The NEVI purchasing managers index came to 50,0 in February. In January it was still 48,4. That is good news. As a rule of thumb, values ​​above 50 indicate growth in the industry and values ​​below that indicate contraction. The NEVI index was below 50 for seven months in a row. In fact, that paints an overly optimistic picture. The NEVI index has been below 2022 since September 50, with a short period of three months in the second quarter of last year as an exception. In any case, the development of this index suggests that there is some cyclical recovery. This is also visible elsewhere in Europe.

Disappointing inflation in February
Dutch inflation rose to 3,8% in February. In January, it had fallen to 3,3%. Our inflation is thus well above that of the eurozone: 2,4% and is among the highest in the eurozone.

CBS has not yet provided many details in the quick estimate, but the information provided is alarming. The following graph shows the increase in the general price level in the month of February compared to January (month-on-month) over the past seventeen years. Our inflation figures are not corrected for the season and February is traditionally a month in which prices rise relatively strongly. But this year is exceptional. The month-on-month increase in prices was higher in February this year than in any other year during the previous sixteen years.

In the rapid estimate, CBS provides figures for four groups of goods and services in addition to the total figure. Only the development of energy prices (gas, electricity and fuels) depressed inflation. The year-on-year change went from -1,4% in January to -1,9% in February. Inflation accelerated for the three other components. Industrial goods were 1,5% more expensive in February than a year earlier, after +0,3% in January. Prices for food, tobacco and beverages were 7,5% higher than a year earlier, after 7,0% in January and inflation for services accelerated from 4,4% in January to 4,6% in February. We know that our high inflation figures are partly due to the enormous increase in tobacco excise duty last year and the rent increase. However, our tight labour market and the relatively high wage increase that results from this also play a role.

Some hope for somewhat lower inflation can be based on the recent development of energy prices. The European gas price has fallen by a third in the last few weeks. Although it had risen considerably in the months before. The price of Brent crude oil fell below $70 per barrel and reached its lowest level since 2021.

ECB is almost ready
The ECB has cut its official rates for the sixth time since last summer. The deposit rate has now reached 2,5%. In her explanation, Christine Lagarde makes it clear that there is a lot of uncertainty. For the ECB, not only the looming trade war is relevant, but also the planned increase in defense spending and the planned increase in German infrastructure spending. None of this came as a surprise. The ECB made it clear that the current interest rate is not nearly as restrictive as it used to be. This means that the end of the rate cuts is in sight. I suspect that the ECB will leave the rate unchanged at the next interest rate meeting and will make one or two more cuts later, but no more.

Closing
President Trump’s erratic behavior on trade tariffs is troubling. It is creating uncertainty, higher costs and prices, and disrupting supply chains. The U.S. appears headed for negative GDP growth in the first quarter, although that is likely to be a one-off.

Dutch purchasing managers have become slightly more positive, indicating some strengthening of the industrial economy.

The Dutch inflation figure for February was disappointing. We have to wait for the details, but our inflation remains higher and more persistent than you would like. When CBS publishes the full dataset next week, it will again become clear that the government is currently also directly contributing significantly to inflation.

The ECB has cut interest rates again, but the end of the rate cutting process is in sight.

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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