Pessimism here, euphoria in Germany

The Dutch consumer is not exactly getting happier. The CBS index that measures consumer confidence fell for the sixth month in a row in March, this time to the lowest level since November 2023. With a reading of -34, the index is also well below the average since 1986: -3,2. That is downright disappointing, because I had thought that the improved purchasing power would lead to more optimism. Not so.

All five sub-questions of the survey on which the index is based were lower in March than in February, but the biggest drop occurred in the assessment of the economic climate over the next twelve months. You are inclined to think that the reporting on Trump's trade war is the biggest culprit here. All the reports about the need to get our defenses in order and the implicit message of the threat of war undoubtedly contribute to the gloom.

The first graph shows that Dutch consumer confidence is fairly in line with that in the eurozone as a whole (although the March figure for the eurozone had not yet been published at the time of writing). This is not surprising. What is striking is that Dutch consumer confidence has developed more negatively in recent months than in the eurozone. I have always attributed this to the chaotic political situation in our own country.

The volume of investments in tangible fixed assets was 0,4% lower in January than a year earlier. That doesn't sound good. However, it should be noted that companies had brought forward investments in means of transport in connection with the tax changes as of 1 January and the changes regarding environmental zones. In December, investments were still 11,4% higher than a year earlier. If you take these two months together and average them, there is still a nice plus. It should be noted that December 2024 had one working day more than December 2023 and January 2025 even had two working days more than January 2024. The figures have not been corrected for this, so perhaps the figures paint a more optimistic picture than is justified.

Unemployment in our country was 3,8% in February, the same as in January. In numbers, unemployment rose by an average of 7.000 per month in the last three months. This was mainly because more people reported to the labor market. Total employment simply increased. Nothing wrong.

AWVN warns
Figures from employers' association AWVN show that the average wage increase of collective labour agreements concluded in February was 4,6% on a 12-month basis. This is the thirtieth month in a row with an increase of more than 4%. The AWVN warns that persistently strong wage increases are eroding the competitiveness of companies. According to the AWVN, the loss of purchasing power from a few years ago has been more than compensated for for almost all employees. I think that is correct. However, the unions take the position that simply maintaining purchasing power is too meagre. The labour market is very tight and that strengthens the negotiating position of employees.

In the past I have noticed that the relationship between wage agreements and core inflation is much stronger than that between wage agreements and inflation as a whole. Perhaps it is a chicken and egg situation, but now that the decline in core inflation has been stagnating for a while, it is perhaps not to be expected that wage agreements will moderate significantly.

Euphoria
Germany is in danger of falling prey to euphoria. The expectations component of the ZEW index, which measures analysts' confidence in the German economy, rose sharply for the second month in a row in March: 51,6 in March, compared to 26,0 in February and 10,3 in January. I admit, it is a bit of an exaggeration to speak of euphoria. The assessment of the 'current situation' improved slightly, but remains at an extremely low level.

The increase in the expectations component is remarkable, however. I checked the figures from 1991 onwards. In the 35 years since then, expectations have only improved more strongly in two months four times before. Back then, it was about the end of a recession and recovery from the pandemic. This time, the reason for the improvement lies mainly in the inauguration of a new government and the plans to invest heavily in infrastructure (and defence) and to largely undo the debt brake.

Fed leaves interest rates unchanged
The Fed left its official rates unchanged again this week. Market players welcomed Jay Powell’s commentary and the projections of policy committee members. The main message is that the impact of Trump’s tariffs on growth and inflation will be limited and temporary.

Of course, we have to wait and see if that is true. The last time the Fed thought a rise in inflation would be temporary, it turned out to be a big disappointment.

The same is true for economic growth. Various indicators suggest that there is a cyclical weakening, but the Fed, through Powell, continues to believe that the economy is doing well.

Closing
Dutch consumers are becoming increasingly gloomy. This is remarkable because purchasing power is increasing. The chaotic political developments in our country, Trump's trade war and the perceived threat of a real war probably play a decisive role here.

The AWVN believes that collective labour agreement wage increases of more than 4% undermine the competitiveness of companies. If such increases continue, the AWVN could be right. Given the equally high core inflation, I suspect that wage increases will not moderate quickly.

Analysts are becoming much more positive about the prospects for the German economy. The plans of the new government led by Friedrich Merz are the reason for an exceptionally strong increase in the expectations component of the ZEW index. An increase such as the index shows for January and February together is rare.

The Fed left interest rates unchanged, saying that while Trump’s trade war will lead to lower growth and higher inflation, the effects will be temporary. Stock prices rose on the statement while capital market rates fell.

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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