D-Day Approaches: Trump's Trade Barriers

Next Wednesday is the day. Then the Americans will let the rest of the world know what exactly is happening in the area of ​​import duties. It seems that there are major differences of opinion within the 'Trump team'. The president does not shy away from making all kinds of aggressive announcements that are then toned down again. We will see.

Meanwhile, various indicators indicate that the European economy has begun to accelerate growth. Economists no longer look so much at purely monetary developments, but I am old school and look at it. The growth of the money supply has been accelerating for a while, albeit from a very low level. Old school-Economists like me like to look at the M1 money supply as a business cycle indicator. In February, it was 3,8% higher than a year earlier, the highest growth rate since September 2022. Growth in the broader aggregate M3 has also increased. And growth in lending is also accelerating somewhat, although it is still quite modest.

In many European countries, business confidence is also improving. The German Ifo index, for example, rose from 85,3 in February to 86,7 in March. That is quite a jump. That improvement was mainly due to the expectations of entrepreneurs and less to their assessment of the current situation. The series of figures for expectations rose from 85,6 in February to 87,7. Incidentally, the figure below makes it clear that the current level is certainly not high in a historical perspective, but that probably means that there is sufficient room for further growth.

The preliminary figures for the purchasing managers' indices confirm this picture. The PMI for the eurozone as a whole for the manufacturing sector improved from 47,6 in February to 48,7 in March. That is not great, a figure below 50 suggests contraction, but it is clearly better than somewhere between the 40 and 45 range in which this indicator has long moved.

Additional government spending
An important factor in the improving business confidence is the intention of European governments to increase expenditure. This applies in particular to defence and in Germany also to investments in infrastructure. The extent to which this addresses the structural problems of the European and especially the German economy is questionable, but substantial additional government expenditure for which there is no immediate room elsewhere in the budget certainly gives the economy a boost. Even apart from the new plans, the European economy seemed to be heading for a slight cyclical improvement. In order to maintain the improvement in business confidence, it is important that these governments come forward within the foreseeable future.

The upcoming import duties by the Americans complicate the picture. Pierre Wunsch, the Klaas Knot of Belgium, rightly pointed this out this week in an interview with CNBC. The import duties depress growth and push inflation up. This is difficult for the central banks. The lower growth argues for further interest rate cuts, the higher inflation does not. Since we have little experience with such heavy trade barriers, it is difficult to predict what the effects will be exactly. The upward pressure on inflation should in principle be temporary. Moreover, this upward price pressure can be compensated by fluctuations in the exchange rate and by producers reducing their profit margins. The effect on economic growth is more difficult to compensate. But it is precisely there that the higher government spending in Europe offers a counterbalance in the short term.

Wunsch, who is known as one of the hawks within the ECB policy committee, concludes that the ECB should discuss at the next interest rate meeting on 17 April whether a pause should be introduced in the process of rate cuts. Although Wunsch added that he is not advocating a pause, I think it would be wise. The end of the process of rate cuts is in any case getting closer because the official ECB interest rate is now reasonably close to the 'neutral' rate. In a recent speech, ECB director Isabel Schnabel recently used the figure below on the influence of interest rates on the demand for credit by companies. According to the latest Bank Lending Survey, for 2024 Q4, 90% of the banks surveyed say that the interest rate at that time had no effect on the demand for credit. Two years earlier, this was over 50%. This suggests that the interest rate is now close to 'neutral', that is to say that the interest rate has neither a stimulating nor a restrictive effect on the demand for credit.

Incidentally, in the US, the confidence of purchasing managers in industry actually fell in March. The index went from 52,7 in February to 49,8 in March. The following graph shows that the difference between the confidence indices in the US and the eurozone fell back to the lowest level in two years in March. Apparently, the American industry is also not very happy about the introduction of various import duties. They are even more negative about these duties than European companies. Investors in American shares are also not very fond of it. You wonder whether such reactions can change Trump's mind.

By the way, American consumers are not enthusiastic about import duties either. This week, consumer confidence according to the Conference Board series showed a significant decline in March. The index fell from 100,1 in February to 92,9 in March. That is a big drop for one month, but certainly not exceptional in historical terms.

If you look a little longer, you will see that consumer confidence has been steadily declining since Trump’s re-election. Since November, this confidence index has fallen by almost 20 points. In the following image, I have put this decline in historical perspective. What is striking is that such a decline is quite unusual and that in the past it has only occurred around recessions. If I were Trump, I would be concerned about that. But then again, I am not Trump…

That doesn't mean the US economy is doing downright badly. The numbers in the next chart also come from the Conference Board's consumer confidence survey. Jobs are a bit less plentiful now than they have been in the last three years, but they are still easy enough to find in historical perspective.

We already knew that the Dutch economy grew by 0,4% in the fourth quarter of last year. The CBS did not adjust this figure in the first revision. For the year as a whole, growth comes to 1,0%. That is not great, but not bad either. The potential growth is probably only slightly above 1%.

I was less enthusiastic about the composition. In the press release, CBS writes that growth in the fourth quarter was mainly driven by foreign trade and investments. If I look at the figures for the year as a whole, I conclude that the government in particular contributed to economic growth. Government consumption increased in volume by 2024% in 3,6 compared to 2023. The volume of household consumption increased by only 1,2%.

Also notable about the figures was that the depletion of stocks depressed growth by 0,7%. This was also the case in 2023. In seven of the last eight quarters, depletion of stocks depressed economic growth. Now these figures are sometimes adjusted considerably after the first publication, so caution is advised in terms of interpretation, but you would think that companies cannot continue to deplete stocks forever. If this process stops and perhaps reverses, then the build-up of stocks gives the economy a boost.

The CBS also reported this week that the government's financing deficit in 2024 will have amounted to more than €12 billion, or 1,1% of GDP. In the recently published Central Economic Plan, the CPB estimated a deficit of 0,6% of GDP. This shows that the deficit in the fourth quarter was considerable: €7,8 billion. This is interesting because there is a discussion going on about why government finances have been structurally better in recent years than estimated by the CPB and the Ministry of Finance. I know how it works at a bank. If the figures seem to be a bit better than you would like, you look for some negative figures. Of course, they are too honest for that at Finance, but a bank board would have instructed the civil servants to see whether income and expenditure could be adjusted to make the figures a bit worse, so that criticism of structurally overly pessimistic estimates might be silenced somewhat.

Hmmm ...
Here too, I see trends that I do not like. Government spending increased by no less than 2024% in 8. As a percentage of GDP, it even increased from 42,1% in 2023 to 44,1% in 2024. In five years, government spending increased by 43%. Before all the alarm bells start ringing, I would immediately add that our nominal GDP increased by 36,7% over that period. This means that government spending increased by an average of 7,5% each year over the past five years, compared to 6,4% in nominal GDP. This may make the figures sound less alarming, but such a trend simply does not seem healthy to me. Who is doing something about it? And what?

By the way, our government debt is low in an international perspective. As a percentage of GDP, it fell to 2024% in 43,3 from 45,2 in 2023. If you also take into account latent tax revenues in our pension pots (something that other countries do not have or have much less of), then the government debt is a lot lower.

Closing
The European economy seems to be experiencing some cyclical recovery. Planned higher government spending on defense and, in Germany, investments in infrastructure will give that recovery a further boost. On the other hand, the trade barriers that the Americans are announcing next week could put a spanner in the works. How all that will ultimately work out is difficult to predict.

The trade-restricting intentions of Trump et al. are, in my opinion, unwise. I am not the only one who thinks so. In fact, all economists I know share that opinion. Perhaps more importantly, players on the American financial markets are not enthusiastic about it either, nor are American consumers and producers. Is Trump influenced by that?

The Dutch economy grew slightly on balance last year. Government consumption in particular drove growth, while the depletion of stocks by companies provided a strong negative impulse. The latter cannot continue indefinitely. If it stops, the negative growth impulse will also stop.

Our government finances are in pretty good shape, but there was a clear deterioration in the last quarter of last year. Of the total deficit of €12,4 billion in 2024, €7,8 billion was booked in the last quarter.

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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