Trade war prevents us from getting a handle on the figures

Dutch consumer confidence fell for the seventh month in a row in April. The index reached -37, the lowest level since October 2023, compared to -34 in March. Both the assessment of the economic climate and the willingness to buy deteriorated. The unrest caused by the trade war will be an important factor in consumers becoming increasingly gloomy. The -37 in April is well below the longer-term average.

The growth of business investments in our country weakened in the first months of the year. According to the CBS, investments in tangible fixed assets fell by 3,6% year-on-year in February. In January, the counter was at 0,0%. In the last quarter of last year, investments had actually grown considerably, by an average of around 7% year-on-year.

The explanation for the strength in the fourth quarter and the much weaker figures at the beginning of this year can mainly be found in the category 'other road transport'. This includes trucks and vans. Tax changes as of 1 January 2025 and changes around environmental zones in some cities gave reason to bring forward purchases of mainly vans. Given the strong growth in the last quarter of last year, the setback at the beginning of this year is actually not too bad. Statistics Netherlands reports that investments in infrastructure and machinery have actually increased.

The eurozone economy is in the midst of a modest cyclical recovery. However, the trade war could throw a spanner in the works. The preliminary figures for purchasing managers’ confidence in April do not yet provide any clarity on which way things are going. In the eurozone, confidence weakened a little, but it could have been worse. The index for manufacturing actually improved slightly: from 48,6 in March to 48,7 in April. Purchasing managers in the services sector, on the other hand, became somewhat more pessimistic: 49,7 in April compared to 51,0 in March.

The leading German Ifo index, which measures broader business confidence in Germany, rose from 86,7 in March to 86,9 in April. German entrepreneurs were more positive about the current state of the economy: 86,4 in April, after 85,7 in March. The index measuring expectations actually fell, albeit modestly: 87,4 in April and 87,7 in March. Economists had expected a much sharper decline. My conclusion is that entrepreneurs are adopting a wait-and-see attitude.

In the US, the sharp increase in orders for durable goods was particularly striking: +9,2% in March compared to February. However, this is a very heterogeneous variable that is unravelled in various ways in an attempt to determine how business investments are developing. The sharp increase in orders was mainly achieved in means of transport. This may have something to do with the import duties that parties wanted to avoid. The sub-indicator that economists prefer to look at as a signal for business investments is 'orders for capital goods excluding aircraft'. Here the increase was extremely modest: +0,1% compared to February, after a decrease of 0,3% in the previous month. So in the US too, entrepreneurs seem to be adopting a wait-and-see attitude.

DNB President Klaas Knot attended the spring meetings of the IMF and the World Bank in Washington this week, but he also gave a speech at the Peterson Institute for International Economics. Among other things, he provided an insight into his own thinking about monetary policy. Before the trade war was unleashed by Trump on 2 April, Knot was of the opinion that the ECB should consider pausing the process of interest rate cuts. However, the ECB did not do so and Knot said that he had nevertheless agreed to the last interest rate cut on 17 April. He explained that the trade war is negatively affecting economic growth, but that the impact on inflation in the eurozone is complicated. In the short term, countermeasures by Europe against the American levies and especially the possible logistical disruptions that could be caused by Trump's levies will lead to higher inflation, but in the slightly longer term, the weaker economic growth will actually lead to lower inflation. Knot noted that the enormous uncertainty caused by Trump's erratic behavior brings out the inflationary effects. That limits the inflationary risks in the short term. It seems to me a reasonable story and I conclude that the ECB will lower the interest rate further at the next meeting. ECB boss Lagarde also said in Washington that the battle against inflation has more or less been fought - or words to that effect. Incidentally, Knot did say that new inflationary risks will emerge in the somewhat longer term when the planned increase in defense spending in Europe is realized. But that has no influence on monetary policy in the short term.

Other ECB officials echoed similar sentiments. ECB chief economist Philip Lane said that rates should be cut if new estimates in June show inflation falling below target over the longer term. And the president of the Bank of Finland said that the ECB should take into account financial conditions in the markets. These have tightened due to the turmoil and volatility. The ECB should then compensate for this with lower interest rates, he said. All these statements suggest that the ECB is far from finished with rate cuts.

Closing
The economy is very turbulent at the moment, but there were not many important and directional macroeconomic figures published this week. The trade war dominates everything. That also makes recent figures less relevant. Everything depends on which way the trade war goes. There is no way to know. On April 2, Trump announces absurd reciprocal import tariffs. Just when they have come into effect on April 9, he postpones them for ninety days, although there are all kinds of exceptions. This week the president came back to that by saying that the lack of bilateral agreements with other countries could lead to the imposition of those tariffs within a few weeks. Does he mean that or is it a negotiating tactic? And how will he respond when financial markets can no longer tolerate it and a lot of stress develops on the financial markets? I remain hopeful that his advisors, especially Treasury Secretary Scott Bessent, will convince Trump of the dangers of the policy as he envisions it. And especially of the erratic way in which he is trying to roll it out. fingers crossed.

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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