From Trump, Confidence to Inflation: Very Encouraging

By far the most important news this week was a statement by Scott Bessent, the US Secretary of the Treasury. After the negotiations with the Chinese, he said that the import duties, as they were, that is to say 145% on Chinese goods exported to the US and 125% on the flow of goods in the other direction, would bring trade to a standstill and that that is not the intention. However, the Americans are sticking to their demand that international trade must become more balanced. That is what the negotiations are now about. For the time being, the Americans are levying 30% on goods from China. That is not bad, but under Trump-1 and Biden a tariff of around 20% had already been created. So the current tariff is not that much higher. If it were to remain at this level, the impact on the economy would be modest, I suspect.

Bessent was right, of course. A 145% import duty is madness. But it is madness that was conceived and implemented by his boss. Most bosses I have had in my life allowed me to have some implicit or explicit criticism of our own organization and sometimes even of their own actions. A few of my former bosses even appreciated critical feedback. But that room was never unlimited. With his statement, Bessent is actually calling Trump to order very firmly, and Trump has apparently given him a mandate to do so. That Bessent seems to me to be a very sensible man and I therefore find this course of events extremely encouraging. In uncertain times, you have to think in scenarios. I would include a scenario in which the entire trade war fizzles out, albeit a rather loud one, in the total scenario set.

Fooled by the late Easter and early May holidays
This week, Statistics Netherlands published the final inflation figures for April. As usual, the figure of the 'quick estimate' was confirmed, 4,1% year-on-year, compared to 3,7% in March. I thought that was a nasty disappointment, but now the cat is out of the bag. In the press release, Statistics Netherlands writes that the figure was mainly inflated by the relatively late date of Easter (20 April) and the early May holiday. Last year, Easter fell fairly early (31 March). The May holiday was apparently linked to the Easter holiday this year and therefore fell partly in April this year. Prices for tourist activities go up during school holidays and Statistics Netherlands does not make any corrections for this. This can result in major fluctuations in the monthly figures.

Finally, the two most obvious influences of all this were the sharp rise in the prices of air travel and the rental of holiday accommodation. International flights were more than 46% more expensive in April than in March and 20,8% more expensive than a year earlier. In March, flights had been 1,4% cheaper than a year earlier. Renting a holiday bungalow in April also required more than 46% more than in March and 21,5% more than a year earlier, while in March they were still 4,4% cheaper than in March 2024. Although we only spend more than 1,5% of our money on both things together, price increases of this magnitude still have a noticeable effect on the total inflation figure. The bottom line is that the relatively late Easter and the early May holiday inflated the inflation figure by around 0,4% via the prices of international flights and the rental of holiday bungalows. Then that 4,1% perhaps paints a more alarming picture than is justified.

For some time now, inflation in our country has been driven up significantly by rising wage costs. Because we were hit by a wave of inflation a few years ago and wage increases lagged behind for understandable reasons, a catch-up process has subsequently taken place. Figures from the AWVN show that the highest average monthly wage increases agreed in new collective labour agreements took place in June 2023. That was 8,0%. After that, a decline occurred in line with the decline in inflation. But in 2024, the decline in the collective labour agreement wage increase stalled and the agreed contract wage increase remained just above 4%. Given the modest development of labour productivity, such a wage increase is not compatible with inflation of 2%. In April, however, the agreed wage increase fell to 3,7%, the first time in over two and a half years. year that the figure falls below 4%. Hopefully this will continue, so that the wage increase will exert less and less upward pressure on prices.

It seems likely to me that the inflation rate will fall quite sharply in the coming months. The effects of Easter and the May holiday will of course disappear. In fact, they should partly 'reverse', which should depress the inflation rate in May. Inflation will then fall further in June. Last year, the lion's share of the increased tobacco excise duty was implemented in June. The tobacco excise duty has not been increased this year, which should make a difference of almost 0,5% to the inflation rate in June. The inflation rate in July will then be depressed by the freeze on social rents, at least if it is not reversed. I suspect that we will ultimately end up with an inflation rate of around 3% in July, hopefully just below that. And then the lower wage increase will hopefully do its work.

Remarkable recovery in some confidence indicators
Trade wars have a major impact on the minds of entrepreneurs and economists. Take the German ZEW index, which measures analysts' confidence in the German economy. In April, it was dented by Trump's announcement of all sorts of prohibitive import duties. But then a ninety-day truce was initiated and confidence recovered. In the graph below, I do not show the value of the ZEW index itself, but the change per month. This makes it clear that confidence improved significantly earlier this year as a sign of an underlying cyclical improvement that has been going on for some time. The trade war turmoil then resulted in the second largest monthly decline in the last seven years. The 'truce' in the trade war then led to one of the largest monthly improvements in years. It is sometimes claimed that the uncertainty created by erratic policy causes damage to the economy that does not quickly disappear when policy normalizes. The development of the ZEW index actually calls this into question. Remember that the business community is pragmatic and resilient. The 'semi-permanent' damage to the economy as a result of the uncertainty may not be that bad.

We see something similar in the figures of the American Philly Fed Index. This is a confidence index based on a survey that the Philadelphia Federal Reserve conducts monthly among businesses in its own district. In May, this index rose considerably, after a decline in April that was probably related to the trade war. In the second picture I show the series from this survey that relates to orders. The absolute level is not yet great, but the recovery is very decent.

Closing
I think Trump is listening to his Treasury Secretary, Scott Bessent, and everything shows that he is very wise. He seems to be able to keep Trump in line. That is very encouraging.

The disappointing inflation figure for our country in April appears to be caused mainly by calendar effects. Inflation will show a clear decrease in the coming months. That is very encouraging.

Several confidence indicators show a fairly impressive recovery in May from the dip in April. That dip was caused by the announcements Trump made on 'Liberation Day', April 2. The recovery in confidence indicators in May is undoubtedly due to the later establishment of the truce. In my opinion, that shows the resilience and adaptability in the various economies. That too is very encouraging.

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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