Please hurry up gentlemen with the import duties agreement

The trade relations debates between countries continue and remain chaotic. There is certainly a possibility that things will escalate, explode and cause major economic damage. More likely, it seems to me, is that it will all fizzle out, albeit a loud fizzle and with occasional afterburners. US Treasury Secretary Scott Bessent has made it clear that 145% tariffs on Chinese goods exported to the US and 125% tariffs on goods going the other way will stop all trade and that this is not the intention. The Americans believe that there is no level playing field in international trade and they have a point there. They want better terms for themselves, not deglobalization.

Time is running out for Trump. The midterm elections of November 3 next year cast their shadows ahead. Before those elections, the economy must be strong enough for voters to express confidence in current policies. If Trump were to lose the majority in the House or Senate, policymaking would become much more difficult.

For now, the economy is going in the wrong direction for Trump. The Fed’s Beige Book, released this week, shows that the economy is weakening. Half of the 37.000 Fed districts reported a decline in activity. Paycheck processor ADP reported this week that the number of jobs increased by just XNUMX in May, according to its data, the lowest number in more than two years.

The Beige Book also speaks of a weakening labor market. According to the Beige Book, the cause of the weaker economy must be sought in the uncertainty caused by the trade war, which is prompting consumers and companies to postpone spending. Companies also indicate that costs are rising due to import duties and that they hope to pass on these higher costs to their customers within three months. Declining business activity and rising inflation is precisely the worst-case scenario for Trump. It is not all that dramatic, but the current trends must be reversed within the foreseeable future.

Meanwhile, US imports are normalizing. In anticipation of the imposition and increase of import duties, US importers and their foreign suppliers had done everything they could to get as many goods into the US as possible. As a result, the import value in the first quarter was almost 30% higher than in the first quarter of 2024. In April, the import value fell sharply, although it did not fall below the average level of the last months of 2024. I do not rule out that imports will fall further in the coming months.

The Chinese, the main target of Trump’s trade war, are also feeling the effects. The manufacturing purchasing managers’ index, as compiled by Caixin, fell from 50,4 in April to 48,3 in May. That was the lowest level since September 2022. China’s leaders may be able to afford a weakening economy for longer than the US government, but this is an unwelcome development for them too. They too will want to push for an agreement with the Americans.

Eurozone inflation fell to 1,9% in May, after 2,2% in April. Core inflation fell to 2,7% from 2,3% in April. Although the ECB's target is for the medium term, the conclusion 'mission accomplished' seems appropriate.

The ECB has therefore lowered its official rates for the eighth time in a row. The deposit rate is now 2%, which can be considered more or less 'neutral'. The ECB left the GDP growth forecast for this year unchanged (0,9% and then 1,1% and 1,3% for 2026 and 2027 respectively). However, the ECB lowered the inflation forecast for the eurozone. For the current year, the ECB now predicts an average of 2,0% and for the next two years 1,6% and 2,0%. According to the ECB, the lower oil prices and the higher euro in particular will put more pressure on inflation than previously expected.

During her press conference, ECB President Christine Lagarde said that with this latest rate cut, the ECB well-positioned is to deal with the current uncertainty. That sounded like a message that the ECB will leave the rate unchanged at the next rate meeting. Incidentally, Lagarde also said that one member of the policy committee was against the rate cut.

I am looking at the figures with some surprise. If inflation is to average 1,6% next year, there will inevitably be months in which the figure is still clearly below that. I would like to see whether the ECB will not become nervous and will not lower its interest rates further to reduce the risk of inflation that is too low. Anyway, I think the ECB will probably leave the interest rate unchanged in July, but we are not yet finished with interest rate cuts.

According to the preliminary estimate of the CBS, our inflation has fallen from 4,1% in April to 3,3% in May. There is a major distortion. Because Easter was late this year, causing the May holiday to fall partly in April, everything related to holidays was much more expensive in April this year than last year, but much cheaper in May. In June, our inflation may fall a little further because the largest effect of the excise duty increase on tobacco that was implemented last year is removed from the monthly comparison.

Yet our inflation, even if you correct for incidental matters, is clearly above the eurozone average. I see articles appearing that the ECB policy is therefore not good for our economy. Well…

For a small, open economy, a stable exchange rate is more important than unlimited scope for an independent monetary policy. Because of our exchange rate policy, we have not had scope for an entirely independent monetary policy for at least fifty years. It is well known that economic circumstances within a monetary union such as the eurozone can differ regionally. The textbooks prescribe that in such a situation other forms of economic policy must be used to achieve price stability, when the interest rate policy pursued by the central bank of the monetary union is not appropriate. So instead of blaming the ECB or our membership of the euro, we should actually look at, for example, budgetary policy. That has been too generous in recent years. In addition, insufficient circumstances have been created to increase the dynamism of the economy. If potential growth had been higher, inflation would have risen less.

In the meantime, Dutch consumer spending seems to be improving somewhat. Retail sales were 4,2% higher in April than a year earlier. In real terms, the increase was 1,7%. It was the strongest growth in over a year and a half. These figures suggest that consumers are starting to wake up a bit. Figures on total household consumption temper the enthusiasm. According to that series of figures, total consumption in April was only 0,2% higher in volume than a year earlier, and that was the lowest figure in ten months. I am going to ask CBS how those two series relate to each other.

Mixed figures from Germany
German industry booked slightly more orders (in volume) in April than in March: +0,6%. In March, 3,4% more orders were also booked than the month before. The graph shows that these figures do not immediately give cause for euphoria, although a slightly rising trend line can perhaps be drawn due to the volatile figures of the past twelve months. A child's hand is quickly filled.

The industrial production figures are dampening some of the burgeoning enthusiasm. In April, industrial production fell by 1,4%, although that follows a 2,3% increase in March. Production in the five most energy-intensive sectors fell by 0,6% month-on-month. I look with concern at the chart below. Production in the energy-intensive sectors took a hit when European gas prices exploded. They have since fallen sharply again, although they are still well above what they were in the past and also well above, for example, the US gas price. There is no sign of recovery in production in these sectors for the time being. This suggests that once production has been lost, it is not easy to recover when conditions improve.

All hopes now rest on the upcoming budget of the new Merz government, which will include tax cuts and an investment package.

Closing
The US economy is weakening, mainly because of the uncertainty caused by the trade war. The Chinese economy is also feeling the effects. It is therefore to be hoped that negotiators will quickly reach an agreement. For Donald Trump this is especially important because the economy must be in good shape in a year, prior to the midterm elections in November. Otherwise he will lose his majority in Congress and policymaking will become much more difficult.

Inflation in the eurozone has fallen and is now more or less in line with the ECB's target. The ECB has lowered the interest rate again, but has indicated that it will pause for the time being. Our inflation fell sharply in May, but that was due to disruptions caused by the early May holiday this year. For example, the April figure gives a worse picture of inflation than is justified and the May figure gives an overly positive picture. For the time being, our inflation remains clearly higher than that in the rest of the eurozone.

Dutch consumers have increased their retail purchases somewhat, but growth in total household consumption remains weak, according to CBS figures.

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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