Opinions Hans de Jong
Financial markets spooked by Israel attack
Israeli military actions in Iran have caused fear in financial markets, but certainly not panic. The attacks targeted nuclear facilities, not oil installations. If tensions were to rise and military actions were to escalate on both sides, it could be a different story.
Iran is the third largest producer within OPEC. Currently, Iranian oil production amounts to around 3,5 million barrels per day. Global production amounts to around 103 million barrels per day. The relevant question for the global economy is what would happen if Iranian production were to come to a complete standstill. If that were to happen overnight, it would certainly cause the oil price to rise. A significant increase in the oil price within a short period of time acts as a tax on the economy, comparable to, for example, a VAT increase. It leads to higher prices and therefore to a loss of real spending power and therefore restricts business activity. Of course, there are important differences between oil exporters and oil importers.
Since there is no question yet of Iran's production (capacity) being affected, the reaction on the financial markets is still quite moderate. Reportedly, the Israelis carried out their actions without the knowledge of the Americans. Israel must be careful with its relationship with the US and will certainly not want to offend Trump any further. The 'price at the pump' has considerable influence on the preferences of the electorate in the US. I suspect that Trump would take it very badly from Netanyahu if the Israeli actions would lead to higher petrol prices in the US.
It should also be noted that OPEC is in the process of gradually reversing the previously imposed production restrictions. During the pandemic and the years that followed, OPEC has limited production several times to stabilize the market. These restrictions have been reversed since April. Over the period April to July, production should increase by around 1,4 million barrels per day. I suspect that there is sufficient unused capacity within OPEC+ to quickly compensate for any loss of Iranian oil production. On balance, I am therefore not so afraid that we will be faced with a sharp increase in the oil price with major consequences for the global economy.
Man is creative
Trump's tariffs have a major impact on US-China trade. In May, China exported almost 35% less to the US than in May 2024. At the same time, China's total export value was 4,8% higher than a year earlier. Although this was lower than the +8,1% recorded in April, it must be concluded that the lower exports to the US have not had a major impact on total Chinese exports. The US market accounts for around 15% of all Chinese exports. A decline of around 35% in exports to the US should therefore have reduced total Chinese exports by more than 5%. However, China has apparently managed to export more to other countries. In this light, it is striking that Taiwan's exports to the US actually increased by 87,5% in May. The question that arises is whether Chinese goods are still finding their way to the US, albeit now via a detour.
Production in Dutch industry fell in April. Production volume fell by 1,0% compared to March and by 0,5% compared to April last year. In the chemical industry, production volume was 9,2% lower than a year earlier, while the food industry produced 7,6% more. On balance, it all remains very meagre.
Confidence among US small business owners improved somewhat in May. The benchmark that measures this, the NFIB confidence index, had shot up when Trump was re-elected. However, the import tariffs scandal led to a major disappointment and the confidence index fell again, although it remained above its pre-election level. In April, the index was 95,8, in May it was 98,8.
However, the uncertainties remain considerable and the US economy remains weak. In the last week, 248.000 people filed for unemployment benefits. That is not alarming, but not long ago the weekly figure was closer to 200.000.
US inflation was surprisingly low in May. Prices rose 0,1% month-on-month and 2,4% year-on-year. Core inflation was also 0,1% mom and remained unchanged from April at 2,8% yoy. In recent months, price increases have been much lower than economists had expected. So far, tariffs have not boosted inflation, but what is not, can still happen. For now, the Fed is waiting. If inflation continues to be low and economic growth remains moderate, the chances of further rate cuts increase.
OECD makes long series of recommendations to Germany
It was an impressive list of policy recommendations that the OECD published this week in a report on the German economy. The aim of these recommendations is to improve the dynamism and growth potential of the German economy. According to the OECD, reforms of the pension and health care systems are needed. Barriers to doing business resulting from bureaucracy and regulations must also be reduced to promote competitiveness. The shortage of skilled workers and the significant regional differences in prosperity must also be addressed. Tax incentives must be used to encourage more women, older people and people on low incomes to work or work longer hours. The government must promote digitalisation, starting by setting a good example itself and digitalising its own services much more strongly.
I have to say that Germany has not had much luck in recent years. The problems in the automotive sector are largely self-inflicted. The decline in Chinese economic growth has hit Germany relatively hard because the country was more dependent on exports to China than other EU countries. Finally, the energy-intensive industry in Germany is much larger than elsewhere. The high energy prices are taking a serious toll on the sector.
The new German Merz government can prepare itself. It does have the advantage that there is more room for government finances due to an adjustment of budget rules.
Closing
I do not expect Israeli actions against Iran to lead to significant disruption of the global economy.
China is suddenly exporting much less to the US, but the country's total exports remain at a good level. The question is justified whether Chinese products are now going to the US via a detour.
US inflation continues to pleasantly surprise. Economists are ready with all their measuring equipment to determine if, where, when and by how much Trump's tariffs will lead to higher inflation. So far so good.
Hans de Jong
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