Strong global economic recovery

The first three graphs in this commentary cover three continents, are based on different variables, but all three show the same picture. There seems to be a kind of explosion of activity around New Year's Eve.

Let's start close to home. German industrialists received 7,8% more orders in December, measured in volume, than in November. Year-on-year, the increase was 12,6%. Orders had already been rising in the three months leading up to December, so that the level in December was more than 18% higher than in August! Aside from the post-COVID recovery, this is the strongest increase over such a four-month period since the mid-1970s. Orders from domestic countries rose by 10,7% in December compared to November. Orders from other eurozone countries fell by 0,6%, while orders from other countries rose by 9,7%.

I should add that industrial production in Germany is not yet recovering. In December, volume declined by 1,9% month-on-month. Production in the five most energy-intensive sectors also fell again. Destatis, the German CBS, provides figures from 2015 onwards. Since then, there has only been one month, December 2023, in which production in these five most energy-intensive sectors was even lower than in December 2015. So, although energy prices are much lower than a few years ago, production is not recovering.

A similar picture can be seen in the development of Korean export values. In January, it was 33,9% higher than a year earlier. In December, it was 13,3%. Korea is benefiting from the boom in artificial intelligence investments. The export value of semiconductors was a substantial 102,7% higher than a year earlier, but Korea also exported more cars (value +21,6% year-on-year). The fact that AI investments are growing particularly strongly in the US is evident from the fact that the value of total Korean exports to the US increased by 29,5% (year-on-year), while the export value of cars (-13%) and machinery (-34%) actually declined. The latter is undoubtedly a consequence of the US import tariffs.

The third indicator that paints a similar picture is the "new orders" sub-index from the Survey of Purchasing Managers in the US Manufacturing Industry (ISM). This sub-index rose from 47,4 in December to 57,1 in January. This is a very substantial increase. In its commentary on the figures, the ISM writes that companies may have placed additional orders to anticipate price increases they expect as a result of import tariffs.

If you compare these three indicators, the obvious conclusion is that a global economic acceleration is underway. On the other hand, it could be a coincidence. Or it could be that the positive figures are driven by another, coincidental factor. Since the Chinese economy currently holds considerable weight in the global economy and especially in international trade, the timing of the Chinese New Year can sometimes influence the figures in January and February. This year, economic figures for January may be inflated because the Chinese New Year falls very late this year, on February 17th. The Chinese economy slows down a few gears during these holidays. This often happens as early as the end of January, but not this year.

Chinese New Year falls by definition between January 21st and February 20th. This year, it falls on February 17th. The last time it fell on a later date was in 1939, and the last time it fell on February 17th (as this year) was in 1996. If the date of Chinese New Year distorted the figures, we should see a correction in February. For now, I'm sticking to a more optimistic explanation for the remarkably strong figures: that a cyclical acceleration is underway.

Significant drop in Dutch inflation
According to Statistics Netherlands' (CBS) rapid estimate, inflation was 2,4% in January. This was significantly lower than the 2,8% recorded in December. Based on the European inflation measure HICP, our inflation fell from 2,7% in December to 2,2% in January. All published components of the CBS inflation figure, except energy, contributed to the decline. Services make up half of the inflation basket. The rate of price increases there decreased from 4,1% in December to 3,9%. I expect the gradual decline to continue as wage increases moderate, albeit slowly.

The price increase for industrial goods moderated from 0,9% in December to 0,6% in January. The slow pace of this price increase reflects global industrial overcapacity and the euro's appreciation in 2025. I certainly don't see this overcapacity changing anytime soon. Rather, I think it will increase. Therefore, I suspect that this source of inflation will also exert downward rather than upward pressure in the coming period.

We know why energy became more expensive in January. Excise duties on gasoline and diesel went up, and the European gas price rose in January. But the excise duty increase was, of course, a one-time thing, and gas prices are falling again. So, things don't look bad for the foreseeable future.

Inflation in food, beverages, and tobacco fell quite dramatically: from 3,1% in December to 2,0% in January. This decline is all the more remarkable because we were briefly hit by severe winter weather in January, which usually leads to higher food prices. But apparently not this time.

Our food prices track global market prices with a significant lag. In the following figure, I show the correlation between our food prices and the Food and Agriculture Organization (FAO) food price index in euros. The correlation is highest with a nine-month lag, at which point the correlation coefficient is 0,63. Statisticians might not find this a particularly impressive correlation, but considering the significant difference between what's traded on the global market and what ultimately ends up in supermarkets and on our plates, I actually find it a remarkably strong correlation. The graph suggests that our food price inflation could fall further in the coming period, unless the January drop was caused by a one-off factor that might subsequently reverse.

Putting all of the above together, and also taking into account that the price level rose relatively strongly in February last year compared to January, I am inclined to predict that inflation will fall again in February and possibly fall close to or even below 2,0%.

Inflation in the eurozone as a whole fell from 2,0% to 1,7% in January. In Belgium, inflation (HICP) fell from 2,2% to 1,4%, in France from 0,7% to 0,4%, and in Italy from 1,2% to 1,0%. In Spain, inflation fell from 3,0% to 2,5%. Germany (along with Cyprus and Slovakia) was one of the three eurozone countries where inflation actually rose slightly. In our eastern neighbors, it was from 2,0% to 2,1%.

The ECB left interest rates unchanged this week, as expected. In the press conference, President Lagarde said that the eurozone economy is resilient and that inflation is "in a good place." She isn't worried about the euro's exchange rate, and moreover, she said, the ECB doesn't have a target for it. Lagarde said that the euro is fluctuating around its average exchange rate since the start of monetary union. I would say: in fact, against the dollar, the current exchange rate is close to where it all began in 1999. Of course, that doesn't mean that the appreciation since the beginning of last year hasn't had a dampening effect on inflation. And a further rise in the euro could tempt the ECB to lower interest rates further. But for now, a new interest rate cut doesn't seem imminent. Apparently, the ECB views the latest inflation figure (1,7%) as a temporary decline below its 2% target. Incidentally, core inflation, at 2,2%, is still slightly above that target.

ECB "not shooting above its range"
In the press conference, Lagarde referred to the meeting of European leaders on February 12. The ECB has drawn up a 'checklist' of what is needed.to unleash the talent of Europe' (making better use of talent in Europe). Lagarde added that the ECB is not overstepping its mark: "We are not shooting above our range." (We are not trying to aim higher than is feasible.) This list contains five elements: the savings and investment unions, the digital euro, deepening the common market, promoting innovation and defending strategic autonomy, simplifying regulations, and strengthening the institutional framework. She remained somewhat secretive about the further content.

It's funny, though. In the US, politicians (read: Trump) are trying to influence the central bank, and here, the central bank is trying to influence politics. Contrary to what Lagarde says, you might wonder if the ECB isn't overstepping its bounds by doing so.

Closing
A remarkable global economic recovery seems to be underway. I'm still cautious, though. The more or less simultaneous sharp increase in German industrial order intake, Korean export values, and the optimism of American industrial purchasing managers could be a coincidence. We'll find out soon enough.

Our inflation fell further in January and will likely continue to decline in February, if only due to base effects. I wouldn't be surprised if inflation falls very close to or even below 2% in February.

Inflation in the eurozone has now fallen to 1,7% in January. The ECB left the official interest rate unchanged this week, but a further possible decline in inflation, for example, as a result of a strengthening of the euro, will intensify the discussion within the ECB. I believe the likelihood of a further rate cut before the end of the year is significant.

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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