Recession or not, it depends on the gas price – Statement Han de Jong


Opinion Han de Jong

Today 16:00

Unemployment in our country rose again in August: 3.8% against 3.6% in July and a low of 3.2% in April. The graph shows that historically unemployment is still very low. It must be said that the increase in unemployment from April to July was solely due to an increase in the number of people entering the labor market. The number of workers continued to increase during these months.

August saw the first drop in total employment. At least from what CBS sees it as: The number of employed people fell by an average of 3,000 per month in the three months to August.

Source: Refinitiv Datastream

In my opinion, how this will continue depends primarily on the price of gas. It largely determines whether we end up in a recession or not, and how deep it will be. I’m an optimistic person, but find it hard to be very optimistic about this. The ECB only foresees a recession for the euro area in a “risk scenario”. The economists of most Dutch banks predict a recession for our country, but immediately add the qualification mild. Okay, businesses and households have relatively healthy balance sheets, so there is no need for a balance sheet recovery that will trigger a recession. Maybe that will keep the recession mild. On the other hand, the policy room for stimulus is much more limited than in many previous recessions. But above all: The erosion of household purchasing power is unprecedented, as is the rise in business energy costs. Maybe I can wake you up with some numbers.

In 1973 and 1974 the price of oil rose by about 375%. It was enough to trigger a global, ugly recession. At the time of writing (€225 MWh), the European gas price is 1,500% (yes, fifteen hundred, no typo) higher than before the pandemic. Today, gas plays a different and perhaps smaller role in our economy than oil did then, but it is a price shock that, at least in Europe, is four times greater than that of oil in 1973/74. According to figures from the International Energy Agency, gas accounted for 45% of the total primary energy demand in our country in 2020 (wind and solar combined 3.2%) and around 60% of electricity production (wind 12%, solar 7%). For comparison: in 2020, gas accounted for 27% of the total German primary energy demand (wind and solar combined 6%) and 17% of electricity production (wind 22%, solar 9%). We use more gas than most other neighboring countries, and we are therefore more affected by the sharp rise in gas prices.

Only if the price of gas falls sharply, in my humble opinion, can we avoid a recession. Perhaps the advance of the Ukrainian army offers hope.

Divergence European and American economy
Meanwhile, there are signs that the economic situation in the United States and the Eurozone are choosing separate paths. This means that the American economy develops more strongly than the European one. This is not surprising because the increase in energy prices in the US is much less than ours and the war zone is much further away, making it less disruptive.

For example, US manufacturing output was 3.3% higher in August than a year earlier (July +2.9%), while Eurozone output in July (latest figures) was 2.6% lower than in July a year earlier.

Source: Refinitiv Datastream

And while our labor market appears to be taking a turn with rising unemployment numbers, the US labor market remains robust. From April, the number of applications for daily allowance rose slightly each week, but has been falling again for two months.

Some better news from China
We certainly shouldn’t celebrate too soon, and the Chinese real estate sector seems to an accident waiting to happen, but the Chinese economy is recovering as restrictions on public life are eased. In August, manufacturing output was 4.2% higher than a year earlier (July 3.8%), better than expected. The increase in car production accelerated from 22.5% to 30.5%. Perhaps this is not only a sign of China’s recovery, but also of a reduction in chip shortages in the sector worldwide.

Growth in retail sales also accelerated more than expected in August: +5.4% y/y from +2.7% in July. If the shutdowns ease, the ‘shoppers’ will apparently show up again right away.

US inflation disappointed in August
Equity markets, particularly the US, took a hit this week immediately following the release of US inflation figures for August. This was because ‘core inflation’ (ie the inflation figures excluding food and energy) was quite disappointing. Prices excluding food and energy rose 0.6% from July and 6.3% from August 2021; in July the year-on-year figure was still 5.9%. This setback fueled the idea that the Fed will not hesitate to decide on another rate hike of 0.75% next week and then raise rates further. The stock markets therefore struggled with that.

Overall inflation was only 0.1% month-on-month, but that was also a little disappointing because oil prices and thus petrol prices, heating oil prices etc. had fallen quite sharply. Headline inflation in the US is now at 8.3% after 8.5% in July. We are jealous of it.

Source: Refinitiv Datastream

Three things are important: rent, rent and rent
In the past I have often pointed out the importance of ‘rent’ in US inflation figures. Actual rents and rents imputed to homeowners have a weight of 30.9% in the US inflation basket (about 23%). In the curve with core inflation, it is even close to 40 per cent. In the US, rent increases follow house prices fairly well, albeit with some lag, as can be seen in the chart below.

Source: Refinitiv Datastream

A year ago, rents were still rising by more than 2% per year. In August, however, they were around 6.5% higher than a year ago. Meanwhile, the rate of increase in house prices is slowing. Now that the capital market rate and thus the mortgage rate have risen again, the housing market will cool down further. A decrease in rent increases can therefore be expected and thus a dampening of inflation. Only… in light of the delays, it may take a while.

All in all, I think US inflation will soon fall anyway. The road to 2% is long, but it may go faster during 2023 than currently expected. I have a few arguments for that:

  1. The international economy is weakening, and so is the American economy.
  2. The increase in housing prices is already slowing down, may turn into a price drop, and this will put pressure on rents.
  3. The increase in producer prices is already clearly slowing following the fall in the price of many raw materials.
  4. Business costs continue to fall due to the now sharp drop in sea freight costs.
  5. Consumer inflation expectations, as estimated by financial market participants, are falling.
  6. Wage growth is currently stabilizing. According to the (weighted) Atlanta Fed wage growth tracker, the rate of wage growth has declined fractionally over the past two months.

None of this will stop the Fed from raising official interest rates quite a bit starting next week. They simply take the risk of contributing to a recession because they find a recession less damaging to the economy in the long term than high inflation.

On antidepressants
I’m an optimistic economist, but now I’m struggling, maybe I should take anti-depressants or go to a cafe every now and then… I’ve discussed the crazy European gas price many times. In my opinion, the impact this will have on our economy cannot be overstated. If the price of gas doesn’t drop significantly soon, a recession seems inevitable to me, and why it needs to remain ‘mild’ or ‘easy’ as many banking economists are currently claiming is not entirely clear to me.

Now that China has put the many lockdowns behind it, things are going a little better there, but that economy still has lots of challenges, and lockdowns can come back again.

The US economy is stronger than ours, but the Fed looks to get inflation under control as quickly as possible. If you raise interest rates enough, you will surely succeed, albeit at the cost of a recession.

Han de Jong

Han de Jong is a former chief economist at ABN Amro and now resident economist at, among others, BNR Nieuwsradio. His comments can also be found at

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