Inflation is falling, so is manufacturing – Opinion Han de Jong

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Opinion Hans de Jong

Today 17:30

As expected, inflation in the Netherlands fell sharply in November. This was already evident last week from the figures based on the European calculation method (HICP), this week Statistics Netherlands confirmed that the same appears from its own calculation method (CPI).

According to its own benchmark, inflation fell from 14.3% in October to 9.9% in November. So-called core inflation fell, but only slightly: from 6.9% to 6.8%. With the European benchmark, core inflation (ie excluding food, energy, tobacco and alcohol) had fallen from 6.0% to 5.6%.

Source: Refinitiv Datastream

The sharp fall in overall inflation was mainly due to energy prices. According to Statistics Netherlands, they fell by more than 25% from October to November. Last year, energy prices rose sharply in November: approximately 20%. As a result, the year-over-year rate of increase dropped from 173% to 70%!

Unfortunately, the rate of increase in food prices continues to accelerate. With these prices up 2.0% on the month, the year-on-year increase was 15.4% compared to 13.8% in October. A sad record.

Another caveat to the drop in inflation is that European gas prices have risen significantly since mid-November. The TTF price was briefly below €100/MWh in November, but it is now €140/MWh again.

The energy price cap starts in January and is expected to reduce inflation by around 2.5%.

Growth industry rapidly downhill
According to figures from CBS, manufacturing in the Netherlands produced 3.3% more in October than the previous year. That in itself is a good number. But it was the lowest year-on-year growth since March 2021. A month earlier, the growth rate was still 5.2%. Although production levels can fluctuate considerably from month to month, it is significant that production in seven of the first ten months of the year has fallen compared to the previous month. In October, the decrease compared to September was 0.4%.

The differences between the various sectors are now very large. Mechanical engineering is the absolute star performer. Production there was 21.2% higher than a year earlier, and Statistics Netherlands also reported that the sector was struggling with chip shortages. As expected, energy-intensive sectors are at the bottom of the list. The production level in the chemical industry was 13.1% lower than the previous year. A minus of 9.8% was registered in the rubber and plastics sector.

The same picture can be seen in Germany. There, Destatis (German CBS) reported that production in industry fell by 0.1% in October compared to September. But the energy-heavy sectors are also doing poorly there. Production in these sectors fell by 3.6% in October compared to September and by almost 13% year-on-year. It is very similar to what happens in our chemical industry. In Germany, BASF has already warned that chemistry in Europe is doomed to the current, absurdly high energy prices. In the Netherlands, the sector provides employment to around 45,000 people, to which is added the employment in the surrounding chains.

From divergence to convergence?
In the past I have pointed out several times the remarkable divergence between industrial production in the Netherlands and in Germany in recent years. In the past, the correlation between the two was very high, but recently the Dutch industry has performed much better than the German one.

Source: Refinitiv Datastream

The differences between the two series started when the German car industry was hit by ‘dieselgate’. Although Holland is also one the automotive industry sector, it is much less with us as a percentage of the total industry.

The following image shows the production of cars and the number of registrations in Germany. Germany is traditionally a major exporter of cars. However, the graph shows that production has fallen sharply from 2018 onwards. Partly this may be because German car companies have moved production to other countries, but Dieselgate may also have led to reduced demand for German cars.

Source: Refinitiv Datastream

However, it appears that the bottom has been passed. Production is increasing again. And that increase is faster than sales on the domestic market. German car exports are therefore increasing again. The next image shows the difference between production and license plate registrations. The imported cars are of course still in between. Still, it is significant that a turning point seems to have been passed.

Source: Refinitiv Datastream

A notable difference in recent years between the performance of Dutch industry on the one hand and German industry on the other can also be found in mechanical engineering. Germany is traditionally very strong in mechanical engineering. Nevertheless, growth in this sector in Germany currently lags far behind growth in the Netherlands. Our sector produced more than 21% more in October than the previous year. In Germany it is a more modest 5%. It is not immediately clear to me how this difference can be explained. This may be due to a large player such as ASML.

German figures on the development of orders in the industry give rise to further concern. The next image shows the development of orders in the German capital goods industry. While production in mechanical engineering has so far grown, order intake has fallen significantly in recent months. Compared to the peak in March this year, this corresponds to a decrease of around 15%.

Source: Refinitiv Datastream

Chinese foreign trade in trouble
The international economy is weakening. I have previously pointed out that China’s economy is one stop walking the economy has been due to the ongoing shutdowns. This was also reflected in the trade statistics this week. As the following figure shows, the value of China’s imports and exports was lower in November than a year earlier. There are reports that the zero covid policy is being relaxed. It would be beneficial for economic activity and thus for the global economy. But I will say: first see, then believe.

Source: Refinitiv Datastream

In 2023, working people will be worse off than unemployment benefit recipients
This week, CPB presented calculations for the Dutch economy based on different energy price scenarios. In relation to the September estimates, two opposing factors determine the otherwise relatively limited differences in the results. Inflation rose more than expected in September, and the price ceiling is now included in the calculations. The bottom line is that the negative factor slightly outweighs the positive. So economic growth will be slightly lower and unemployment slightly higher. The price ceiling is expensive for the government, but the treasury is cushioned by higher gas revenues, so the public deficit is estimated to be only slightly larger than in September.

Purchasing power is worse than expected in September. CPB expresses this as the total purchasing power loss over 2022 and 2023. In September, a combined purchasing power loss of around 3% was still expected in 2022 and 2023. CPB now estimates the loss at more than 4%

Two other things in particular struck me about the CPB release. The first is shown in the chart below. This shows a point cloud of the change in purchasing power for households with different conditions and different incomes. The solid lines are averages for different groups. What struck me most now is how much better the purchasing power development of benefit recipients on low incomes is than for workers and pensioners on the same income. It has everything to do with the increase in the minimum wage, which affects all benefits. Low-income workers are often self-employed, and they face a reduction in the self-employment deduction. I thought the motto was that work should pay… The increase in the minimum wage also affects the state pension, but nevertheless pensioners with incomes up to €35,000 are worst off in terms of the development of their purchasing power.

Source: CPB

Another striking finding is that, according to CPB, energy prices will sustainably be significantly higher than before the pandemic. This requires a structural adjustment. A price ceiling, where the treasury matches the difference between the market price and the ceiling, is not. I would say, government, do everything you can to bring energy prices up to a normal level. But CPB believes that an adjustment of the salary is necessary. As it is now clear that we are suffering from a significant loss of terms of trade, wage increases are not a solution for the economy as a whole. Someone is going to have to take a welfare loss here.

Urgency among politicians
Inflation fell in November, but mainly thanks to energy prices. Unfortunately, the European gas price, which largely determines the course of our energy prices, has risen sharply since mid-November.

The growth in production in Dutch industry is falling noticeably. The strength of the machinery industry is still keeping the overall figures up, but there has been a sharp drop in production, especially in the energy-intensive sectors. You are holding your breath, what will happen in those sectors in the long term if energy prices do not normalize. I have yet to see any urgency among politicians to think about this, let alone do anything about it.

China will reportedly weaken its zero covid policy. This does not come a day too early for the business cycle. China’s foreign trade has fallen sharply.

The purchasing power in our country will fall in 2022 and 2023 more than previously predicted by the CPB. What particularly strikes me is that the picture looks much worse for workers on very modest incomes than for those on benefits. Pensioners are even worse off. With many politicians talking about work paying, one would expect them to address this development with some urgency. Nor is there any trace of such haste.

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Hans de Jong

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

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