Feedback Hon de Zhang
4:00 pm today – Hon de Zhang
If I can’t think of any arguments in a debate that will convince someone else, my last asset: ‘Believe me’. This is a desperate attempt to be right. It rarely works. Only those who love me always notice such a desperate call. It may be an expression of love rather than hope.
For example, I try to love ECB President Christine Lagarde during their regular press conferences, but I can not. It’s amazing how touching those shots are. She means well, that’s all. The truth is that the purpose of the ECB is to achieve and maintain price stability. The fact is that inflation is now higher than the target. The most important fact is that inflation is very high and will be higher for a longer period of time than the ECB predicted a few months ago. In other words, the ECB knows nothing about it. Not that I know everything well, but I am not going to preach with confidence what is going to happen after such nonsense. ECB does it through Ms Lagarde. At press conferences he uses the tone of a kindergarten teacher, who certainly knows almost everything about his students. Terrible!
Well, it should get out.
The ECB says high inflation is temporary and will probably decline next year, if not in the first quarter. Lagarde pointed out that the emergency procurement program PEPP (Epidemic Emergency Procurement Program) would be completed by the end of March next year. It seems reasonable to me that the economy will recover enough from the epidemic.
However, the interest rate hike will have to wait a long time. The market is now setting prices at the first interest rate in late 2022, but the ECB says it is too early. The ECB has laid down three conditions for the normalization of interest rate policy. First, the inflation forecast should reach 2% before the forecast horizon ends. Second, ECB economists expect inflation to remain at 2% by the end of the forecast period. Third, there should be enough improvement in core inflation to expect 2% in the medium term. So the ECB relies a lot on the forecasts of economists, who were very wrong this year
I also understand that inflation is currently driven by temporary factors. But the higher inflation continues for a long time, the more likely it is to hit inflation expectations and wage growth. In other words, the longer it takes, the more inflation becomes permanent. We did not listen to Lagarde about it.
The Central Bank and the Bank of England policy committees are likely to meet next week. It will be interesting to see if there are any differences with the ECB.
Inflation again exceeded expectations
In October, inflation again exceeded expectations by a large margin. On a monthly basis, prices in the euro area rose by 0.8%. Year-on-year inflation rose to 4.1% in September from 3.4%. Major inflation (i.e. excluding food, energy, alcohol and tobacco) was 0.3% per month and 2.1% year-on-year. Since the introduction of the euro in 1999, inflation has averaged 1.6% and core inflation has been 1.3%.
Economic growth is slowing
Economic growth in the eurozone and the United States has been moderately weak, yet lags behind in industrial logistics. In some fields this is a bigger problem than others. At the moment, this mainly affects Germany, because of the overweight of the car industry in that country and the problems facing this sector due to the global chip shortage.
According to preliminary figures, the French economy grew by less than 3.0% in the third quarter, compared to the second quarter. The Italian economy also grew strongly: 2.6%. In Germany, growth was hampered by problems in the industry. The growth there was 1.8%. German statisticians say that private consumption in particular has contributed to growth. For the euro area as a whole, the provisional growth rate for the third quarter was 2.2%. Unfortunately, we still have to wait for the detailed figures.
They are already available about the US economy. Growth there (expressed in the European way) was only 0.5% in a short quarter, which was clearly lower than ours. It all has to do with the spending stimulus provided by the Biden government earlier this year and it is now working. On an annual basis, US growth is 2.0%. It was down 6.3% and 6.7% in the first and second quarters, respectively.
Last week I wrote here about the Atlanta Fed’s GDPNow Metric Forecast Annual Growth 0.5%. So 2.0% is not so bad. It should be noted in this regard that the sharp decline in stocks contributed to the 2.1% growth. Without stock movement, the US economy would have shrunk somewhat, although such rationale would have been somewhat simpler, as the growth contribution of international trade would have been less negative without stock movement. The impact of inventory changes on GDP growth is a highly technical story. In balance, you could say the growth figure was flattering. Coincidentally, companies still saw a sharp decline in inventory in the third quarter (albeit much less than in the second quarter). They cannot and will not continue to do so, so there is no doubt that stock change will continue to make a positive contribution to growth in the coming quarters.
Business investment figures are very interesting
In my view, the investment figures of companies (except those in reserves) are the most interesting of all. The first graph shows the growth contribution of investments Information processing equipment And inside Intellectual Property Products. When the epidemic struck and pushed the economy into an unprecedented recession, revenue models came under massive pressure. Companies responded with a leap. Substantial investments were made in digitalization. This is reflected in the increase in the growth contribution of Information processing equipment From the second quarter. With a slight delay, from the third quarter, the growth contribution of investments Intellectual Property Products Significantly increased. This is in my favor regarding the expected growth of productivity and profitability of companies in the future.
Overall business investment is doing well in the US right now. This is a theme I have been following closely for some time. The following figure shows the value of capital goods shipped to the United States. In September, the amount rose to $ 75.9 billion from $ 74.9 in August. This level was 2.7% higher than the previous year (August 11.6%). This series is a proxy for business investment. However, keep in mind that these are nominal amounts and that capital goods will become more expensive at this time as well as commodities. However, the film confirms that companies have captured the shock of the epidemic. Distribution problems and staff problems, to invest to increase their costs. It should be conducive to productivity and profitability.
How smart are we?
We live in a cold country. And despite being a government overseer, we are doing better. We are growing faster than our neighbors and inflation is low. How smart we are.
Business confidence in Germany and the Netherlands differs, respectively. In Germany, the leading IFO index fell for the fourth consecutive month in October and was below its long-term average. The index compiled by the Netherlands figures based on manufacturer confidence among industrial entrepreneurs in our country actually equaled the all-time high in October and weakened briefly in August in recent months. The following picture provides an interesting picture. Until 2018, the two codes are compatible with each other. But in the course of 2018, German business confidence will be much weaker than ours. This is undoubtedly the cause of dieselgate problems in the automobile industry, which is very important to Germany. Also, the recent difference between the two series may be mainly related to problems in the automotive industry because it is plagued by severe and persistent chip shortages. Another explanation is that Dutch entrepreneurs are smarter than German entrepreneurs and thus respond better to economic disruptions. Distribution series. I would not dismiss it outright. In general, the development potential in the Netherlands is somewhat higher than in Germany. I say this based on my own experiences from the time I lived in Germany. But most important is undoubtedly the problem of the car industry.
Yes, our low inflation is definitely a cynical joke. It is true that our inflation rate is lower than many other countries, but the main reason for this is the government’s restrictions on rent, all of which account for 23% of the inflation rate.
Hon de Zhang
Hon de Zhang is a former chief economist at ABN Amro and currently an economist living at BNR Nieuwsradio. His comments can be found at Crystalcleareconomics.nl
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