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2023: Recession or Growth Acceleration?

 

  • "Some confidence indicators are improving
  • Negative factors, however, remain dominant for the time being
  • Dutch inflation falls disappointingly little in December"

Google Translated from Dutch to English. Here is the link to the original article in Dutch. The article was originally published on 06 January 2023.

 

Opinions on where things are going this year vary quite a bit. Pessimists are sure that the world economy is tumbling into recession. The 'diehard pessimists' are also certain that the recession will lead to major financial instability, major losses on asset markets, possibly a euro crisis, etc.

Optimists come in two types. The optimistic optimists see inflation falling sharply, giving stock markets the wind in the back. The rise in interest rates has come to an end, a slight fall is reasonable. That supports the housing market. Wealth effects give the economy a boost.

Somewhat more moderate optimists do expect a recession but welcome it with enthusiasm. A short, mild recession is exactly what we need. This relaxes the labor market and reduces inflation without causing much damage to the rest of the economy. In fact, the dry wood artificially kept alive in recent years by pandemic support and loose monetary policy is giving way to new life.

I doubt. The story of the 'moderate optimists' sounds quite logical, but it is the first time in my career that I have heard economists speak so enthusiastically about a recession. That seems suspicious to me. Capital market interest rates have risen at a record pace over the past 12 months. Wouldn't that create a nasty, negative dynamic in a recession?

Recent economic indicators paint a far from the uniform picture. In fact, the picture is very confusing. For example, the largest economy in Europe seemed to be heading straight for a recession, but in the last three months, German entrepreneurs have become more optimistic again. The confidence index of Dutch purchasing managers fell through November but bounced back quite a bit in December. After a reading of 46.0 in November, 48.6 was registered in December. That is still below 50, indicating that the pessimists are in the majority, but purchasing managers were less pessimistic and certainly more optimistic about production in the coming months.

This more positive picture was given a huge stir in Germany this morning by the publication of the figures on factory orders. They can be quite volatile on a monthly basis, but a fall of 5.3% in November from October and 11.1% from a year earlier does not seem to coincide with growing optimism. It should be noted that the drop in orders was mainly caused by foreign customers. They placed 8.1% fewer orders than in October, and domestic customers were only 1.1% less. Whether this is noise in the figures or a new trend remains to be seen.

 

Finance4Learming | Germany: Factory orders (volume, index)

Source: Refinitv Datastream

 

 

The economic picture in the US is equally confusing. The labor market remains unprecedentedly tight. In the last week of 2022, 204,000 people applied for unemployment benefits. That was the lowest number in 14 weeks. Although the number of vacancies fell very slightly in November and has fallen by approximately 1.4 million from the peak in March, with a total of more than 10 million, this remains historically high.

 

 

Finance4Learming | US: Claiming Unemployment Benefits (Weekly *1,000)

Source: Refinitv Datastream

 

 

On the other hand, US business confidence in the industry continues to weaken. The ISM index, which has been measuring this for decades, fell from 49.0 in November to 48.4 in December. The new orders sub-index fell from 47.2 to 45.2. That's pretty thin.

 

Finance4Learning | US: Industry Business Confidence (ISM)

Source: Refinitv Datastream

 

 

For the time being, I will continue to look at the economic outlook on the pessimistic rather than the optimistic side. In my view, the erosion of purchasing power, the rise in interest rates, and the resulting tightening of financial conditions make a recession likely. And I cannot convert to the doctrine of enthusiasm for a short, mild recession. After all, that doctrine boils down to a 'this time is different' vision and that is usually a bad starting point.

Of course, I also know that the falling gas prices and the resulting fall in inflation provide relief and that measures to support purchasing power will support the economy in the short term, but still…

 

Dutch inflation falls disappointingly little in December

According to provisional figures, inflation in our country fell to 9.6% in December, from 9.9% in November. That was disappointing because inflation in France fell by 0.4 percentage points and that in Germany was even more than 1.5 percentage points, although that comparison is quite difficult due to the differences in purchasing power measures taken in these countries.

 

Statistics Netherlands has not yet published any details about the inflation figures. The lower inflation was caused entirely by energy. The rate at which energy prices are rising fell from 41.3% to 30.0%. Inflation in food increased further: 14.0% in December against 12.9% in November. The same was true for services (4.6% in December against 4.4% in November) and for industrial goods (8.7% against 7.2%). I am hopeful that we are at or near the peak in terms of food inflation. Food inflation fell slightly in Germany and was stable in France. In addition, food inflation often follows energy prices, albeit with a lag.

In January, inflation will undoubtedly come down quite a bit. This is mainly due to the price ceiling for gas and electricity.

 

Finance4Learning | Netherlands: Inflation (CPI % y-o-y)

Source: Refinitv Datastream

 

Closing

Opinions differ somewhat on the economic outlook this year. Some indicators are improving, while others are not. In my view, the negative factors, such as the erosion of purchasing power, the rise in interest rates, and the tightening of financial conditions, predominate. The optimists who are enthusiastic about the beneficial effect of a possible, in their view short and mild, the recession have quite a reasonable story. So it can still work out. It remains a matter of 'hope for the best, but prepare for the worst'.