Loss of purchasing power: 9.5% of all poor children – Han De Young’s opinion

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Opinion Han Dae-jung

Today 4:35 PM

According to the European Central Bank, the purchasing power loss will reach 6.8% this year. This is not wrong, although the European Central Bank expects some recovery in purchasing power for the next year: +0.6%. I hear on the radio today that everyone is 6.8% shocked. Where the hell are these people the last few months? If inflation is 10% and wages increase from 3% to 4%, you need not be Einstein to realize that there is a huge loss in purchasing power, even though the Cabinet has taken some support measures. And don’t forget that cuts in energy consumption charges, energy value-added tax, and some taxes have already lowered inflation by about two percentage points.

It’s actually worse: The Community Development Bank predicts that 9.5% of children in our rich country will live in poverty next year. This is also mentioned in the draft Environmental Impact Assessment, the document outlining the economic environment after which the Cabinet will finalize the budget for next year. It is difficult to see a piece of CPB other than a file call for action.

This year, our economy is still growing at 4.6%. Two-thirds of this was already achieved in the first half of the year. Next year growth will remain 1.1% according to the European Central Bank.

Hyperinflation and the attendant rise in income are eroding purchasing power in an unprecedented way. Despite this loss in purchasing power, private consumption is still growing 5.7% this year, according to the People’s Bank of China. It is clear that people are withdrawing significantly from their financial reserves. This is of course not sustainable. The European Central Bank expects a slight improvement in purchasing power (0.6%) next year, but also a decrease in private consumption (-0.3%). I actually still love it. If inflation remains above the 4.3% that the European Central Bank projects for 2023, the picture will naturally deteriorate.

The government has plenty of fiscal room to do something to restore purchasing power. Next year, if policy remains unchanged, the budget balance will be -1.1% of GDP (and government debt at 47.1% of GDP). The Dutch Central Bank (DNB) this week warned of public measures to compensate people for the loss of purchasing power. According to DNB, this will only exacerbate inflation problems. After all, inflation mainly occurs due to the imbalance between supply and demand for goods and services in the economy. Supporting the general purchasing power on a large scale will enhance consumer demand and thus exacerbate the imbalance between supply and demand, which will exacerbate the problem of inflation. There is little to be said about this per se. It’s a little annoying that the institution that has so long astonishingly underestimated and underestimated inflation, now suddenly knows exactly what it should do and how not to do it.

The government should also be aware that families reaching 120% of the social minimum were helped this year with an energy surcharge of €1,300. If this is not repeated, there is a risk of a significant loss in the purchasing power of this group in 2023.

The People’s Bank of Palestine published poverty figures for the first time. People live in poverty when their net income is less than they can meet their basic needs. This year 6.7% of the people in our country live in poverty, and next year it will be 7.6%. And this is even more unfavorable for children: 9.5% next year.

The needs are high, the reasons are clear and the financial scope is available. I think this adds up to a good set of measures on budget day. we will see.

GDP growth explodes
The Dutch economy grew 2.6% in the second quarter compared to the first. This was much more than could reasonably be expected. Not many details have been released yet, but Statistics Netherlands reported that investment and foreign trade in particular have generated a lot of growth. When asked, CBS acknowledged that figures for the investments were happy with the ships and planes being delivered. Our growth was much higher than that in many other countries. Germany scored a slight minus, Belgium +0.2% and countries that benefited from the revival of tourism grew a little faster, about 1% for Italy and also for Spain. The difference with Germany is getting bigger and bigger which is very noticeable, as shown in the following picture.

Source: Refinitiv Datastream

The unemployment rate in our country rose slightly for the third consecutive month in July: 3.6% versus 3.4% in June. The number of unemployment benefits decreased slightly: -4,000 to 157,000. At the same time, Statistics Netherlands reported that the labor market suffered again in the second quarter. In the first quarter, there were still 133 vacancies for every 100 unemployed people, and in the second quarter this number rose to 143 for every 100 unemployed people. 38% of all entrepreneurs say that a shortage of employees is the main obstacle to their production or activities.

Source: CBS

Total confusion in the United States
Economic indicators in the US are currently painting a very confusing picture. The strong positive and negative indicators alternate distinctly. The housing market is very slow. The National Association of Home Builders (NAHB) confidence index fell to 49 in August from 55 in July, marking the eighth consecutive monthly decline. NAHB talks about a housing market stagnation. This is due to an increase in mortgage interest and an increase in construction costs. The fact that the latter factor appears to be starting to weigh on it is evidenced by the fact that confidence continues to weaken, while mortgage rates have fallen slightly again in the past two months. So the housing market seems to have a bit more vacuum than interest rates. The number of existing homes sold fell again in July and was down about 25% from what it was in January.

Source: Refinitiv Datastream

The Empire State Index, which measures producer confidence in the New York Federal Reserve, fell sharply in August. In July, the index was still at 11.1, but in August it reached the fifth lowest level ever in the past 20 years: -31.3.

Source: Refinitiv Datastream

This drop was also the third strongest in a month. Only the decline in March and April of 2020 was greater. Now this is a confidence indicator measured in a limited regional area, so we have to be careful in the interpretation. However, this is a remarkably strong decrease.

Source: Refinitiv Datastream

Against this negativity, a similar sentiment index tied to the Philadelphia Federal Reserve district improved in August: +6.2 from -12.3 in July.

Another positive thing in the US is that the industry is still able to expand its production. Industrial production rose 0.7% month over month in July, up 3.2% from a year earlier. This isn’t overly strong but it certainly isn’t sluggish, not even close.

The US labor market also appears to be stabilizing. The number of applications for unemployment benefits reached 250,000 in the week of August 13. The number of orders increased in the second half of June and the first half of July, but this increase has now stopped.

Will the economy enter a recession or not?
There have been many discussions lately about whether or not the economy will enter a recession. For Europe – and the Netherlands – this opportunity seems very high to me, especially due to the massive loss in purchasing power. The United States has a slightly better chance of getting out of hand. It should be noted, however, that the US yield curve (that is, the difference between the actual yield on 10-year government bonds and two-year government bonds) has been negative for some time now. In the past 50 years, every US recession has been preceded by an inverted interest rate structure.

Is Russian inflation stable?
There is no doubt that the Russian economy is suffering greatly from war and sanctions. It is clear that policymakers in Moscow are trying to manage the economy in the best possible way. I don’t know if we can believe the published numbers. But my eyes were fixed on the prices of Russian producers this week. In the following graph I compare it to those in Germany and the United States. German numbers look really bad. Until the beginning of 2021, this paralleled strikingly with the American picture, but that picture has changed dramatically. European gas prices will undoubtedly play a major role in this. Moreover, the Russians seem to be doing a good job of controlling inflation at the producer level, which is often seen as a harbinger of consumer-level inflation.

For what it’s worth, of course.

Source: Refinitiv Datastream

It is inevitable that the Cabinet will come up with a broad package of measures on Budget Day to bolster the purchasing power of the most vulnerable.

Indicators for the US economy at the moment present a very diverse picture. While I still believe that many countries will experience a period of real deflation between now and the end of next year, Americans have a better chance of avoiding a recession than we have.


Han Dae-jung

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 at Crystalcleareconomics.nl

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