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Wednesday, 9 October 2013

The gutfeeling of President Klaas Knot of DNB: seemingly fact-free economics from a typical pundit. The €100,000 question: is he right?!

Tonight's the night
Let's live it up
I got my money
Let's spend it up

Last weekend, one of the most important officials in The Netherlands put himself unexpectedly in the spotlightsKlaas Knot of the Dutch national bank DNB (i.e. De Nederlandsche Bank).

Most of the time, the president of a national bank within the European Union is the silent force in the background:
  • He guards the national financial markets;
  • He informs the government about important financial and monetary developments in his country and in the region;
  • Besides that, the president represents his country in the ECB, where he has to guard the national interests within the Euro-zone or the EU. 

Normally you could say about the president of the DNB, that the lesser he speaks, the better it is. A stable, “sphinx-like” national bank president makes often a good, rock-solid impression next to politicians, who are sometimes virtually doing everything to attract media attention for their soundbites. 
Until now Klaas Knot seemed such a sphinx-like president. 

Last weekend, however, Knot found it the perfect time to step to the media for an interview. And Klaas had, amidst a few warnings for Dutch politics, some good news too: the Dutch economy was going to be in good shape again. He had a gutfeeling about it!

The following snips are from the Financieel Dagblad:

The current, uncertain political situation forms a large risk-factor for the recovery of the Dutch economy. This was stated by president Klaas Knot of the Dutch national bank DNB.

This morning, Knot seized the moment at a press conference about financial stability, to express his concerns about the political stability in The Netherlands. At this moment, the cabinet is very busy with its negotiations with the opposition parties to gather sufficient political support for the state budget for 2014. 

“It would be a worst-case scenario, when political incapacity would tear down the cautious recovery of the Dutch economy, after eight quarters of contraction”, according to Knot. Concerning the intended €6 bln in additional austerity measures, he stated that these won’t lead to an improvement of the state finances, but at best will stop the further deterioration of the Dutch economy.

At the other hand, Knot is optimistic about the recovery of the Dutch economy. “I expect that we hear in November that the Dutch economy has grown during Q3. Then we are out of the recession. Growth won’t be spectacular yet, but many roadsigns have turned to green again.

The president pointed at the Dutch PMI (Purchase Manager Index), which currently shows the highest rate of all Europe. Besides that, Knot sees a small rejuvenation of the Dutch housing market.    

Klaas Knot was definitely right, when he spoke about the current political instability and the heartburn-invoking indecisiveness of the Cabinet Rutte. These factors will indeed put new growth (if any) under jeopardy. As far as this concerns, his speech could be seen as a wake-up call.

Besides that: it is not bad when the president of the Dutch national bank is optimistic about the Dutch economy. It is like a placebo: even if it doesn’t help, it won’t hurt much.

What the FD article didn’t mention, however, was that Knot talked explicitly about his ‘gutfeeling when he stated that the Dutch economy will grow in Q3 and that the recession then will be over (everybody who understands Dutch: watch the video!).

With such a statement by Knot, we are approaching ‘the fact-free economics zone’ after all. And then Klaas Knot suddenly turns into a pundit, who makes his best guess and hopes to do the right thing.

It is true that the Dutch PMI was high, surprisingly high even! However, we need the next month to know if it was a one-off outlier, or a structural development indeed. A Dutch (and English) proverb states: one swallow doesn’t make a summer.

The countries in the EU seem on the road to recovery and that is always good news for ‘number one export country’ (per capita), The Netherlands. When especially the PIIGS and the Eastern European countries refind the path to economic growth again, this will probably lead to soaring exports of Dutch agricultural produce and re-exports of imported products from the Far East, throught the vast Dutch distribution network.

But… The Dutch unemployment is still rising and mass lay-offs are yet the name of the game at many companies of name and standing. It seems that the poison cup is not empty after all, as far as this concerns.

And until today, the elephant in the room is the massive overproduction and structural vacancy within the Commercial Real Estate industry (CRE): more than 15% (structurally) vacant commercial real estate in The Netherlands. 

There is the chance of an iceball-in-hell that this structural vacancy and overproduction will suddenly vanish from the face of the earth and the building frenzy can continue like in 2005. It just won’t happen… In spite of the desperate attempts of the government, the industry itself and various lobby groups to rejuvenate the Building and Construction industry, there are still lots of jobs on the line within this labour intensive industry.

Not only there should and probably will be a shake-out among many building companies, but the ones that survive will probably either hire cheaper workers from (South-) Eastern Europe or try to reduce the salaries of Dutch workers, by hiring them through unfavorable freelance contracts. Both solutions will not spur an improvement in consumption within this industry..

That the Dutch housing market is showing some small signs of recovery, when compared to last year, is no miracle and no reason to celebrate yet. For various reasons (most important: meandering and indecisive politics), the summer of 2012 was really bad for the housing market. Only when the recovery in the housing market will remain for a number of months in a row, it is time to uncork the champagne.

Although you could say that there is indeed a substantial need for new and improved residential real estate in The Netherlands, this is more the result of a giant mismatch between the available and the required housing, than a signal of a rejuvenated housing market. 

This explains why the latent desire for new housing doesn't spur the demand. Most houses for sale are just too big and too expensive for the designated buyers. People suppress their desire and wait if the housing market will go any lower, before they buy their dreamhouse. This is the main reason that many communities are not raising the flag yet. 

And there is one important lesson to remember, when it comes to the housing market: no person with more than two braincells will purchase a new house when his job or income is on the line, unless he has no other option. And too many people have indeed their job and income on the line, right now:
  • The Small and Medium Enterprises are going through a rough time with soaring numbers of bankruptcies: a 6% rise in 2013Q3 y-o-y;
  • And even companies which are still healthy, are looking for ways to save money and doing the same or more work, with less people under contract;
  • Many workers, who may keep their contract, in return have to deal with a diminishing salary and fake ‘demotions’: the work remains the same, but the job title is downwardly adjusted, including the salary involved. 

And let’s finally talk about Dutch consumption and why I am not very optimistic about it increasing soon:

  • People who have their job or salary on the line will not start to consume more or more expensive.
  • The people in The Netherlands do keep consuming, but the average Joe and Mary spend their money mainly in discount supermarkets, cheap thrift stores and outlet centers and during sales periods: cheap is the name of the game, unless for a happy few, who don’t have to worry about anything;
  • Durable goods that don’t need immediate replacement, will be repaired and maintained, instead of replaced by a new one;
  • The social-economic mood is currently also not into exuberant spending ‘like it’s 1999’:
    • When people for instance buy a car (personal or business), they choose the most economic model (personal) or the model with the most favorable taxing arrangement (for lease-drivers);
    • Tailor-made suits, exuberant jewellery and large, expensive, mechanical watches are not everybodies' business anymore
    • Pre-cooked luxury dinners are out of fashion and cooking yourself is in again. 

These are all signals that the crisis is still very much present in the heads of the Dutch people. When the crisis doesn’t vanish from the heads, it will not vanish from the economy. That might be a bearish notion, but it suited me fine in the recent past.

All in all, it is my conclusion that Klaas Knot’s speech was more a cry for good fortune than a realistic forecast. Even if the economy grows again in Q3, we should have a cautious look again in Q4 and 2014Q1. Also in 2010, many people thought that the crisis ( I still call it a depression) was over…

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