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The Netherlands: A good feeling about growth

Economic Update


In November 2013, Viswanathan Anand and Magnus Carlsen played for the World Chess Championship. Carlsen was considered the favourite based on his rating and managed to live up to the expectations. The new World Champion is sometimes called ‘the Mozart of Chess’; he seems to have a feeling about his moves, even in the most complex positions. At the same time, this feeling has been based on experience and not pure luck. The Dutch Central Bank president Klaas Knot also talked about his feelings regarding the economy in the beginning of October. He believed that the Dutch economy will move out of recession, even though he had no hard facts to support this claim. It appears that he played the right move though: the economy grew in Q3 again, albeit with a modest 0.1% q-o-q. Besides, the previous two quarters were revised upwards by 0.1%.

Inventory formation made a strong positive contribution (0.6%-point) to GDP growth. This makes the growth figure hard to interpret. There is no key driver for economic growth yet. Private consumption declined in the third quarter with 0.5% q-o-q. Exports remained flat while imports increased slightly. This resulted in a negative contribution of trade to growth. Private investment increased though, with housing investment growing for the first time in more than two years.

Sentiment points at the right move

As stated in our previous Economic Update, the ‘good feeling’ of Klaas Knot was probably based on sentiment indicators, which have improved over the last few months. Producer confidence in the manufacturing industry rose further in November. The majority of the respondents stated that orders are increasing. The high purchasing managers’ index (PMI) points to a robust growth in manufacturing production (figure 2). In November, the PMI grew with 2.4 index points to 56.8; the highest since April 2011. Improving sentiment in the main trading partners of the Netherlands point to the strengthening of external demand. Therefore, the outlook for Q4 is positive. If sentiment translates into higher activity in the end of this year, we will probably revise our GDP growth forecast for 2014 to ¼%- ½%.

Figure 1: GDP and contributions
Figure 1: GDP and contributionsSource: CBS
Figure 2: PMI and manufacturing
Figure 2: PMI and manufacturingSource: CBS, Markit

Black is still testing white’s position

The recovery is still two-faced, however. While exports are likely to grow, domestic spending is expected to decrease. Consumer confidence rose at the fastest pace on record in November (to -18), after rising quickly in October as well. However, sentiment remains substantially below pre-crisis levels. The sharp fall of inflation in October (figure 3) slows down the decline of real wage growth. That said, a significant rise in real wage growth is not on the cards yet. Besides, the stabilisation of the unemployment rate, which remained at 7% for the fourth consecutive month in October (ILO/Eurostat definition), will probably not last. We do not expect economic growth to be fast enough to prevent further job losses. Domestic spending is still contracting and the production per worker is in many sectors still at a much lower level than before 2008.

Figure 3: Inflation declines sharply
Figure 3: Inflation declines sharplySource: CBS
Figure 4: Temporary stabilisation unemployment
Figure 4: Temporary stabilisation unemploymentSource: CBS

Downgrade does not pose a threat to the endgame

On November 29, Standard & Poor’s (S&P), a rating agency, downgraded the Dutch economy from AAA to AA+. The downgrade was based on lower growth forecasts than originally anticipated. The sluggish recovery is also in line with our expectation. The impact on Dutch government bond yields has been limited though, as the spread with German bunds has not widened. The 10-year bond yield had already converged to that of Austria, which also has an AA+ rating (figure 5). S&P has placed the Dutch rating on a stable outlook, while Moody’s and Fitch retain their AAA ratings although with a negative outlook.

What is finally going to be the right move? We believe that the Dutch economy will grow in 13Q4 as well.

Figure 5: Government bond yields
Figure 5: Government bond yieldsSource: Reuters EcoWin
Table 1: Key economic forecast the Netherlands
Table 1: Key economic forecasts the NetherlandsSource: Reuters EcoWin, Rabobank

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