Dutch economy back in recession
The Dutch economy contracted for the second consecutive quarter in 12Q4 and is going through its third recession in four years as a result. Recent sentiment indicators point to some stabilization at the start of the year, but the economic outlook remains weak and uncertain.
In the fourth quarter of last year, real Gross Domestic Product (GDP) fell by 0.2% q-o-q (adjusted for calendar- and seasonal effects). This is a much more moderate decline than the 1% contraction in 12Q3. Since this was the second contraction in a row, the Dutch economy is now ‘technically’ in its third recession since the beginning of 2008. In contrast to the period between the Great Recession of 2008/09 and the recession in 2011, with two quarters growth amounting to only 0.1% and 0.2%, the pace of recovery was in the interim was extremely disappointing (figure 1). As such, recessionary conditions have been present in the Netherlands since the second quarter of 2011. In 2012 as a whole, the economy contracted by 0.9% y-o-y. In 12Q4, Dutch output was still 3.2% below its pre-crisis peak (08Q1). The Dutch economy performed better than most other eurozone economies in the previous quarter (see Macro Comment 13/03). Eurozone-wide GDP fell by 0.6% q-o-q. On the other hand, in 12Q3, the Netherlands was a clear negative outlier, with GDP falling 1% against a 0.1% fall for the eurozone. This means the Dutch economy clearly underperformed the Eurozone average in 12H2.
Foreign demand up, domestic demand down
The expenditure breakdown shows that export volume grew in 12Q4. Apart from higher world trade growth, this was partially due to a rebound after the dismal performance of exports in 12Q3. Imports were stagnant, resulting in a positive contribution of net-exports to GDP growth after acting as drag in the previous quarter. Even so, the renewed growth of foreign demand was not sufficient to compensate for the continued weakening of domestic demand. The fall in private consumption accelerated to 1.1% from -0.4% in 12Q3. This was due to a marked fall in consumer confidence, which was sparked by the austerity measures announced by the new government and falling real incomes on the back of the VAT hike on October 1. Private investment recovered somewhat, growing by 3.3% q-o-q. But rather than signifying better conditions for investment, this is just a partial rebound following the very sharp 5.9% fall in the previous quarter. Government expenditure fell sharply, posting a 1.1% decline, owing the on-going public sector retrenchment. In 12Q3, this was the only component of domestic demand to contribute positively to GDP.
Employment and vacancies fall further
The number of employees fell by a 0.2% q-o-q in 12Q4 (seasonally adjusted) after having contracted by 0.3% in 12Q3. Although this was a slight moderation in the pace of decline, employment has been falling for five consecutive quarters. This has brought the level of employment to 2% below the early 2008 level. The decline in employment was broad based, but the biggest declines were found in the construction and real estate sectors. Because the growth of the labour force accelerated in the last quarter of the year, the rise in unemployment accelerated in 12Q4. The unemployment rate reached 5.8% in December (international definition), a level not seen since 1997. The number of vacancies fell by 6.9% q-o-q (seasonally adjusted) to 101,100 and is getting very close to the low points seen in 1997. Fiscal consolidation measures pushed vacancies in the government to a new low point.
Figure 3: Sentiment remains at depressed levels
Stabilisation in 2013
In the short run, the recession seems set to continue. The Economic Sentiment Indicator for the Netherlands rose modestly in both December 2012 and January 2013 but remains at very depressed levels (figure 3). As such, the Dutch economy is unlikely to return growth in the first quarter of this year. We do see some tentative signs of stabilisation, however. The manufacturing Purchasing Manager Index (PMI) rose above the theoretical cut-off point (50) between contraction and expansion in January. In another survey by the Statistics Netherlands (CBS), the number of firms seeing their orders rise almost became equal to the number seeing their orders fall. In a number of countries, the manufacturing PMIs for January point to higher growth at the start of the year. As such, we expect export growth to strengthen further. Consumer confidence is still very low, but the relatively calm period in the European debt crisis, which has pushed up stock markets, might pull confidence off its recent lows. Although this will not be enough to compensate for the fall in households’ real disposable incomes, it may lead to a more moderate contraction in private consumption going forward. Given the very low capacity utilisation rate in the manufacturing industry, private investment is likely to remain weak for the coming quarters. Government spending is set to fall significantly this year due to the sizeable fiscal contraction.
In all, our outlook for 2013 is similar to the developments in 12Q4, with exports growing and domestic demand falling. We expect export growth to be strong enough to compensate for somewhat more moderate falls in spending by the private and public sector. Against this backdrop, we foresee some modest GDP growth from the second quarter of this year onwards. Unemployment is likely to rise further and the number of bankruptcies will remain elevated. Of course, the risks to our outlook remain firmly on the downside due to a possible resurgence of financial market stress and the possibility of additional government austerity measures.