RaboResearch - Economic Research

The Netherlands: heading for seven lean years

Economic Quarterly Report

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The Dutch economy has failed to recover from the Great Recession of 2008/2009 over the past several years. It contracted again in 2012 due to relatively low export growth and a drop in domestic spending. We do not expect this outlook to change to any significant degree this year or next: the economic downturn is expected to continue in the immediate future, keeping both unemployment and the number of bankruptcies high.

Economy backslides

After two quarters of very limited growth during the first half of 2012, the Dutch economy slipped back into a recession in the second half of the year for the third time since early 2008. During the last quarter of 2012, economic activity was nearly back to the level of early 2010, when GDP had not yet fully recovered from the sharp contraction witnessed during the Great Recession (figure 1). By the end of 2012, GDP-volume was 3.2% lower than the pre-crisis peak. With an expected contraction of ¾% this year and growth at the same rate next year, GDP by the end of 2014 will still be 2.2% lower than just before the crisis.

The new economic downturn has caused a spike in unemployment and the number of corporate bankruptcies. After a slight decline following the economic recovery of 2010, unemployment has been rising steadily again since June 2011. At the end of 2012, the unemployment rate reached a level not seen in the Netherlands since 1997 (figure 2). The number of corporate bankruptcies filed also skyrocketed in 2012.

Figure 1: Economic recovery interrupted again
Figure 1: Economic recovery interrupted againSource: Niesr, Rabobank
Figure 2: The pain of three recessions since 2008
Figure 2: The pain of three recessions since 2008Source: Statistics Netherlands

In the Rabobank publication Outlook 2010 we wondered how, exactly, the economy would recover from the Great Recession. At the time, this discussion was underpinned by the use of letters: a ‘V-shaped fast recovery’, a ‘W-shaped double dip’ or a ‘no-growth, L-shaped Japan scenario’. A key question in the debate on the nature of the medium-term recovery was the extent to which the economy would be able to return to the trend path of the pre-crisis years.

Figure 3: Permanent production loss

Figure 3: Permanent production loss

Source: Reuters EcoWin, Rabobank

After mild recessions in the past the economy could usually revert to the former growth path relatively quickly owing to periods of high growth. However, historical data shows that this has not always been the case for recessions coupled with a financial crisis. In the Nether­lands, the first stage of economic recovery was not nearly strong enough to bring GDP back to the growth path where the economy would have been if it had continued to grow after the last quarter of 2008 at a rate defined by the 1999-2008 average (figure 3). Due to the recessionary state of the economy since 2011, the gap with this trend has increased again, and according to our growth forecast for 2013 and 2014 this development will continue. A return to the pre-crisis growth path is also not likely in the long term. In the Rabobank publication Special 12/20: Diminished growth, we argued that the current downturn will be followed by a period of low growth.

This year and the next, the economic situation will remain largely unchanged from 2012. The weak economic growth we anticipate is caused by a combination of contracting domestic spending and relatively weak export growth.

Foreign trade: the only bright spot

Export growth was the only bright spot for the Dutch economy in 2012. Although volume growth, at 3.1%, was lower than the previous year, import growth was also lower compared to 2011 due to a decline in domestic spending. The contribution of net trade to GDP growth was therefore the same in 2012 as it was in 2011 (0.5%-points).

Growth in world trade was very weak in 2012 due to a global slowdown in economic growth. However, world trade bounced back during the last quarter due to strong economic growth in Asia (figure 4). Economic indicators point at a further recovery of global economic growth in early 2013. For 2013 as a whole, we also expect slightly higher growth of the global economy than in 2012, which translates into higher world trade. However, since economic growth in Europe remains extremely weak, the portion of world trade growth relevant to the Netherlands will increase slightly less.

For 2013, we therefore anticipate only a slight acceleration of growth in Dutch exports from 3.1% in 2012 to 3½% in 2013. We expect a further acceleration of export growth for 2014 to 4½%, although this remains  moderate from a historical perspective. Contrary to 2012, we do expect domestically produced exports to contribute to total export growth both in 2013 and 2014. Since more value is added to domestic exports, its contribution to economic growth is larger.

Since import growth will remain limited in 2013 and 2014 due to contracting domestic spending, and domestic export growth will increase, net exports will continue to contribute to economic growth. Due to the slightly higher export growth, we expect a somewhat higher contribution of net exports for both years: ¾%-points versus 0.5%-points in 2012.

The eurozone debt crisis continues to exert a downward pressure on the euro: the real trade-weighted exchange rate in the Netherlands declined by 1.6% in the last quarter (year-on-year) (figure 5). For 2012 as a whole, the exchange rate was 3% lower than the previous year. The exchange rate for the Netherlands is expected to appreciate in 2013 and 2014. The appreciation of the euro we anticipate implies that Dutch goods and services are becoming more expensive for other countries. This means export growth will not be supported by a lower exchange rate and will continue to be driven mainly by a growing world trade volume.

Figure 4: Asia pulls world trade back up
Figure 4: Asia pulls world trade back upSource: Netherlands Bureau for Economic Policy Analysis
Figure 5: Euro slightly cheaper in 2012
Figure 5: Euro slightly cheaper in 2012Source: Bloomberg, BIS

Due to the lower trade-weighted exchange rate and other factors, the growth in import prices outpaced that of export prices in 2012. However, since the increase in exports exceeded the increase in imports, the trade surplus, at 8.9% of GDP, was as high as during the record year 2011. We expect the national savings surplus to remain very high in 2013 and 2014.

Investment growth remains weak

Industrial capacity utilisation declined further in early 2013: to 76.6% (figure 6). This is nearly 5%-points below the long-term average. The low capacity utilisation has had negative impact over the past year on business investment and producer confidence. Business investment dropped by more than 2% last year, and in the fourth quarter of 2012 it was 12% below the pre-crisis level of early 2008. Business confidence in the manufacturing industry improved slightly in the last few months of 2012 and the beginning of 2013. Order expectations among businesses also improved slightly at the beginning of this year, which points at a stabilisation of industrial production, but not yet robust growth.

We expect global growth in the industrial sector to pick up slightly. In this respect, it is important that sentiment indicators point at higher  production growth of the German economy, as this may result in cautious growth of Dutch industry in the immediate future. However, we do not expect investment volume to improve anytime soon. Due to weak domestic demand, capacity utilisation remains too low for now to justify investments in expansion, both in industry and other sectors. Overall, we expect a slowdown in business investment this year, followed by very moderate growth in 2014. Due to the difficult housing market situation, investment in the housing market will continue to fall in 2013 and 2014. We expect total private investment to contract by 3¼% in 2013, followed by a very modest growth of ¾% in 2014.

Unemployment rises further

The weak domestic demand, low capacity utilisation and lower profitability are compelling businesses to look for ways to reduce cost, which has had an impact on staff turnover. Employment, which had remained relatively stable until mid-2012, fell in the second half of last year. This decline accelerated in the last two months of 2012 and in January 2013 (figure 7). Since the labour force simultaneously increased in the second half of 2012, unemployment grew rapidly as well. The unemployment rate increased by 0.9%-points in mid-2012 to 6% in January 2013 (Eurostat definition). The increase in the labour supply was the most significant among younger cohorts (aged 15-25) and older cohorts (aged 45-65). For young people, this is partly because many of them opted to remain in college right after the economic crisis hit in 2009 in order to improve their chances in the labour market and possibly in anticipation of better economic times. Some of them entered the labour market with some delay in 2012. Due to austerity measures that negatively affect college tuition subsidies, the option of remaining in college for a longer period of time has become more expensive. The increased labour supply among older workers is due mainly to population ageing and the phasing-out of early-retirement schemes.

Figure 6: Low capacity utilisation
Figure 6: Low capacity utilisationSource: Statistics Netherlands
Figure 7: Employment decline accelerates
Figure 7: Employment decline acceleratesSource: Statistics Netherlands

The tentative economic recovery expected for this year is likely to be insufficient to generate an uptick in employment. We therefore expect unemployment to rise further, averaging 6½% in 2013. The unemployment rate is likely to increase slightly in 2014 since employment growth is only expected to continue in the second half of 2014.The unemployment rate for 2014 as a whole is estimated to reach 7%.

Figure 8: Budget balance barely improves

Figure 8: Budget balance barely improves

Source: Reuters EcoWin, Netherlands Bureau for Economic Policy Analysis

Government struggles with excessive budget deficit

Despite the substantial cost cuts and increased taxes introduced by the Dutch government in 2012, the budget deficit turned out significantly higher than previously expected. Despite the setbacks in the budget balance, substantial policy measures have been taken. In its Winter Forecast, the European Commission established that the structural budget balance in 2012 improved by 1.1% of GDP compared to 2011. Due to the economic contraction, however, the actual budget balance improved by only 0.4% of GDP. The EMU balance equalled 4% of GDP last year (figure 8). Since economic development remains weak this year, the deficit for 2013 is expected to reach 3½%. As a result, the Dutch government will not make the deadline set in 2009 as part of the Excessive Deficit Procedure (EDP) to reduce the deficit below 3%. Because economic activity is weak, this deadline will likely be extended to 2014. Despite existing measures, the deficit will still amount to approximately 3½% in 2014, implying that additional budget cuts will be necessary for that year. The Dutch govern­ment has already announced for over 4 billion euro worth of additional cuts for 2014. The exact nature of the austerity package will be discussed with the social partners (labour unions and employers’ organizations) and opposition parties in the coming months. Since the nature of the austerity package is not yet known, they have not yet been incorporated into our forecast. A further increase in taxes or lower wage growth for civil servants would trigger a further negative adjustment in our consumer spending forecast. Depending on the exact nature of the upcoming austerity measures and the additional austerity announ­ced in other European countries, our GDP forecast of ¾% growth in 2014 will likely be downgraded to between 0% and ½%.

Higher taxes drive up inflation

The impact of the government policies currently in place is clearly visible in the development of inflation rates. Due to the increase in the VAT rate, inflation rose from 2.3% in September to 2.9% in October (figure 9). The insurance premium tax and energy tax were raised in January 2013, causing inflation to remain extremely high (3%). However, derived inflation rate – where Statistics Netherlands adjusts general price trends for product-related taxes and subsidies – has fallen sharply since August. Of the inflation rate of 3% in January, 1.4%-points were accounted for by indirect taxes. Although inflation may fall slightly in the coming months due to the weak economy, the upward pressure on the inflation rate from the VAT hike will continue up to October. Since product-related taxes eventually drop out of the year-on-year comparison of price levels,  the inflation rate is bound to fall sharply in the last quarter of 2013 and first quarter of 2014. On account of this unusual situation, we anticipate a relatively high inflation rate of 2½% for this year, but for 2014 we expect a sharp decline to just 1¼%.

Consumption continues to fall

The contractual wage increase under the Collective Labour Agreement (CAO) was markedly higher in January (1.8%, year-on-year), but was significantly lower than the inflation rate (figure 10), causing real wages to decrease.

Figure 9: Tax hikes cause inflation to increase
Figure 9: Tax hikes cause inflation to increaseSource: Statistics Netherlands
Figure 10: Wage growth lags behind inflation
Figure 10: Wage growth lags behind inflationSource: Statistics Netherlands

Pensioners have suffered an overall loss in purchasing power in recent years because many pension funds did not index their benefits with the inflation rate after the start of the financial crisis. In fact, a number of funds will even be forced to lower pension benefits as of April 2013. The downward trend in private con­sumption volumes continued at an accelerated pace in the second half of 2012. Consumption volume is currently more than 5% below the level right before the crisis.

New housing market measures are also withholding consumers from spending their cash. Since 1 January 2013, Dutch home­buyers are required to repay their mortgage debt on an annuity basis if they wish to claim mortgage interest rate deduction. This results in a reduction of the maximum mortgage amount, which induces homebuyers to save more to be able to refurbish their home. By saving more beforehand and redeeming more during the term of the mortgage, homeowners have less cash available for consumer spending.

Due to the further decline in house prices consumers are faced with negative equity. In nominal terms, house prices have dropped by around 16% since the third quarter of 2008. This has made it progressively more difficult for home owners to increase  their mortgage in order to take advantage of surplus value. Although 2012 saw a minor recovery in the stock markets, it was insufficient to offset previous losses. Besides, part of the recovery had already been lost by the first few months of 2013.

In addition, Dutch consumers are faced with sustained uncertainty regarding the housing market, the pension system and the European debt crisis. This is causing consumers to save more, as they want to have some reserves for tough economic times. This is clearly reflected in consumer confidence, which in February reached its lowest level since 1985 (figure 11). Consumption is expected to contract further. In 2013, private consumption will decline by an average estimated 2%, followed by a slightly smaller decline in 2014 (¼%).

Figure 11: Consumer confidence at record low

Figure 11: Consumer confidence at record low

Source: Statistics Netherlands 

Conclusion

The Dutch economy sunk back into a recession in the second half of 2012. Unemployment and the number of bankruptcies reached high levels as 2012 progressed, and a further increase until 2014 is probable.

Lacklustre domestic dynamics are undermining the economy and will improve only gradually over the next two years. As a result, the economy will remain dependent on international trade in the coming years (figure 12). The economic growth expected for 2014 will be driven mainly by the increase in world trade growth. However, the additional austerity measures planned are certain to compromise this growth. This is compounded by the significant uncertainty about our economic outlook. Weak global economic growth could soon dim the only bright spark for the Dutch economy. In the section Global economic outlook elsewhere in this Economic Quarterly, we address the main uncertainties in the European and global economies.

Figure 12: Dependence on trade increases
Figure 12: Dependence on trade increasesSource: Niesr, Rabobank
Table 1: Netherlands key figures
Table 1: Netherlands key figuresSource: Reuters EcoWin, Rabobank

The Dutch government does not have much control over the weak economic conditions in large parts of the global economy and in Europe, nor can it provide support insofar as consumption is held back by households paying down debt. As we previously argued in Special 12/07 Tijd voor echt trendmatig begrotingsbeleid (only available in Dutch)and Special 13/04 Mind the fiscal speed limit, a slower pace of austerity, more gradual increases in taxes, and greater emphasis on measures designed to increase the economy’s long-term growth potential and improve the government’s budget balance, would be desirable ingredients to kick start economic growth and employment.

This is a translation of a part of the Dutch version of the Economic Quarterly.

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Author(s)
Theo Smid
Rabobank KEO
+31 30 21 62666
Tim Legierse
RaboResearch Netherlands Rabobank KEO
+31 88 726 7864

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