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Dutch economy still in recession

Economic Comment

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At 0.1%, the contraction of Dutch GDP in the first quarter of 2013 was relatively modest. But the fact that economic activity fell, in spite of a considerable boost to output provided by ele­vated gas consumption due to a cold first quarter, shows that underlying economic activity was very weak.

The Dutch GDP volume fell by 0.1% q-o-q in the first quarter of 2013 (figure 1), making the current recession enter its third quarter. Based on industrial production figures up to March, which showed very strong growth due to mining and energy output, we would not have been surprised to see GDP post a small gain in 13Q1. The strong growth of total industrial production (manufacturing contracted sharply) was due to elevated gas production on the back of an unseasonably cold first quarter. This effect was also visible in today’s GDP release. Household consumption rose 0.4% on the quarter. We know from the monthly data that this growth was certainly not due to retail- and car sales. Higher gas consumption has boosted consumer spending. Until we get additional figures on consumption, it is very hard to estimate the impact of the cold weather. But without the positive push from gas consumption, household spending would probably have continued its downward path. Apart from private consumption, other domestic demand components sustained their decline. The unrelenting economic weakness is clearly visible in the 5.8% q-o-q contraction of business investment. Fiscal austerity resulted in a rather large 1.7% q-o-q fall in government spending.

Exports of goods and services grew 1% q-o-q. Although that is a somewhat lower growth than 12Q4’s 1.5% rise, it compares favourably to many other European countries, which saw their export volume fall. With imports falling by 1.3% q-o-q, net exports contributed a whopping 1.8% to GDP growth. We do note that the cold first quarter may also have had a positive impact on the export of natural gas. In that case, the underlying growth of exports was probably weaker than the growth figure suggests, much as it has been the case for private consumption.

With household consumption and perhaps also exports having been temporarily boosted amid the cold weather, economic activity in 13Q1 was weaker than the 0.1% contraction suggests.

Figure 1: Recession continues
Figure 1: Recession continuesBron: Statistics Netherlands (CBS)
Figure 2: Unemployment keeps rising
Figure 2: Unemployment keeps risingBron: Statistics Netherlands (CBS)

In the second quarter, gas production will probably fall back from its elevated level, which will have an adverse effect on GDP. Dutch consumer- and producer confidence has remained very weak up to and including April. Together with falling real wages, rising unemployment, a low capacity utilisation rate in the manufacturing sector and ongoing government austerity, there is every reason to expect a further decline in domestic demand.

As for external demand, sentiment indicators have fallen in both March and April in Germany and Belgium. Up to now, any pick-up in Chinese economic growth is still not forthcoming and the US is coping with lower economic growth due to government spending cuts. All of this does not bode well for export growth in the second quarter. As a result, the Dutch economy will likely remain in recession in 13Q2 as well. If so, economic activity in the first half of the year will have been weaker than we have anticipated.

The recession has pushed up unemployment considerably in the past months. In April, the number of unemployed rose to 6.5% of the labour force (figure 2). And although the month-on-month rise of the unemployment rate moderated to a 0.1%-point increase, the fall in employment actually accelerated relative to the previous month. The slower rise in the unemployment rate was thanks to a fall in the labour force.

The Netherlands Bureau for Economic Policy Analysis (CPB) forecast an average unemployment rate of 6¼ in 2013. With this rate having been surpassed already in March and a further rise over the coming months being very likely, the CPB will probably revise this forecast upward. Our analysis of the economic weakness in the first half of the year shows that downward revisions to GDP forecasts are more likely than upward revisions. And although higher gas production might have a positive effect on this year’s government budget deficit, it will not change the structural government balance or next year’s deficit projections. As such, the EUR 4.3bn in additional budgetary consolidation for 2014 that have been put on hold in the hope that the CPB will have more positive economic forecasts, which form the background for the 2014 Budget, will probably need to be implemented after all. 

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Author(s)
Tim Legierse
RaboResearch Netherlands Rabobank KEO
+31 88 726 7864

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