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The Netherlands: freeze or thaw?

Economic Update

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In recent weeks, the Netherlands has been greatly occupied by the predictions of Klaas Knot. Has the economy grown or contracted in the third quarter? Based on the data currently available, no clear conclusion can be drawn.

'The Knot feeling'

In recent weeks, the Netherlands has been engrossed by the so-called 'Knot feeling'. In early October, the President of the Dutch Central Bank, Klaas Knot, stated that he had the feeling that the Netherlands was out of recession - despite the fact that hard data were lacking. We likewise expect the country to have left the recession behind in the second half of 2013, but we question whether this is already the case in the third quarter. We shall know the answer on 14 No­vem­ber, when Statistics Netherlands (CBS) releases its flash estimate of economic growth in the third quarter. No unequivocal conclusion can be drawn on the basis of the data currently available. The data show a mixed picture - which is usually the case at the point of a cyclical turnaround.

Knot's prediction is chiefly based on sentiment indicators. Producer confidence in the manufacturing industry showed considerable improvement in recent months (Figure 1). In October it reached the highest level in over two years. The purchasing managers index (PMI) likewise improved strongly in recent months, reaching 54.4 in October, with a number over 50 indicating growing production. However, the improved sentiment is not yet visible in output or trade figures. In August, production in Dutch manufacturing declined by 1.7% (m-o-m). Momentum, also known as 3 month-on-3 month growth, amounted to only 0.4% which was distinctly disappointing. Total industrial production, which besides manufacturing, also encompasses mining and energy production, rose by 2.3% in August. However, momentum is clearly negative, at -4.2%. This is partly due to a sharp drop in gas consumption. In August export momentum was 0.1%, and import momentum was -1.1%. We expect that better sentiment among producers will become visible in the headline GDP figure in 13Q4 at the earliest.

Table 1: Key Data, The Netherlands
Table 1: Key Data, The Netherlands Source: Rabobank
Figure 1: Producer confidence rising
Figure 1: Producer confidence risingSource: CBS (Statistics Netherlands)

Consumer confidence flatters to deceive

In recent months, consumers have likewise become less pessimistic. In October, the confidence indicator reached -27 (Figure 2). Despite the improvement, it remains a low level. As is the case with producer confidence, the improved consumer confidence is not reflected in hard economic data. In August, private consumption fell again by 0.5% (m-o-m) - based on our own seasonal adjustment. Momentum was likewise negative, registering -0.9% (Figure 3). Despite the less negative sentiment, we do not expect consumption to pick up in the coming quarters. Disposable income continues to decline, and notwithstanding a rise in the number of houses sold and a first positive change to the three-month average of the house price index in September, a true recovery of house prices is likely to be some way off. The volume of consumer spending will therefore remain under pressure.

Figure 2: Consumers less pessimistic
Figure 2: Consumers less pessimisticSource: CBS
Figure 3: Consumption still declining
Figure 3: Consumption still decliningSource: CBS, Rabobank

Labour market situation not yet stable

In  recent months, there has been little or no change in the situation on the labour market. In September, unemployment was running at 7% of the working population, according to the international definition (Figure 4). However, in our view, this is not a sign that the labour market is stabilising. Although the number of corporate bankruptcies in recent years is considerably lower than in the first half of the year, the overall level remains high (Figure 5). The decline in bankruptcies fits with the picture of less negative economic developments in the third quarter of 2013 and a possible end to the recession. However, a robust economic rebound can be ruled out for the time being, with the number of bankruptcies remaining high. Companies will want to continue to reduce costs, leading to fewer job opportunities, and an expected further rise in unemployment.

Figure 4: Unemployment not rising for the moment
Figure 4: Unemployment not rising for the momentSource: CBS
Figure 5: Bankruptcies remain high
Figure 5: Bankruptcies remain highSource: CBS
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