The Netherlands: signs of stabilisation
The Dutch economy is showing signs of stabilisation in some segments. We expect the recession to end in the second half of this year. But a robust economic recovery is not in the cards yet.
Better export outlook, domestic demand remains weak
Manufacturing production grew 0.8% m-o-m in July after 0.3% growth in June. Momentum as measured by the growth rate of the three month average was still rather modest at 0.5% (figure 1). But the rise of producer confidence in August and the sharp rise of the manufacturing PMI in both August and September suggest that output grew further in those months, which would lead to a relatively strong quarterly growth rate for 13Q3. At the same time, total industrial production will probably contract in 13Q3. Mining and energy production will be held back due to a normalization of gas consumption from the elevated level in the relatively cold first half of the year. As a result, the end of recession may be postponed to the last quarter of the year.
The positive developments in the manufacturing industry are tightly linked to improving economic sentiment in important export markets. At the same time, producer confidence is still rather depressed in the services and construction sectors (figure 2). Consumer confidence is also still very low, despite having improved somewhat since the start of the year. We expect domestic demand to continue on its downward trend. As a result, the end of recession will not be followed by robust economic growth.
Unemployment takes a breather, housing market seems to stabilise
After an unrelenting rise over the past year, the unemployment rate (ILO/Eurostat definition) held at 7% in August (figure 3). Positively, was due to a rise in employment for the first time in 9 months. Statistics Netherlands (CBS) suggested that the very good summer weather in August has boosted employment in food and accommodation services by more than the usual seasonal peak. Given the on-going weakness in the overall economy we expect this to be have been a temporary break in the upward trend of the unemployment rate. Although we expect an end to the recession before the end of the year, we do not foresee a significant pickup in economic growth. Therefore, the unemployment rate will continue to rise well into 2014.
In August, the number of existing home sales rose for the second month in a row (both the actual series as our own seasonally adjusted one). House prices similarly increased for two consecutive months. The latest figures for existing home sales support our expectation that the number of transactions will find a bottom this year (figure 4). We expect this stabilisation to be confirmed by the incoming data in the months to come and for stabilisation of house prices to follow next year.
Additional austerity does not bring the deficit to below 3%
The government budget deficit narrowed to 2.5% of GDP in the four quarters to 13Q2 (figure 5). One-off revenues from telecom frequency auctions and elevated revenues from natural gas sales explain this favourable outcome. The volatile nature of some income and expenditure components also means that these figures cannot be taken as guidance on the annual deficit for 2013. In line with the CPB Netherlands Bureau for Economic Policy Analysis, we expect the full year deficit for this year to be 3.2% of GDP. The CPB expects the 2014 Budget, which was presented on September 17 and included EUR 6bn worth of additional measures as requested by the European Commission, to result in a 3.3% deficit in 2014. Given our somewhat less optimistic take on the economy for next year, we expect the 2014 deficit to be higher than that and by extension we think that there is a serious risk that an additional austerity package will be required next year to attain the 2.8%-GDP deficit currently projected for 2015. As such, the risk of a continued negative feedback-loop between austerity and economic growth remains high.