RaboResearch - Economic Research

A slightly better outlook

Economic Quarterly Report

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The Dutch economy remained in recession in the second quarter of 2013. We expect export growth to pick up in the coming quarters. However, low domestic spending will hold economic recovery back.

Recession continues in the first half of 2013

Dutch GDP volume fell 0.2% in the second quarter of 2013 compared to the previous quarter (figure 1). With the exception of the second quarter of 2012, the Dutch economy has been two years in recession. Partly because of this, GDP per capita is still 6.5% lower than at the beginning of 2008 and is now at its lowest level since the beginning of 2006.

Economic activity contracted by a smaller degree in the second quarter com­pared to previous quarters. The volume of business investment rose again for the first time in over a year and the contraction in housing investment was considerably smaller than in recent quarters. Government spending also fell less rapidly. The decline in private consumption on the other hand was much more serious. This was due to high gas consumption in the cold first quarter of the year. This mitigated the decline in consumption volume in that quarter, but was followed by a particularly sharp fall in the second quarter.

Exports of goods and services rose by 0.4% in the second quarter, a slightly higher growth than the 0.1% increase in the first quarter, but still very weak in historical terms. Moreover, there has been no increase in the export of goods produced in the Netherlands since mid-2011 (figure 2). The growth of exports is mainly driven by re-exports and to a lesser extent by the export of services. Since the contribution of re-exports to GDP growth is limited, net international trade has provided relatively little support for the Dutch economy in recent quarters.

Figure 1: GDP volume and spending components
Figure 1: GDP volume and spending componentsSource: Statistics Netherlands
Figure 2: Export volume by type
Figure 2: Export volume by type Source: Statistics Netherlands

Better outlook for exports

The outlook for exports has improved. Our major trading partners achieved relatively high economic growth in the second quarter. Sentiment ­indicators point to an acceleration of growth in the second half of the year, especially in the US and the UK (figure 3). We expect these countries to see significantly higher growth next year compared to this year and last year. Although there will only be tentative growth in Europe, this represents an improvement compared to the period of recession that is behind us. See the article on United Kingdom for a detailed forecast of this country.

Although we are accustomed to the list of our major export markets to consist of Germany, Belgium, France, UK, Italy, US in that order, a new data set from the Organisation for Economic Cooperation and Development (OECD) has put this assumption in a different light. The familiar list shows the share of exports of goods. However, an increasing share of our goods exports consists of re-exports, whereby imported goods are re-exported after limited processing. The fact that this processing is limited means that the value added of these products for the Netherlands is small and their contribution to Dutch GDP volume is also low. The Trade In Value Added (TIVA) database of the OECD shows the share of our trading partners in the export of value added created in the Netherlands. As a result, countries which are mainly important for re-exports decrease in relative importance and other countries increase in importance. After adjusting for value added, Germany is still the most important export market, but the UK and the US improve in rank and take a second and third place (figure 4). These three countries account for nearly one third of total Dutch exports of value added. After two years of stagnation, the export of domestically produced goods is expected to increase again due to higher export growth to these countries.

Figure 3: Improving sentiment trading partners
Figure 3: Improving sentiment trading partnersSource: Reuters EcoWin
Figure 4: Export share trading partners
Figure 4: Export share trading partnersSource: OECD

Investments remain weak

The expected recovery of exports will be most noticeable in the manufacturing industry, which depends for a large part on foreign demand. The cautious rise in producer confidence up until the end of July, reflecting a positive view on order receipts for the first time in months, supports this expectation. Capacity utilisation somewhat recovered in the second quarter from the very low level in the first quarter, but remains at a historically low level (figure 5). Capacity utilisation will rise as a result of the higher production that follows from an acceleration in export growth. In domestically oriented sectors, however, capacity utilisation will remain low. On balance, we expect the volume of business investment to show cautious growth next year. Although we expect sales of existing residential property to stabilise in the second half of this year, we do not expect housing investment to pick up immediately. Next year, we expect to see a further decline in housing investment, meaning that after a very sharp contraction this year, total private investment will only slightly increase at best next year.

Private consumption declines further

The volume of household consumption has contracted sharply in the last two years. In 2011 and 2012 together, the decline coincided with a fall in household real disposable income. The main reason for the decline in real disposable income is the fall in the real hourly wage (figure 6). Wage growth was substan­tially lower than the inflation rate in both 2011 and 2012. This was exacerbated by the fall in employment in 2012. Disposable income will fall this year, as it did in 2012, due to falling real wages, a decline in employment and higher direct taxes. We also expect a further decline of private consumption next year, although across the board the negative factors will be less severe than they were this year and in 2012.

Figure 5: Capacity utilisation in manufacturing
Figure 5: Capacity utilisation in manufacturingSource: Statistics Netherlands
Figure 6: Real household disposable income
Figure 6: Real household disposable incomeSource: Statistics Netherlands, Rabobank

Unemployment rises further

The unemployment rate rose further in the first half of the year, from 6% in January to 7% in July 2013. Such a rapid increase in a period of six months has not occurred in the past 30 years. Contrary to the situation in 2011 and the first half of 2012, when the rise in unemployment was mainly driven by an increase in labour supply, the rise in unemployment in the past year was mainly due to a fall in employment that is broadly distributed across all sectors (figure 7). Since we expect to see an end to the recession towards the end of this year but no return to sufficient economic growth thereafter, we expect employment to fall further. The decline will, however, be less than that seen this year and in 2012. Together with a small increase in labour supply, this is expected to lead to a further rise in unemployment to an average of 6.75% this year and 7.5% next year.

Inflation will decline sharply

The inflation rate rose to 3.1% in July. Prices were pushed up by higher oil prices in 2011. The high inflation rate since then is the result of government policy. The VAT increase in October 2012 and the increase in the insurance and energy taxes in January 2013 are responsible for inflation being 1.4%-points higher than it otherwise would have been. Housing corporations were allowed this year to increase rents by more than the inflation rate for higher incomes. Due to this policy change rents increased by more than they did in previous years. The rent increases added 0.3%-points to the inflation rate in July. As the wage increase is lagging behind inflation since 2011, wages have been declining in real terms for years (figure 8). But from October, the inflation rate will fall sharply when the upward effect of the VAT increase disappears. This means that the decline in the real hourly wage next year will be significantly smaller than this year.

Figure 7: Employment by sector
Figure 7: Employment by sectorSource: Statistics Netherlands
Figure 8: Inflation and wage growth
Figure 8: Inflation and wage growthSource: Statistics Netherlands

Consumers still cautious

Although the decline in real disposable income is expected to be less in 2014 compared to this and last year, we expect to see a relatively large decline in household consumption again next year. The decline in consumption was limited last year because gross household savings fell. This year as well, it would seem that the macro-economic savings will decline further. This is partly because of the high volume of consumption in the first quarter due to high gas consumption. This is not paid for until later, so that spending in relation to disposable income has remained high. The fall in disposable income this year and last year is therefore expected to lead to a further fall in consumption in coming years. In addition, the previous fall in house prices and the fact that the amount of pension is less certain than was previously thought will mean that the savings rate will rise next year. Lastly, uncertainty regarding government cuts and tax increases is currently still high, and this is preventing a recovery of confidence and is holding consumption back.

Heavy cuts in government spending

Government spending volume fell further in the past three quarters after a sharp decline in the second half of 2011. Total spending has dropped by 2.6% since the beginning of 2011. This has been achieved by means of a 7% fall in collective consumption and a decline of 12.6% in government investment. Individual government consumption, the majority of which concerns health care, rose by 2.3% over this period. The increase in this spending was, however, significantly lower last year than in the past (figure 9). Impressive progress has thus already been made in cutting government spending. Apart from recent years, the only instance of a cut in government spending since 1978 was in 2003. In addition, a large package of higher taxation and social insurance contributions has been introduced. The fact that the government’s budget deficit has not been reduced at the desired rate is not therefore due to a lack of government action. Because of disappointing economic activity, which can partly be attributed to government policy in the Netherlands and in many other European countries, the austerity measures did not have the desired effect.

Measures already taken and additional measures that will be presented on Budget Day will imply that government spending will continue to fall both this year and the next. In our economic forecasts, we are assuming that the EUR 6 billion in measures already announced to reduce the budget deficit in 2014 will actually appear in the budget on Budget Day. Since we are already taking this into account, our prediction for GDP growth in 2014 is lower than the forecast provided by the Netherlands Bureau for Economic Policy Analysis (CPB) and the Dutch Central Bank (DNB).

Figure 9: Government spending by type
Figure 9: Government spending by typeBron: Statistics Netherlands
Table 1: Key figures The Netherlands
Table 1: Key figures The NetherlandsBron: Statistics Netherlands, Rabobank

Conclusion

The economic outlook for important trading partners is positive. This means that export growth will provide stronger support to the Dutch economy in the second half of this year and in 2014. Based on this we expect the Dutch economy to emerge from recession in the second half of this year. Although a small and open economy as the Netherlands is highly dependent on exports, 70% of economic activity is still determined by domestic spending. Recovery based on export growth alone is not possible. Robust economic recovery will not take place if household disposable income does not increase. And, because domestic spending will decline further, a return to economic growth is not expected to occur before mid-2014. This means that unemploy­ment will rise further and that the number of bankruptcies will remain at a high level.

As in past years, our predictions are subject to a high level of uncertainty. It is also uncertain whether there will be a pick-up in economic growth among our trading partners. A further escalation of the European debt crisis could push the economy of the Eurozone back into recession. In the United States, uncertainty regarding government policy due to the lack of unity between Democrats and Republicans could lead to a lower growth rate. The reduction of monetary stimulus by the US Federal Reserve could exert further downward pressure on economic growth in emerging markets. The effect of negative developments abroad or in relation to the European debt crisis could put consumer confidence in the Netherlands under further pressure. Confidence could also be undermined by additional uncertainty regarding government policy, if the government has difficulty in getting its proposals through the Senate. On the other hand, positive developments in the global economy and stabilisation on the housing market could lead to a recovery of confidence. This could lead to a more positive development in domestic spending than we currently expect. 

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

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

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