Country Report Netherlands
After two consecutive years of contraction, the Dutch economy is expected to grow again this year and in 2015. Domestic demand will gradually improve, but growth will remain restrained due to deleveraging. The long-term sustainability of government finances has improved due to a number of key reforms. Looking forward, one particular risk is that the unemployment rate remains high once the recovery in jobs sets in (hysteresis), which could be harmful for the long-term productive capacity of the Dutch economy. Furthermore, losses in bank loan portfolios have increased in recent years, particularly for Small and Medium Enterprises (SMEs).
Strengths (+) and weaknesses (-)
(+) Fiscal discipline
The Dutch government has been successful in improving fiscal metrics despite the prolonged economic downturn.
(+) Sizeable current account surplus
The external surplus is high partly because of the strong competitiveness of the Dutch economy.
(-) Limited economic growth
The reduction in private debt is likely to restrain economic growth for a prolonged period.
(-) Deteriorating credit quality
Losses in bank loan portfolios have increased.
1. Economic growth is picking up
After two consecutive years of contraction, the Dutch economy is expected to grow again this year and the next (Figure 1). Exports are expected to pick up on the back of the return of economic growth in the eurozone and accelerating growth in important trading partners such as the United Kingdom and the United States. Domestic demand is expected to improve gradually, although growth will remain constrained due to deleveraging. Economic activity is expected to rise by 1% this year and to accelerate to 1½% in 2015. At the end of the year real GDP will still be slightly below the early 2008 level in our forecast. GDP per capita will still be 3% below the 2008 peak. The economic recovery is unlikely to reduce unemployment this year. We expect unemployment to reach its peak in 2015.
2. Improved public finances
The sizeable austerity measures that have been implemented over the past years are beginning to bear fruit. This year we expect the deficit-to-GDP ratio to reach 3%, although there is a risk that the deficit may come in higher than currently expected, particularly if economic growth were to weaken, but also because this year’s budget contains some temporary revenue measures with uncertain results. However, we do not expect that additional austerity measures will be needed this year, as the deficit is expected to decline to 2¼% of GDP in 2015. The public debt-to-GDP ratio will rise moderately over the next two years. The debt ratio is expected to reach its peak in 2015 at 75% of GDP (note that an announced revision to the GDP data by Statistics Netherlands will pull down this ratio by 4 to 5%-points in July). Long-term fiscal sustainability has improved because the government implemented a number of key reforms with respect to the housing market, labour market and retirement age. Some opposition parties have helped the government to get the reforms through the Senate, where it lacks a majority in its own right.
3. Unemployment rate remains elevated
The unemployment rate has shown a upward trend over the past two and a half years, rising from 4.1% in June 2011 to 7.2% in March this year. Last year the rise in unemployment was almost exclusively caused by job losses. The number of employed persons fell by 122,000 last year, slightly more than the decline in 2009 when the economy entered a deep recession. The largest contribution to the fall in employment came from non-commercial services, particularly the health and welfare sector. We expect the unemployment rate to average 7¼% this year. Employment will rise again slightly next year, but the labour supply is also expected to increase. The unemployment rate will therefore fall only to a limited extent next year and will remain at an average of 7¼% for the year as a whole. The risk is that unemployment remains high even after the recovery in jobs sets in (a phenomenon called hysteresis). Along with the very low level of corporate investment over the past years, this could be harmful for the long-term productive capacity of the Dutch economy.
4. Housing market stabilises
The decline in house prices since 2008 has left around 22% of Dutch home owners, or 950,000 households, with a negative home equity position. The Dutch housing market entered calmer waters in the second half of 2013. Sales of existing homes increased over the last three quarters of 2013 on a quarterly basis. Prices remained unchanged on balance in the second half of last year and the first quarter of 2014. We expect the recovery in sales to continue in 2014, albeit cautiously. Prices are expected to bottom out during the course of this year as confidence is returning and affordability is much improved.
5. Deteriorating credit quality banking sector
Losses in bank loan portfolios have increased in recent years, particularly for Small and Medium Enterprises (SMEs). The percentage of problematic loans is much lower in the mortgage portfolio, although it has increased gradually. Bank exposure to residual mortgage debt is mitigated as approximately half of the home owners with a mortgage that is higher than the value of the house are covered by National Mortgage Insurance.
The Netherlands has an open economy that is highly developed and diversified. It has a sizeable current account surplus (10.9% in 2013). The Dutch economy is very competitive, taking the 8th position in the World Economic Forum 2013-2014 global competitiveness index. Important export destinations are the eurozone (particularly Germany), the United Kingdom and the United States. The Dutch economy was heavily affected by the 2008 global financial crisis. In the aftermath of the financial crisis, the Dutch government has nationalised several banks and recapitalized another major bank. GDP volume contracted by 3.5% in 2009 during the global economic crisis. As a result of the crisis and a fiscal stimulus package, the government deficit deteriorated from 0.5%-GDP in 2008 to 5.6%-GDP in 2009. The debt-to-GDP level was equal to 74% last year (up 29%-points from 2007). The debt ratio is set to rise moderately over the next two years. From 2011 onwards, the government stepped up efforts to reduce its deficit by implementing sizeable austerity measures. Although fiscal consolidation is starting to bear fruit in terms of improving fiscal metrics, austerity has come at a significant cost as illustrated by the elevated unemployment rate. The long-term sustainability of government finances has improved considerably since 2010 when the first steps were taken to raise the statutory retirement age.