The Netherlands: 2014 starts on a positive note

Economic Update

February 05, 2014, by Leontine Treur

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Sentiment indicators for January point to continued economic growth at the start of 2014. Both consumer and producer confidence have improved substantially from the second half of 2013 onwards, and are now close to their historical average.

Our recently created Business Cycle Indicator points to a continued upswing in the first months of 2014 (figure 1).

Households see silver lining

In January, consumer confidence rose for the fourth consecutive month. The index is now at -12 versus a long term average of -7.4. This improvement has been primarily driven by a more positive assessment of the general economic outlook. Households have also become less pessimistic about their own personal financial situation in the year ahead.

For 2014, we expect a lower inflation rate of around 1%, because base effects from various indirect taxes that were introduced in October 2012 and January 2013 have dropped out of the y-o-y comparison of the price level. Low levels of inflation will bring an end to the sharp fall in real wages that occurred over the past years, as inflation outpaced nominal wage growth (figure 2). A temporary reduction of the income tax rate will further support household’s purchasing power. While unemployment rose from 6.9% to 7% (Eurostat/ILO definition) in December, unemployment was roughly flat during the second half of 2013, after a rather steep increase in the preceding two years. Although we expect that unemployment will rise further in 2014, this stabilisation has contributed to the rise in consumer sentiment.

For the first time in 2.5 years, the household consumption volume did not show a y-o-y decline, but grew by 0.2% y-o-y in November. According to our own seasonally adjusted series, the 3m/3m momentum is now at exactly 0.0, which is better than we had anticipated. That said, these positive results are largely driven by a temporary increase in car sales, in anticipation of a tax hike in 2014. We expect that household consumption will continue to decline in 2014, but at a slower pace than in 2013.

Figure 1: Rabobank Business Cycle Indicator

Housing market shows signs of recovery

Sentiment is also supported by developments in the housing market, where existing home sales rose significantly while prices remained flat in second half of 2013 (figure 3). These developments are also somewhat more positive than we had anticipated. We think that the trough in terms of transactions has been reached, and that prices will bottom out in the course of 2014.

In 2013, household saving deposits grew by only € 2.2 bn (figure 4). We believe these lower savings did not translate into higher consumption but rather see it as a sign of balance sheet reduction by households. Mortgage redemptions were significantly higher than in previous years, and total outstanding mortgage debt declined by approximately € 10 bln. Redemptions are driven by low interest rates on savings accounts, as well as a range of tax incentives, such as the temporary increase in the tax break for gifts, if used for house purchase or mortgage redemption. These factors will probably lead to high redemptions in 2014 as well. In general, deleveraging by households is one of the reasons that we foresee a further contraction in private consumer spending.

Figure 4: Annual increase in household deposits and mortgage debt

Exports and manufacturing are growing

The export volume of goods grew 2.8% m-o-m in November, after increasing by 1.1 % in October. The recent upswing in trade fits well with the acceleration in world trade, and is reflected in the high level of the Dutch manufacturing PMI, which still stood at 54.8 in January, after having reached 57 in December.

Up to November, manufacturing production has continued to grow at a more moderate pace (figure 5). So despite the strong increase in PMI, these numbers point to a gradual recovery rather than a sharp improvement in manufacturing. The high level of the PMI still offers hope for a sharper pickup in manufacturing growth in 14Q1 though.