The Netherlands: Strong end to 2013
Economic growth appears to have accelerated in the last quarter of 2013. But we still expect economic growth in 2014 to be very subdued. Inflation remains on a downward trend.
Good last quarter of 2013
The available information for the last quarter of 2013 points to relatively favourable economic developments. Both the manufacturing producer confidence index of Statistics Netherlands and the PMI manufacturing continued to improve in December. These indices point to a significant acceleration of manufacturing production growth in 13Q4. The sector is benefitting from higher economic growth in important export markets. In the short term, though, this will not result in employment growth. At the same time that the majority of producers reported a rise in orders in the last months, they have become more pessimistic about the prospects for employment (figure 1).
The last quarter of 2013 has seen a sharp rise in new car sales due to changes in the CO2 levels that determine the amount of taxable income attributed for the private use of company lease cars (figure 2). This has resulted in a frontloading of investments in passenger cars, which will reduce seasonally adjusted car sales in 14Q1. As such, we expect a boost to economic growth in 13Q4 followed by a drag in the first quarter of this year.
For the remainder of 2014, we continue to expect very modest economic growth. Export growth will continue in a relatively robust pace, but a further decline in private consumption will constrain the pace of overall economic growth.
Consumer confidence has improved sharply
Consumers ended the year in much better spirits in 2013 than in the previous two years (figure 3). The reduction in pessimism can be explained by various factors. After four years of declines, household purchasing power is expected to rise, due to a temporary lower income tax rate and higher deductions for lower income households. Next to that, the improvement in the coverage ratio of most pension funds has been sufficient to prevent further cuts in pension income. Sales of existing homes have stabilized in the past quarters. And unemployment fell slightly in November after having remained constant since July (figure 4). Having said that, we do not expect economic growth to be high enough to prevent a further fall in employment over the coming quarters. As a result, the rise in real household disposable income will be lower than the rise in purchasing power (the latter being a static concept assuming an unchanged household and employment situation). Moreover, we expect the previous declines in disposable income and house prices to lead to a further decline in private consumption in 2014.
Inflation keeps falling
Inflation continued to fall in November, to 1.5% (figure 5). In July, price increases still amounted to double that pace. Half of the fall in inflation can be attributed to the one-off price increase that was caused by the VAT hike of October 2012 falling out of the year-on year comparison of the price level. Next to that, gasoline prices have been falling due to lower oil prices and a relatively strong euro versus the US dollar. Recent developments in oil prices and the euro/dollar exchange rate suggest that this effect will continue to keep inflation low at the start of this year, although higher excise taxes will partly mitigate this effect. Similar to the VAT effect in October of last year, inflation will have been pushed down in January of this year due to last year’s increase in energy and insurance taxes. As a result, for the first time in more than three years, inflation is likely to be lower than contractual wage growth this year. The latter has been very subdued due to the high level of unemployment (figure 5).