RaboResearch - Economic Research

The Netherlands: economy picks up more strongly than expected

Economic Quarterly Report

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The Dutch economy emerged from recession earlier and with stronger growth figures than we had expected in mid-2013. According to the latest figures from Statistics Netherlands (CBS), there was growth in real gross domestic product, (GDP) already in the second quarter and the growth rate accelerated in the third and fourth quarters. Economic activity actually increased by 0.7% on a quarterly basis in the fourth quarter of 2013 (figure 1).

This study can be downloaded here as a pdf-file.

Strong growth

Much of the strong growth in the fourth quarter was due to very high car sales as a result of changing CO2 limits for the addition to taxable income for drivers of company lease cars and the tax on passenger vehicles and motorcycles (BPM). This caused a surge in business investment. Household consumption also rose slightly, thanks to higher car sales in the last quarter. We estimate that without this effect, GDP volume growth would have been around 0.3%.

Figure 1: Strong economy in the fourth quarter
Figure 1: Strong economy in the fourth quarterSource: Statistics Netherlands (CBS)

We expect household investment and consumption to decline in the first quarter due to lower car sales. Gas consumption will also be low, due to the very mild winter. Investment in buildings and infrastructure on the other hand could be higher, since the construction industry has been able to continue working longer than during normal winters due to the absence of frost. On balance, we expect to see a small decline in the volume of GDP in the first quarter of 2014, with modest economic growth over the rest of the year. We expect a 1% rise in economic activity in 2014 compared to the previous year, with an acceleration of growth to 1½% in 2015 as a result of improving domestic dynamics.

Exports benefit from stronger European growth

The growth in exports was disappointing last year. Exports increased by only 1.1% compared to 2012, which was significantly less than the 3.2% growth in 2012. Export volume declined in the second half of 2013, even on a quarterly basis. The weak development of exports is difficult to reconcile with the accelerating growth in the manufacturing industry and the rising economic growth in key export markets. We expect exports to increase this year, on the back of the return of economic growth in the eurozone and at important trading partners for the Netherlands such as the United Kingdom and the United States.

We expect exports to be supported by a weaker euro against the dollar in 2014 and 2015. The competitive position will be further strengthened because employment will grow less rapidly than production this and the next year, reducing the rise in unit labour costs. This year we expect to see a rise in export growth to 2¾%, followed by further growth in 2015 as a result of improving economic conditions in the eurozone and a weaker euro, bringing export growth next year to 5¼%.

Increase in investment not solely due to car sales

There was exceptionally high growth in investment in the fourth quarter, driven mainly by a nearly 80% increase in investment in vehicles compared to the previous quarter (figure 2). As mentioned above, this increase was due to a one-off boost in car sales. However, investment growth was more broad-based. The volume of investment in housing and machinery and computers also rose in the second half of 2013. Capacity utilisation in the manufacturing industry also increased gradually last year, accompanied by a clear rise in producer confidence. Businesses in the export-oriented sectors such as the manufacturing industry expect to see higher investment compared to last year due to the improved outlook.

Business investment will rise further in the course of 2014 on the back of higher export growth. The cautious recovery in housing investment will also continue, in line with the expected slight increase in home sales (see the Dutch Housing Market Quarterly). On balance, the volume of private investment will increase by 2¾% in 2014, and will continue to rise to 4% in 2015, especially since domestic spending will also pick up in line with the improved outlook for exports.

Figure 2: Boost to investment from car sales
Figure 2: Boost to investment from car salesSource: Statistics Netherlands (CBS)

Contraction in employment continues

The labour market is as yet showing little sign that the recession has ended. 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 main contribution to the fall in employment last year came from non-commercial services, with a large number of jobs disappearing mainly in the health and welfare sector (figure 3). The job losses were mostly in home care and child care, with jobs disappearing in home care as a result of the government transferring this task to municipalities and then cutting the budget. Although the deepest cuts will not take effect until 2015, many municipalities are already trimming their budgets. In child care, there was a substantial fall in demand due to a cut in the child care allowance and the high unemployment. Government policy thus has a significant effect on the labour market.

Many of those who lost their jobs in health care were women. Recent data shows that at least a proportion of these women are withdrawing from the labour market (the discouraged worker effect) and are not registered as unemployed. A sharp decline in employment in the second half of 2013 was thus accompanied by a stable unemployment rate. The business survey conducted by Statistics Netherlands also showed that business owners in other sectors also expected the size of their workforce to decline further. This will mean a further contraction in employment in 2014. We expect unemployment to rise to an average of 7¼% of the working population this year. Employment will rise again slightly next year, although the labour supply is also expected to rise. The unemployment rate will therefore fall only to a limited extent next year and will average at 7¼%.

A fall in employment while economic growth is already picking up is not particularly special. In the initial phase of recovery, employers usually strive to bring productivity up to a certain level before they hire new employees. In many sectors, productivity is currently lower or only slightly higher than it was at the beginning of 2008 (figure 4). Hence we can initially expect to see a period of jobless growth. According to our forecast employment will rise slightly in 2015, but will remain well below its level at the beginning of 2008.

Figure 3: Sharp contraction in employment
Figure 3: Sharp contraction in employmentSource: Statistics Netherlands (CBS)
Figure 4: Labour productivity still very low
Figure 4: Labour productivity still very lowSource: Statistics Netherlands (CBS)

Private consumption is falling further

The volume of private consumption fell sharply again in 2013. However, since real disposable incomes also contracted sharply, the process of paying down private debt made little headway. At the same time, a significant proportion of home-owning households face a situation of negative equity, with a mortgage debt that is higher than the value of their home. An increasing number of households use their savings to reduce their mortgages. Partly as a result of this, the total amount of outstanding mortgages declined in 2013 for the first time in decades. This ‘balance sheet reduction’ by home owners appears to be the result of the low interest rate paid on savings and various tax incentives (see the Dutch Housing Market Quarterly).

Real disposable incomes will fall slightly this year, mainly due to a further decline in employment. For those with jobs, purchasing power will increase for the first time in years. In collaboration with the opposition, the government has taken a number of measures that will positively affect incomes, such as the reduction in the income tax threshold for the lowest tax bracket as of 1 January 2014. Moreover, the pension funds are in a better state now than they were a year ago. A number of large pension funds announced at the beginning of 2014 that they would no longer be forced to curtail pension benefits, or could even actually increase the level of benefit in some cases. Many funds have also reduced the level of premiums. Another factor this year will be an end to the heavy decline in real wages as a result of low inflation.

Consumer sentiment has clearly become less pessimistic in the past few months (figure 5). So, there are several factors that indicate an improvement: the worst of the decline in house prices seems to be over, unemployment will rise only to a limited extent and there is more certainty with respect to government policy. We therefore expect the contraction in private consumption to ease in the course of 2014. However, since some households will use some of their greater purchasing power to pay off debt or to accumulate capital, we still expect a further significant fall in the volume of private consumption this year of 1%. The increase in consumption will also lag behind the development of real disposable income next year. Growth in private consumption in 2015 will only amount to ¼%.

Figure 5: Consumers become less pessimistic
Figure 5: Consumers become less pessimisticSource: Statistics Netherlands (CBS)

Government budget improves

Thanks to the one-off income from the 4G telecom auction, last year’s budget deficit fell below 3% of GDP. This year, we expect a deficit of around 3%. While the deficit may slightly exceed 3% this year, with its package of additional spending cuts of 6 billion euros the Netherlands will meet the requirements of the European Commission’s Excessive Deficit Procedure. The Netherlands is thus not expected to be fined this year and we will be given an extra year to reduce the deficit to below 3% of GDP. In 2015, the deficit will probably amount to 2¼% of GDP, meaning that an additional austerity package is off the table.

Economic recovery in perspective

The effects of the deep and lengthy recession in the past years have been a serious burden. The cautious pick-up in economic growth is only a small step in the process of repairing the damage that has been done. The size of the economy is not expected to have returned to its pre-crisis level by the end of next year (figure 6). The unemployment rate will still be around its current high level at that time.

The downside risks for the Dutch economy are however lower than they were two years ago. A return of the euro crisis has become much less likely. Furthermore, the government has succeeded in implementing a number of important reforms with support of part of the opposition. This has reduced uncertainty in a number of policy areas such as social security and the housing market. The housing market has stabilised in the past six months and pension funds now have better funding ratios than they did a year ago. The worst of the government cuts and tax increases appears to be over. Apart from unexpected external shocks, it is now much less likely that the Dutch economy will re-enter recession.

The strong rise in consumer confidence last year actually raises the prospect of stronger economic growth than we currently expect. We are assuming that household deleveraging will continue to slow down consumption for the time being. The necessity of debt reduction is concentrated in particular groups, mainly young home-owning households. Collectively however, Dutch households have significant financial assets. And although some of these assets are not freely available because they are tied up in houses and pension funds, there are a substantial number of households that will be able to increase their consumption by drawing down their capital. If they, supported by the rise in confidence, increase their spending, this can to some extent offset the negative effect from deleveraging. For example, if the savings ratio were to remain constant, the contraction in consumption would be only ½% instead of 1% this year, and consumption growth in 2015 could amount to 1% rather than ¼%.

Figure 6: Economy recovers further
Figure 6: Economy recovers furtherSource: Statistics Netherlands (CBS)
Table 1: Key figures The Netherlands
Table 1: Key figures The NetherlandsSource: Statistics Netherlands (CBS)

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

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