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The Netherlands: growth keeps surprising on the upside

Economic Update

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According to the first estimate of Statistics Netherlands (CBS), the Dutch GDP volume increased by 0.7% q-o-q in the fourth quarter of 2013. Also, the quarterly growth rates for the previous two quarters were revised up by 0.1%-point. This has pushed GDP at the start of 2014 to a higher level than we had foreseen. We have therefore revised upwards our growth forecast for this year from 0.5% to 1%. 

Growth in 13Q4 driven by high car sales

Fourth quarter GDP growth was mostly driven by a 8.2% q-o-q increase in business investments (figure 1) as companies made an exceptional high number of car purchases in December 2013 (figure 2). From 1 January 2014, CO2 emission levels that determine the amount of added taxable income for the private use of company lease cars have been lowered. As a result, companies frontloaded car purchases to December. Car sales also pushed up the private consumption volume, which increased by 0.1% q-o-q in the fourth quarter. The export volume declined for the second consecutive quarter. This is hard to explain as manufacturing production has increased over the past three quarters and accelerated in 13Q4. Approximately 70% of manufacturing production is exported. Although the figures do not bear this out, it suggests that producers have increased inventories, anticipating export growth in the near future.

In the first quarter of 2014, business investments and consumption will fall back considerably owing to a strong decline in car sales in January (figure 2). Consumption is also expected to be low in 14Q1 due to relatively very warm weather that will reduce the consumption of natural gas. Against that, this mild winter will have supported infrastructure and building investment. In all, we expect the GDP volume to contract modestly in the first quarter, followed by limited growth in the rest of the year.

Figure 1: GDP growth driven by investments
Figure 1: GDP growth driven by investmentsSource: Statistics Netherlands (CBS)
Figure 2: Car sales drop back sharply
Figure 2: Car sales drop back sharplySource: Reuters EcoWin, Rabobank

Deteriorating labour market and deleveraging hold back consumption

Since August 2007 employment has not been as low as in January 2014. In the same period the labour force increased, causing the unemployment rate to rise to 7.1% in January (figure 3). We expect employment to deteriorate throughout this year, not in the least because government austerity will further reduce employment in health- and personal care. The further decline in employment will lead to yet another year of declining real disposable income, reducing the private consumption volume.

Deleveraging of households forms a second reason that we expect a fall in consumption. Compared to their peak in 2008, house prices have dropped 20%. A part of the households that face negative equity as a result, will try to deleverage by increasing mortgage repayments or by building up savings. Up to now, the sharp decline in disposable income has made this rather hard. Total mortgage debt of Dutch households decreased in 2013 only for the first time since the start of house price declines (figure 4).

Figure 3: Employment at lowest point since August 2007
Figure 3: Employment at lowest point since August 2007Source: Statistics Netherlands (CBS)
Figure 4: Total mortgage debt is stabilising
Figure 4: Total mortgage debt is stabilisingSource: DNB

Room for upside surprises

Although we expect consumption to fall in 2014, there is some room for upside surprises. For those households that are not confronted with employment loss, purchasing power is expected to rise as inflation will be low and the income tax rate for the first bracket has temporarily been lowered. The coverage ratio of most pension funds is restored to levels that prevent additional cuts in pension income. The stabilization of the housing market is proceeding faster than we had anticipated. As a result, consumers ended 2013 in much better spirits than they had started the year. Consumer confidence rose further in January and February of this year (figure 5). In more than 40 years, the 12 month increase of consumer confidence has not been as steep as between February 2013 and February 2014. The effect that this increase in confidence may have on spending forms a bit of a wildcard for our economic projections. 

Figure 5: Consumer confidence improves further
Figure 5: Consumer confidence improves furtherSource: Statistics Netherlands (CBS)
Table 1: Key figures The Netherlands
Table 1: Key figures The NetherlandsSource: Statistics Netherlands (CBS), Rabobank
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