The Netherlands: Underlying growth continues
After a strong fourth quarter in 2013, first quarter growth in real Gross Domestic Product will likely show a sharp drop. This is due to one-off effects. Otherwise, The Rabobank Business Cycle Indicator points to a positive development in the early months of this year (Figure 1).
Slump in car sales
In the fourth quarter of last year, real GDP rose by 0.9% q-o-q. This strong growth was due to a one-off surge in vehicle sales, as companies and households acted in anticipation of tighter tax regulations from 1 January 2014, relating to taxation on the private use and the purchasing of company all cars. Car sales subsequently slumped in the early months of 2014 (Figure 2). Accordingly, growth in GDP will likely show a sharp drop in the first quarter.
Consumers remain cautious
Consumer confidence improved considerably during the latter months of 2013 and the early months of this year (Figure 3). This is mainly attributable to improved sentiment about the economic situation in general. In April, the sub-indicator ‘economic situation in the next 12 months’ reached its highest level in seven years. Although the sub-indicator ‘willingness to buy’ also showed a slight rise in recent months, consumers remain reluctant when it comes to making large purchases.
Despite the improved confidence, this year we expect to see a further drop in private consumption. In February, consumption rose by 0.4% m-o-m (our own seasonal correction), having dropped by 2.7% in January. Assuming that March consumer spending remained stable, then the contraction in the first quarter would be 1.3% q-o-q. This compares to a rise in household consumption of 0.6% in the fourth quarter of last year. We expect that households will continue to reduce debt or build up savings this year. Although purchasing power will increase slightly again, it will have little impact on higher real disposable household income, as employment will drop further.
On the housing market, both house prices and house sales bottomed out in 2013 (Figure 4). In March this year, the Existing Homes Index (PBK) of Statistics Netherlands/Land Registry was slightly higher than the trough registered in July 2013. The number of existing homes sold also started to rise during the course of last year, continuing into 2014. House sales are picking up thanks to the improved affordability since the peak of house prices in 2008 and the release of pent-up demand triggered by the improved consumer confidence. Although the housing market is showing a tentative recovery, we do not expect to see a strong growth of prices or transaction numbers. Unemployment will rise further slightly this year, and potential negative equity will continue to dampen sales.
Strong momentum in the manufacturing industry
Exports of goods rose by 1% m-o-m in February, following a decline of 1.2% in January. Momentum slipped somewhat, from 2.1% in January to 1.2% in February. The purchasing managers indices (PMI) of the Dutch manufacturing industry and of a number of important trading partners fell slightly in recent months (Figure 5). However, the level remains well over 50, which more or less reflects the difference between growth and contraction in the manufacturing industry.
Despite the slight dip in the Dutch PMI, the momentum of output in the manufacturing industry was clearly higher in the December to February period than in the preceding months. Thus the growth spurt we predicted earlier has finally taken off. However, total industrial production, which also includes energy use and mineral extraction, deteriorated in recent months. This can be largely attributed to reduced gas consumption as a result of the mild winter. As was the case with the contraction in car sales, this effect reduces the level of real GDP in 14Q1.