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The Netherlands: economic growth masks underlying weakness

Economic Update

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A first estimate by CBS Statistics Netherlands indicated the Dutch GDP volume grew by 0.5% over the second quarter of 2014 compared to the previous quarter. Over the past three quarters, high automotive sales (fourth quarter of 2013) and very low gas production (in the warm first quarter of 2014) were the cause of significant fluctuations in the GDP volume. Looking beyond that, we can see limited economic growth over the past four quarters averaging 0.2% per quarter, and for the time being a very limited recovery is taking place. The underlying economic developments are therefore still rather weak. For the rest of the year we expect the GDP volume to show some limited, mostly exports- and investment-driven growth, resulting in an overall growth of ½% for 2014 as a whole. The uncertain geopolitical developments constitute an increasing downside risk in this respect.

Figure 1: GDP recovers from negative growth
Figure 1: GDP recovers from negative growthSource: Statistics Netherlands

Consumers remain reluctant

As a result of the improving housing market and the mild increase in real disposable income, we expect to see limited growth take place in private consumption over the remainder of the year. These developments are likely to continue next year, allowing the growth in consumption to improve and, according to our forecasts, eventually to rise to 1% in 2015. The €1 billion tax relief, which will be announced with the government’s annual budget on 16 September and will likely result in a ¼% increase in purchasing power, will support this.

Since the start of 2013, consumer confidence has increased at an unparalleled pace. The end of the recession, the housing market recovery, the falling unemployment since the start of the year, and the relative quiet spell in policymaking have contributed to this. However, this greater confidence has not yet led to greater private consumption. Over the past 12 months, on balance consumption has stayed at the same level (Figure 2). One hopeful sign, however, is that the consumption of durable goods has risen over that period.

In the light of the ‘reluctant consumer’ and the limited consumption growth, the fall in unemployment is encouraging, particularly as it is mostly due to job growth (Figure 3). Since March 2014, employment has grown by 50,000 people. The increase in vacancies and hours worked in temp jobs over the past four quarters also suggests a labour market recovery. Although the increase in labour supply will slow the fall in unemployment, an increase in employment does mean that more people are in work, and so real disposable income is increasing. Many households are still (partially) using this increase to repay (mortgage) debts and/or to build up savings, but it is also having a positive effect on private consumption.

Figure 2: Consumers still reluctant
Figure 2: Consumer still reluctantSource: Statistics Netherlands
Figure 3: Continued fall in unemployment
Figure 3: Continued fall in unemploymentSource: Statistics Netherlands

Exports still biggest driver of growth

The economic recovery taking place since mid-2013 can mostly be attributed to exports, driven in part by the return of growth to the Eurozone. In this respect, the weakening of growth in the Netherlands’ most important European trading partners is worrying. Although sentiment indicators have weakened in the past months, we expect Eurozone growth to persist over the rest of the year. Together with higher growth in other important export destinations such as the US and the UK, and a greater depreciation of the Euro against the US dollar, this will likely lead to a greater increase in export volume.

The continued political tension between Russia and the West and the resulting economic sanctions constitute a downside risk for exports and the fragile economic recovery. The recent fall in both consumer and producer confidence in the economic situation for the coming period illustrates this (Figure 4). Russia’s imports boycott has a limited effect on Dutch GDP, but it does have major consequences for parts of the agricultural sector, their suppliers and the food processing industry. Additionally, if the conflict escalates and leads to further sanctions, the negative impact on the Dutch economy will increase and threaten the already fragile economic growth.

Figure 4: Confidence falls on Russian sanctions
Figure 4: Falling confidence due to Russian sanctionsSource: Statistics Netherlands
Table 1: Key figures The Netherlands
Table 1: Key figures The NetherlandsSource: Statistics Netherlands, Rabobank
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