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The Netherlands: low oil price and euro exchange rate good for growth

Economic Update

  • Exports and manufacturing output up in November
  • Negative inflation thanks to falling oil prices
  • Decline in unemployment marking time

In 2014, the Dutch economy is likely to have expanded by ¾% compared to the previous year. For 2015 we expect a further acceleration of GDP growth, thanks to rising exports and a positive contribution from consumer spending. The sharply declining inflation rate has boosted real disposable income, supporting consumption growth. Export growth will experience a further tailwind this year from a depreciation of the euro.

Exports boosted by cheaper euro

In November, the volume of Dutch exports rebounded after a dip in October (seasonally adjusted; m-o-m). Thus, momentum (growth of the three-month average) rose to 2% (Figure 1). With the volume of exports remaining unchanged in December, export growth in the fourth quarter was higher than in the previous two quarters. It seems the negative effect on international trade from the unrest in Russia/Ukraine was temporary. Currently, exports are being boosted by the sharp depreciation of the euro in recent months. Because the depreciation is more marked than we had expected, the outlook for exports may now be somewhat more positive than we had forecast to date. Based on a cheaper euro and further growth in our main trading partners, we expect Dutch export growth to expand further in the coming period.

In November, the volume of manufacturing output rose for the second successive month (seasonally adjusted, m-o-m). Output momentum remained stable in November, at 0.6% (Figure 2). It appears that the positive sentiment indicators for the manufacturing industry are at last translating into higher production growth (Figure 2). Going forward, we expect to see further growth in the manufacturing industry. The PMI in January increased to 54.1 from 53.5 in December, which point towards future growth of manufacturing production.

Figure 1: Export growth picking up
Figure 1: Export growth picking upSource: Statistics Netherlands (CBS); computation: Rabobank
Figure 2: Positive sentiment for the manufacturing industry
Figure 2: Positive sentiment for the manufacturing industrySource: CBS, Markit

Inflation negative in December

Inflation in the Netherlands (measured by the European HICP) declined in December from 0.3% to -0.1%. This means that for the first time in five years, we have had deflation. For 2014 as a whole, inflation averaged 0.3%, the lowest annual rate since the HICP was first measured (1997). The deflation in December (HICP) can be virtually entirely explained by the fall in fuel prices (Figure 3), which dropped by 8.4% year-on-year in that month. The lower fuel prices are the result of the sharp decline in oil prices of recent months (Figure 4).

For the coming months, we anticipate a further drop in inflation. Pump prices for fuel will decline further in the early months of 2015, because lower oil prices are always followed with a lag by fuel prices. Moreover, the reduced gas and oil prices (Figure 4) are likely to translate into lower energy prices for households during the course of this year, pushing down inflation further. The extent of the drop in energy prices is expected to be small and somewhat uncertain, partly because gas prices have fallen by relatively little and also because tax on energy for households went up on 1 January 2015.

Owing to the unexpectedly sharp drop in inflation, our current inflation forecast for 2015 is almost certainly too high. For this reason, we intend to adjust to our inflation expectations for 2015 downward to -½% - 0% in our next round of estimates.

The volume of private consumption rose in November for the second successive month (m-o-m). In the last quarter of 2014, consumption growth on a quarterly basis is likely to have been very weak; and in the year as a whole, consumer spending is likely to have remained the same as the previous year. For 2015 we expect to see modest growth in household consumption. Declining inflation will lead to higher real disposable income for households, leaving them with more to spend on a net basis. Moreover, willingness to purchase has remained stable in recent months, despite international tensions. Finally, the recovery on both the housing and the labour markets will contribute to consumption growth in 2015. Because the decline in inflation is more pronounced than anticipated, the growth of consumer spending and accordingly the growth of Gross Domestic Product will probably be higher than we had expected to date. In late February we will publish our new economic forecast.

Figure 3: Further decline in inflation
Figure 3: Further decline in inflationSource: Statistics Netherlands (CBS)
Figure 4: Sharp drop in oil prices
Figure 4: Sharp drop in oil pricesSource: Macrobond, Bloomberg

Decline in unemployment stagnates in second half of 2014

In December, unemployment amounted to 6.7%, compared to 6.5% in November (Eurostat/ILO-definition). In 2014 as a whole, the rate of unemployment averaged 6.8%. After a sharp drop in the first half of last year, unemployment remained relatively unchanged in the second half of the year. The main reason for this is a difference in the development of the labour supply in the two periods. In the first half of 2014, employment decreased, but joblessness also declined because of a sharp drop in the labour supply. In the second half of the year, there were 50,000 more people employed, but the unemployment rate remained unchanged, owing to an even greater rise in the labour supply. In fact, the underlying employment trend was more positive in the past half year than in the first half of 2014.

We expect unemployment to come down this year, thanks to a growing number of jobs; however, a rise in the labour supply will dampen this trend somewhat.

Figure 5: Unemployment up in December
Figure 5: Unemployment up in DecemberSource: Statistics Netherlands (CBS)
Table 1: Key Data, the Netherlands
Table 1: Key Data, the NetherlandsSource: Statistics Netherlands (CBS), Rabobank
Martijn Badir
RaboResearch Netherlands Rabobank KEO
+31 88 726 7864

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