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The Netherlands: domestic demand drives up economic growth

Economic Quarterly Report

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  • The Dutch economy is expected to grow by 2% in 2015 and 2016
  • Exports and domestic demand will ensure that growth is broad-based
  • A possible reduction in taxation could give the economy an additional boost in 2016
  • Unemployment is declining, but remains at a high level

On balance, we expect the Dutch economy to grow by 2% this year and next. The growth will be broad-based; in addition to exports, domestic demand will also make a contribution, driven mainly by private consumption and housing investments. Government spending will not slow growth as it has in recent years. It is even possible that domestic demand could receive an additional boost in the form of lower taxation for private citizens and businesses. Unemployment will fall somewhat less this year, mainly due to an increase in the labour supply.

Steady growth to continue in the first quarter

The Dutch economy increased in size during the first quarter of 2015, making this the fourth consecutive quarter of growth. Gross Domestic Product (GDP) in real terms increased by 0.4% compared to the last quarter of 2014, when the economy grew by 0.8% (figure 1). There were temporary factors that had an upward effect on growth in the fourth quarter, such as the expiry of the increased gift tax exemption and the imminent stricter tax regulations for environmentally friendly vehicles. These factors boosted investment in housing and car sales at the end of last year. For this reason, we expected to see a somewhat larger fall in growth in the first quarter than was actually the case. The development in housing investments was particularly notable. The very strong growth in the fourth quarter was followed by a significant increase in the first quarter. Exports on the other hand were disappointing. A difficult to explain contraction in the export of services offset the growth in goods exports.

We expect to see further economic growth this year and next, and are assuming GDP growth of 2% in both years (table 1). In addition to higher exports, private investment and private consumption will positively contribute to economic growth. The recovery in the housing market, the growth in employment and increasing purchasing power are encouraging a recovery in domestic demand.

Figure 1: Once again GDP growth in the first quarter
Figure 1: Once again GDP growth in the first quarter Source: Statistics Netherlands (CBS), Rabobank
Table 1: Key data for the Netherlands
Table 1: Key data for the Netherlands Source: Statistics Netherlands (CBS), Rabobank

Exports continue to contribute

The volume of exports was down by 0.1% in the first quarter compared to the preceding quarter. This was mainly due to a contraction of the export of services by 2.2% quarter-on-quarter, mostly due to lower royalties and licensing rights. The export of goods however rose by 0.9% in the first quarter. Since we expect the contraction in services exports to be temporary, exports will most likely return to making a positive contribution in the coming quarters. Exports will also be supported by the low level of the euro against the US dollar and the British pound. Although the euro has risen slightly in value in recent months (figure 2), we expect it to weaken again slightly in the coming quarters (see also the section on Interest Rates and Currencies).  

Figure 2: The depreciation of the euro
Figure 2: The depreciation of the euroSource: Macrobond

Growth is also expected to pick up further in the rest of the eurozone, which will benefit Dutch businesses through exports. There are however downside risks. The conflict between Russia and Ukraine seemed stable. However, the recent new escalation of this conflict could disturb our growth expectations. There is also the matter of how the situation surrounding a potential Grexit will develop in the coming months (see also the section on the Eurozone). If these downside risks do not materialise, we expect exports to rise by around 4¼% compared to 2014 and to rise again in 2016, by around 5¼%. 

Return of the consumer

Last year, private consumption made little or no contribution to economic growth. We expect to see a clear increase in consumption this year and next. In past years, it has been mostly the decline in real disposable incomes and higher savings that have led to lower consumption. The indications for private consumption now are however positive. We expect real private consumption to increase by 1½% in both years. 

There are various factors that will contribute to faster growth in private consumption this year. Low inflation and increases in negotiated wages mean that real disposable household income will rise. The same applies to the further increase in employment. In addition, consumer confidence has been rising for some time already. A notable development is that the attitude of Dutch consumers to making large purchases has gradually improved over the last two years (figure 3). We expect to see lower growth in real wages in 2016, since inflation will rise again. Nevertheless, we expect to see further growth in private consumption, since households are increasingly coming out of saving mode and employment is expected to rise further. The fact that propensity to save will not increase further is, among other things, due to the easing of the negative equity problem in the housing market as a result of previous debt repayments and higher house prices.

Figure 3: More favourable times for large purchases
Figure 3: More favourable times for large purchasesSource: Statistics Netherlands (CBS)

The positive effect of the higher number of home sales is seen mainly in the consumption of home furnishings, household equipment and household articles. Based on the past relationship between activity in the housing market and durable goods spending, a 10% rise in property transactions in a particular quarter leads, with a lag, to a 0.7% increase in durable goods spending (Giesbergen, 2014). We expect private consumption to be supported by the positive developments in the housing market this year and next, as described in our most recent Dutch Housing Market Quarterly

Housing investments drive private investments

The recovery in the housing market has a positive effect on investment as well as on consumption. The end-of-year rally in the number of transactions in the housing market led to a strong increase in housing investments in the fourth quarter of 2014, which rose by 15.5% compared to the preceding quarter. We had expected this strong increase to lead to a downturn in the first quarter of this year, but this did not happen. Besides a higher than expected increase in the number of home sales and increased new-build activity, this could also have been due to anticipation of the expiry of the temporary reduction in the rate of VAT on labour costs for rebuilding and renovation projects as of 1 July 2015.

Although housing investments continued to increase in the first quarter, business investments did show a decline (figure 4). Looking ahead, we expect private investment to increase in 2015 and 2016 due to rising domestic demand and higher export growth. The rise in the business capacity utilisation rate will furthermore mean that there will gradually be more need to invest in expansion (figure 5). 

Figure 4: Growth of housing investment continues
Figure 4: Growth of housing investment continuesSource: Statistics Netherlands (CBS)
Figure 5: Industrial capacity utilisation
Figure 5: Industrial capacity utilisation Source: Statistics Netherlands (CBS)

Is there room for a reduction in taxation?

While government spending has negatively contributed to growth in recent years, we expect the effect of this to be neutral in 2015 and 2016. This means that government spending is not expected to put any additional brake on economic growth in addition to the cuts already discounted for this year and next.

The government’s budget deficit amounted to 2.3% of GDP last year (figure 6). This was the same as in 2013, but there was an underlying improvement because a number of non-recurring positive factors in 2013 disappeared in 2014. We have now seen the worst of the cuts and increased taxation agreed in the past years. As a result of these measures and the expected increase in economic growth, the budget deficit is expected to remain comfortably below the 3% norm set by the European Commission. In 2015, we expect to see a deficit of 1¾% of GDP. This is expected to decline further in 2016, to 1% of GDP. This means that the Cabinet will not have to implement any further cuts or increases in taxation in the coming years. There is even discussion in The Hague about the possibility of a reduction in taxation in 2016.

Figure 6: Improved government finances
Figure 6: Improved government financesSource: Statistics Netherlands (CBS)

The question is, what are the possibilities for reduced taxation. In addition to the actual budget deficit, Brussels also looks at how the structural government balance compares to the Medium-Term Budgetary Objectives (MTO). This is the budget balance adjusted for cyclical and non-recurring developments, which according to the Netherlands Bureau for Economic Policy Analysis (CPB) will show a deficit of 0.5% of GDP (CPB, 2015). This means that the Netherlands is exactly in line with its MTO, which strictly speaking means there is no room for a reduction in taxation (see also Council of State, 2015). It is not yet clear how strictly the Cabinet will follow these rules under the so-called preventive arm of the Stability and Growth Pact. 

However, even if there is room to allow the budget deficit to rise, reduced taxation is not the only item on the government’s wish list. Geopolitical developments have created the desire to spend more on defence and security. Furthermore, a decision still has to be taken on the gas extraction ceiling in Groningen, which could lead to lower incomes. All in all, there is still a good chance that tax will be reduced next year. The government will wish to do everything in its power to boost the economy as much as possible in the run-up to the elections in 2017. We have not included reduced taxation in our forecasts since no decision has as yet been taken. If it happens, domestic demand could be boosted further next year.

Unemployment falls little by little

The development of unemployment has been more or less flat since the second half of 2014. Although employment has risen substantially, we are not seeing an equivalent decline in unemployment. This is partly due to a more or less equal increase in the labour supply. There are various explanations for this. The better economic conditions have prompted more people to look for a job (the ‘pull’ effect). The changes to benefits and allowances have also freed up more labour supply. Another factor is that the decline in the potential labour force has been offset by the increase in the age of entitlement to state retirement pension (AOW). All these factors have limited the decline in unemployment, so that there has been only a slight fall. On balance, we expect to see a moderate decline in unemployment this year and the next. This year, unemployment is forecast at 7% of the labour force, and is expected to fall further in 2016 to 6½% (Eurostat/ILO definition).

The number of people employed in non-commercial services declined sharply in the first quarter of 2015, especially in health care (figure 7). On the other hand, the number of people employed in commercial services rose strongly, especially in business services. We expect employment to increase further this year, mainly in the private sector. Labour market indicators such as the rise in the number of vacancies and hours worked by temporary personnel support this expectation. The number of vacancies rose in the first quarter for the seventh consecutive quarter. The development of hours worked by temporary personnel points in the same direction (figure 8). When employment picks up, this is usually first visible because businesses take on more flexible labour such as temporary personnel.

The Work and Security Act will introduce a number of changes to dismissal law on 1 July. It is not clear how this will affect the development of unemployment in the short term. There will be a uniform dismissal system whereby it will be clear in advance which dismissal route employers choose to take. Redundancy payments will also be reduced. Besides the changes to dismissal law, flexible employees will be given more security and will be eligible for permanent employment sooner than previously was the case. They will also receive a transitional payment on termination of employment lasting two years or more. How the changes will affect employment and unemployment is not clear at this time. Employers may anticipate the change by dismissing employees before, or indeed after 1 July. The number of requested redundancies registered by the Employee Insurance Agency (the UWV) until the end of April is not currently showing any noteworthy effects of such anticipation by employers.

Figure 7: Non-commercial services cause decline in number of people employed
Figure 7: Non-commercial services cause decline in number of people employedSource: Statistics Netherlands (CBS)
Figure 8: Increase in hours worked by temporary personnel indicates further increase in number of people employed
Figure 8: Increase in hours worked by temporary personnel indicates further increase in number of people employedSource: Statistics Netherlands (CBS)

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The Economic Quarterly is a publication of Economic Research (KEO) of Rabobank and a co-production with Financial Markets Research.

The views presented in this publication are based on data from sources we consider to be reliable. Among others, these include Macrobond. The economic growth forecasts are generated from the NiGEM global econometric structure models.

This data has been carefully incorporated into our analyses. Rabobank accepts, however, no liability whatsoever should the data or prognoses presented in this publication contain any errors. The information concerned is of a general nature and is subject to change.

No rights may be derived from the information provided. Past results provide no guarantee for the future. Rabobank and all other providers of information contained in this study and on the websites to which it makes reference accept no liability whatsoever for the content or for information provided on or via the websites.

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Abbreviations for sources: CBS: Statistics Netherlands, EIU: Economist Intelligence Unit, NIESR: National Institute of Economic Social Research, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development.

Abbreviations used for countries: GB: Great Britain (UK), IE: Ireland, US: United States, DE: Germany, IT: Italy, NL: Netherlands, ES: Spain, AT: Austria, FR: France, GR: Greece, BE: Belgium, FI: Finland, EZ: Eurozone, CY: Cyprus, PT: Portugal, SI: Slovenia, MT: Malta, EE: Estonia, LV: Latvia, SK: Slovakia, LT: Lithuania.

Abbreviations used for currencies: BRL: Brazilian real, IDR: Indonesian roepia, INR: Indianroepie, TRY: Turkish lira, ZAR: South African rand.

Economic Research is also on the internet: www.rabobank.com/economics

For more information, please call the KEO secretariat on tel. +31 (0)30 – 216 2666 or send an email to economics@rn.rabobank.nl

Editors-in-chief: 
Allard Bruinshoofd, head of International Research, Economic Research
Tim Legierse, head of National Research, Economic Research

Graphics: Selma Heijnekamp and Reinier Meijer

Production coordinator: Christel Frentz

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Author(s)
Björn Giesbergen
RaboResearch Global Economics & Markets Rabobank KEO
+31 88 726 7864

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