The Netherlands: consumers start contributing to economic growth
Economic Quarterly Report
- The Dutch economy will grow by 1¾% in 2015 and 2016
- Consumption, exports and private investment will contribute to the recovery
- The labour market is also picking up
- Inflation will be negative this year
The Dutch economy returned to growth in 2014, after two years of contraction. The volume of Gross Domestic Product (GDP) rose last year by 0.8%, mainly due to exports (figure 1). Consumer spending was still weak in 2014. For 2015 and 2016, we expect consumers to contribute to growth again while exports will pick up further. We therefore estimate GDP growth of 1¾% in both years.
The Dutch economy grew modestly in 2014, but the underlying recovery was much stronger than this would suggest. Lower gas extraction was a significant brake on growth. The temperature in the Netherlands was significantly higher than usual last year, which led to lower gas consumption. The minerals sector thus made a negative contribution to growth in 2014 (figure 2). There was however growth in all other sectors (figure 2). This also explains why consumption remained virtually unchanged in 2014 while the retail sector generated growth: lower consumption of gas due to warmer weather slowed overall consumption growth in 2014.
The negative effect of lower gas extraction will disappear this year, since temperatures are expected to return to normal. This is one of the reasons for economic growth being higher this year. For 2015 as a whole, we expect to see economic growth of 1¾%. Besides exports, consumption will contribute to growth this year. Both exports and consumption will be boosted by the recent fall in the oil price and the weaker euro. The lower euro is boosting exports. Oil prices have also fallen sharply in the past months. The main macroeconomic effect of this is that inflation is now negative, which will lead to increased consumption on the back of higher real incomes. These temporary boosts to spending will disappear in 2016, but we expect the underlying strength of the economy to be sufficient by then to generate a further increase in GDP volume of 1¾% in that year.
Exports pick up again
Exports rose by 3.9% in 2014, a significant increase on the 2.2% growth seen in 2013. The pick-up in exports was closely linked to the better growth figures in the Netherlands’ important trading partners. The eurozone emerged from recession in 2014, with growth of 0.9%. GDP growth in our major trading partners outside the eurozone, the US and the UK, was also higher in 2014 than in the preceding years.
We expect exports to increase by 5¼% in 2015. Economic growth is expected to pick up further in the US and the eurozone. Furthermore, the euro weakened significantly towards the end of last year against both the dollar and the pound, which makes Dutch goods and services cheaper for foreign purchasers and thus supports exports. Exports will most likely not benefit from a depreciation of the euro in 2016, however economic growth at our major trading partners is expected to be high enough to generate growth in exports of 5%. There are however downside risks for Dutch exports. The main factors that could hinder growth in trade this year are a Grexit or an escalation in geopolitical tensions between Russia and the West (see the Global Economic Outlook).
Inflation will be negative this year
Inflation in the Netherlands, as measured by the European comparable HICP (Harmonised Index of Consumer Prices), will be negative this year. Prices have shown very little increase for some considerable time (see figure 3). Last year, average inflation was 0.3%, the lowest level since measurement with the HICP began (1997). The weak price increase in 2014 was broad-based, with core inflation excluding rented housing also at an extremely low level (figure 3). The core inflation measure excludes the volatile components of energy, fuel and food. The increase in housing rents is more or less completely determined by government regulation, meaning that core inflation excluding rented housing is a better measure of underlying price pressures in the Dutch economy. The current low level of core inflation thus indicates the still very weak economic conditions in the Netherlands.
Inflation has fallen further since the end of 2014, and prices are now even lower in comparison to one year ago. The recent decline in inflation is however less broad-based, and is mainly the consequence of the sharp fall in oil prices. The lower oil price has led to significantly lower fuel prices at the pump. Contrary to what one might expect however, the lower oil price has hardly led to cheaper energy prices for consumers. This is because energy prices are mainly based on the price of gas, which has fallen much less. The decline in household energy bills has also been limited due to increasingly high taxes on energy. We do not expect household energy bills to decline significantly this year either.
Inflation will rise slowly over the year, although prices over the whole of 2015 are still expected to fall by ¼%. We expect that oil prices will gradually increase. Partly because of this the decline in fuel prices will disappear from the inflation figures at the end of this year. The lower euro will mean that goods from outside the eurozone are more expensive, which will lead to imported inflation. Prices are expected to rise by around ¾% again in 2016. Fuel prices will then increase year-on-year again, partly due to higher oil prices. The economic recovery will also drive prices higher to some extent: the better economic outlook will likely lead to increased wage growth and reduced overcapacity in sectors.
Positive outlook for investment
The increase in the volume of investment was limited In 2014. The last quarter of 2014 saw strong growth. This was however temporary, due to the ending of the more lenient gift tax exemption in January 2015. This led to a large number of housing transactions in December 2014, which caused strong growth in investment in housing in the fourth quarter.
We thus expect to see a decline in investment in housing in the first quarter of this year. Nonetheless, the volume of housing investment will rise over 2015 as a whole, mainly due to increased new-build and an increase in existing home sales (see also our Dutch Housing Market Quarterly). Furthermore, higher consumption and export growth will generate stronger growth in business investment in 2015 and 2016.
Consumers will again contribute
Household consumption showed hardly any increase in 2014 compared to the year before: private consumption was up only 0.1% last year. Real disposable household income did rise again in 2014 after years of decline. The main reason for this is that inflation was low last year, meaning that wage growth outstripped inflation for the first time since 2010 (figure 4). However, falling employment, debt reduction by households and lower gas consumption were factors that limited total consumer spending.
Consumption will once again contribute to economic growth this year, and consumer spending is expected to rise by 1¼%. Negotiated wages are rising while inflation is on average negative, meaning there will be a relatively rapid increase in wages in real terms. In addition, higher employment will also contribute to an increase in disposable income. The rise in real wages will be less in 2016. However, because households will probably not continue to increase their savings we estimate there will be growth in consumption in 2016 of 1¼%.
Limited gas extraction in Groningen a potential negative for the government budget
With its austerity measures, the government is succeeding in gradually improving the state of its budget. The budget deficit is still expected to be 2¾% in 2014. The deficit will be reduced further this year and in 2016, to 2¼ and 2% respectively. That’s why extra budget cuts won’t be necessary.
The gas extraction in Groningen is an uncertain factor with respect to the budget deficit. Under political pressure, the government already decided to reduce gas extraction to around 40 billion cubic metres in 2014. There is however a possibility that gas extraction in Groningen will be further reduced to 35 or even 30 billion cubic metres. This will affect the government finances and economic growth: if only 30 billion cubic metres is extracted this year, the government deficit in 2015 is expected to be 2¾% and growth will be ¼% lower.
Positive signs labour market recovery
The Dutch labour market showed the first signs of recovery in 2014. While there were on average fewer people employed in 2014 than in the previous year, the number of employed persons increased quarter-on-quarter in the last three quarters. The increase in employment in the last quarter of 2014 was actually the highest since 2008.
The development of employment in 2014 varied widely per sector (figure 5). The largest increase occurred in commercial services, and to a large extent concerned new jobs through temp agencies. In construction, where employment has been falling without interruption since 2009, the decline in employment continued last year. Labour productivity in the construction sector is still well below the level in early 2008, meaning that a strong labour market recovery in this sector is not likely in the near future. There was also a relatively sharp decline in the number of employed persons in the government sector in 2014, mainly caused by redundancies in health care. A ray of hope for both health care and construction is that these sectors saw little or no decline in employment in the last quarter of 2014.
Unemployment in 2014 averaged 7.4%, and remained relatively stable in the second half of the year after a sharp decline in the first half (figure 6). The main cause of this was a difference in the development of the labour supply in these two periods. In the first half of 2014, employment contracted while unemployment declined because of a sharp fall in the labour supply. In the second half, employment increased strongly, but unemployment remained unchanged due to a similarly large increase in the labour supply. So, although this was not apparent from the unemployment figures, the underlying development of the labour market in the last six months was more favourable than in the first half of 2014.
We expect the labour market to continue to recover this year and next. Economic growth will increase this year, and the leading indicators suggest there will be further recovery in the private labour market. The number of hours worked by temp agencies, usually a good forecaster of labour market recovery (see figure 7), has been rising continually for more than 18 months and is now at the highest level since the end of 2008. The number of vacancies has also been rising for six quarters in a row. We also expect the decline in employment in health care to be less than it was last year, since we think this sector has now passed its worst point. The labour supply will probably increase this year and next due to higher labour participation. Nonetheless, we expect growth in employment to be large enough to bring unemployment down to an average of 6¾% this year and 6½% in 2016.
We have some way to go yet
It is good news that the economy grew in 2014 and that growth will accelerate this year and in 2016, and that growth will be less dependent on exports. However, if we compare today’s situation with that of 2008, it is clear that there is no cause for complacency. The level of GDP at year-end 2014 is still well below that seen in 2008 (figure 8). We do not expect GDP volume to return to its pre-crisis level until early 2016. However, the population has grown in the meantime, which means that the national income has to be divided among more people. If we look at GDP per capita we see that at the end of 2016 we are still considerably below the pre-crisis level. The fact that eight years after the crisis we have not regained the level of GDP per capita of 2008 is food for thought.
This failure of growth to catch up affects businesses and consumers directly. Figure 9 shows that both the number of bankruptcies and unemployment are still far above the pre-crisis levels (figure 9). We expect unemployment at year-end 2016 to still be well above the level seen in the years before the crisis. GDP per capita will also still be lower than in 2008.
It is of course positive that our economy and labour market are expected to recover more powerfully in 2015 and 2016. However, if we put this expected recovery in historical perspective, it is clear that we still have a long way to go.
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.
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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, HU: Hungary, DE: Germany, IT: Italy, NL: Netherlands, ES: Spain, PL: Poland, AT: Austria, FR: France, GR: Greece, TR: Turkey, ID: Indonesia, JP: Japan, BR: Brazil, RU: Russia, CN: China, BE: Belgium, FI: Finland, DK: Denmark, LT: Lithuania, EE: Eurozone, CY: Cyprus, PT: Portugal, SI: Slovenia
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