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Outlook 2016: green surrounded by orange

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Introduction to 'Outlook 2016'

The Dutch economy is showing clear signs of recovery. As the Dutch prime minister Mark Rutte said recently, “All indicators are green”, and that is certainly true for the Netherlands. Consumer confidence is high and the business community is fairly optimistic. This is reflected in an upturn in private consumption, reviving business investment and growing employment. The housing market has started to pick up in the past couple of years and further recovery is forecast for 2016. The government is supporting these developments with tax cuts, which means more purchasing power for most people. Dutch exports are benefiting from the sustained recovery in growth in our export markets and a relatively cheap euro.

The positive developments in the Netherlands are surprising given the turbulent conditions elsewhere in the world. Emerging markets are seeing a slowdown in growth, as in China, or a recession, as in Russia, Brazil and Argentina. Cooperation in Europe is under pressure due to the large-scale influx of refugees from the Middle East. In the Middle East itself, fighting is going on in Iraq, Syria and Yemen. Furthermore, the major regional powers Iran and Saudi Arabia are diametrically opposed to one another.

The financial markets are waiting tensely for the moment when the US Federal Reserve decides to tighten up its policy again. It looks increasingly likely that the first modest increase in interest rates will be made before the end of the year. In Europe, the focus is still on deflationary risks in view of weakening growth in emerging markets and falling commodity prices. That is why the expectation here is that the European Central Bank will soon announce an expansion of its quantitative easing programme. This diverging development in monetary policy is one of the driving forces behind the expected further weakening of the euro’s position with respect to the dollar. This is strengthening the Dutch export sector’s competitive position and thus contributing to the recovery in growth. At the same time it will act as a brake on growth in the US to some extent. A more fundamental cause for concern is the fact that economic blocks with large foreign trade surpluses, in particular the eurozone and Japan, are seeking to boost growth through a weak currency, while the US, the country with the largest deficit, is seeing its currency appreciate. This trend is not tenable in the long run.

In Europe, the threat of the British voting ‘no’ on Europe is also playing a role in the background. Although the Brexit referendum will probably only be held in 2017, it may already lead to volatility in the financial markets in 2016.

Given these uncertainties, one has a sense that various trends in the financial markets cannot be sustained indefinitely, as said, and will therefore go into reverse at some point. Even so, after taking everything into account, we are still assuming moderate growth for the global economy in 2016 in our basic scenario. The eurozone will experience steadily continuing, albeit relatively weak, growth with a slight increase in inflation. The differences between the individual countries within the eurozone will remain large. In this regard, it is striking that Spain, which was considered to be a problem country until recently, is now the best performer in terms of growth.

The Netherlands is also one of Europe’s best performing countries at present. This is partly because of the Dutch Cabinet’s relatively expansionist fiscal policy. In addition, the Netherlands is in good financial health, with sound public-sector finances and a strong competitive position. The procyclical fiscal policy pursued by this Cabinet is not in itself something to be admired. However, in an international climate where so many indicators are orange, we should count our blessings for now that the Netherlands is set to be a green oasis both this year and next.

Things have looked rather different in recent years.

I am pleased to present you with our Outlook 2016. I hope you enjoy reading it.

Wiebe Draijer
Chairman Executive Board
Rabobank

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Wiebe Draijer
Rabobank KEO

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