Outlook 2016: The Netherlands
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Stable growth outlook amid global economic uncertainty
- Dutch economy to grow by 2% in 2015 and by 2½% in 2016
- Both exports and domestic demand contribute to growth
- Export outlook clouded by global economic uncertainty
- Positive ‘feedback loop’ between housing market, economy and government finances
- High unemployment remains a point of concern
- Period of catch-up growth, eventually followed by lower long-term growth
In 2015 and 2016, the Dutch economy is poised to grow at a rate we would not have thought possible just a few years ago. We expect GDP to increase by 2½% in 2016 (Table 1); for 2015, this rate is slightly lower at 2%. However, these diverging growth rates can be attributed entirely to the lower production ceiling for the Groningen natural gas field in 2015, which reduces real GDP growth for this year by one half percentage point. Excluding mineral extraction, the underlying growth rate of the Dutch economy for both years is, therefore, as high as for 2016.
After years of crisis, recession and stagnation, economic growth appears to have convincingly returned to the Netherlands, and the increase in economic activity is occurring across the economy as a whole (see Figure 1). Exports remain the Dutch economy’s main growth driver, alongside private consumption and private investment. With domestic demand on the rise again, virtually all industries are set to benefit from a growing demand for their goods and services for the third consecutive year in 2016.
This is not to say, however, that all the damage caused during the crisis will be undone: unemployment, for one, is expected to remain at nearly 6% at the end of 2016. While this may be low from an international perspective, it remains rather high by Dutch standards. Several industries have contracted so sharply in recent years that production volumes for 2016 remain significantly below those for 2008 (see Figure 2), notwithstanding their relatively high growth rate. A growing number of households are floating back into positive equity on the back of increasing property values, but this certainly does not apply to all homeowners who were hit by negative equity during the housing market’s downturn several years ago (‘negative equity’ refers to the situation where a property’s market value falls below the outstanding amount of the mortgage secured on it).
The relatively strong and widespread economic growth is rooted in a number of positive developments occurring in the Dutch economy over the past two years – the very same forces which negatively impacted the economy in preceding years. These developments are the economic performance of the eurozone, inflation trends, crisis and recovery on the housing-market and the interaction between economic growth and government finances. It is therefore worth looking back on recent trends in the economy so as to be able to provide an accurate context for our 2016 outlook.
Export growth strengthens despite the struggling external economy
As the European debt crisis subsided, the eurozone saw a tentative economic recovery in 2014. The UK economy was back on track after a long downturn, in the wake of an earlier recovery in the US. This return and acceleration of economic growth in the main part of the Dutch export market spurred export growth. Following the ECB’s announcement of its quantitative easing programme, the euro fell sharply against the currencies of the two main trading partners of the Netherlands outside the eurozone, the US and the UK. This gave Dutch exporters an additional boost in 2015. For 2016, we expect the euro to continue to fall slightly in value (see our Outlook on the Financial markets), but because this depreciation is substantially smaller than in the past year, it does not contribute to the export growth to the same extent. However, on account of the slightly stronger economic growth in the eurozone, we do anticipate marginally higher export growth for 2016 than for 2015.
As detailed in our Outlook on the International economy and our Outlook on the Financial markets, the world outside the Netherlands is beset by a variety of uncertainties. A stronger-than-expected growth slowdown in China or a precipitous rate hike in the United States could easily throw a spanner in the works for European and Dutch exporters, while an unexpectedly strong increase in interest rates in the eurozone could disrupt the housing-market recovery and investment growth.
Lower stock prices could cause funding ratios at pension funds to fall further, and although the Dutch Central Bank has extended the term these pension funds have to rectify low funding ratios, they will inevitably, at some point down the line, find themselves compelled to increase their premiums or reduce payments.
Yet headwinds in the international economy or downturns in the financial markets need not automatically nip economic growth in the Netherlands in the bud. The current growth in domestic demand is set to continue even if export growth turns out weaker than expected. The positive domestic dynamic is bolstered by a number of positive developments which reinforce each other.
For one, the housing market and the wider economy benefit from each other’s growth, and secondly, the downward spiral of slower economic growth, a growing budget deficit, new austerity measures and a further growth slowdown has now been reversed.
Housing-market recovery boosts economic activity
Since 2008, two major recessions and significant changes in the Dutch government’s homeownership and mortgage policies have significantly reduced the number of home sales and average house prices. When the Dutch government made its most recent changes to tax rules for homeowner debt in early 2013, this marked an end to a period of major uncertainty about the policies to be pursued. And with the fog then lifted, we have seen a return to confidence, which has led to a rise in home sales and property values since mid-2013, buttressed by the sharp fall in mortgage interest rates.
With the initial stage of catch-up growth now behind us, we anticipate the rate of increase of home sales to slow down significantly. With sales numbers presently at a high level, the market has tightened. Along with the increase in household income and what we anticipate will be a modest increase in capital market interest rates (see our Outlook on the Financial markets), this will facilitate an acceleration in the increase in house prices next year (Rabobank 2015).
During the years of recession, developments in the housing market and the wider economy created a downward spiral, but since 2014 the two have been reinforcing each other. For example, the large number of home sales over the past few quarters boosted the consumption of durable household goods such as home furnishings and accessories and electrical appliances. Besides private consumption, home investments in the form of new construction, refurbishments, home improvement and a growing amount of work for service providers such as real estate agents and civil-law notaries are also contributing to economic growth. The construction industry is the fastest-growing sector in the Netherlands in 2015 and will continue to outpace the economy as a whole in 2016. This comes in the wake of a long period in which this industry was hit harder than almost any other sector. In all, the recovery in the housing market is increasing domestic demand across the economy as a whole.
The overall economic recovery, through income growth and growing employment, has a positive effect on trends in the housing market. Income growth is boosting the increase in property values. Growing employment opportunities and incomes and an increase in consumer confidence (see Figure 3) also serve to encourage potential homebuyers.
The increase in consumer spending can be attributed not only to the recovery in the housing market: inflation rates plummeted at the end of 2013 and were outstripped by wage growth for the first time in three years (see Figure 4). In 2011, by contrast, inflation had risen sharply following an increase in oil prices. In 2012 and 2013, the rate of inflation remained high due to increases in VAT, excise duties, energy tax and insurance tax. All these effects had disappeared in 2014, resulting in substantially lower inflation that year. The resulting increase in real wages (defined as nominal wage growth minus inflation) caused an increase in real disposable household income, thereby providing room for growth in the consumption volume. When oil prices fell by over 50% during the period from mid-2014 to early 2015, this further pushed down inflation. Since we do not expect a further drop in oil prices, the downward effect of oil prices on inflation will no longer be reflected in the figures by the end of 2015, and we can expect the rate of inflation to accelerate going forward.
While inflation will remain low in 2016 at an estimated 1¼%, this is one percentage point higher than in 2014 and 2015. Both private-sector and government-sector wages growth will increase somewhat during this time, with the latter showing the strongest growth. However, the growth in real wages will be somewhat lower next year than in the past two years. Growth in disposable income will remain level thanks to the 5-billion-euro tax cut implemented by the central government. The government saw fit to introduce this cut because the budget deficit has shrunk significantly, spurred by economic growth. As such, the boost to the economy triggered by lower inflation and the housing-market recovery was strong enough to create a self-sustaining economic momentum.
Turnaround in government finances
As with the housing market and the wider economy, the negative, downward spiral between government finances and the economy has been transformed into a positive, upward spiral. For 2013 and 2014, the Dutch government was compelled to implement substantial additional austerity measures (see Figure 5), since the slower economic growth prevented the desired reduction in the budget deficit. These austerity measures and the uncertainty created by the additional fiscal packages further dampened economic growth.
With the return of economic growth, the budget deficit has suddenly been reduced sufficiently to implement a significant tax cut for 2016. In this sense, the improved economic growth has facilitated the reduction in the tax burden which will play an important role next year in maintaining the relatively high level of economic growth. As such, the negative feedback loop between economic trends and government finances has been transformed into a positive feedback loop, representing a very welcome change indeed. Given the high unemployment rate, it is understandable that the government plans to boost the economy in 2016 by reducing taxes. However, from an economic perspective it would have been more sensible not to increase austerity during the years of economic recession. In taking such measures, the government only made the economic downturn more severe, whereas now it is bolstering the recovery by reducing taxes. This may be a perfect example of a procyclical budget policy for the economics textbooks, but it has been rather harmful to the economy.
In recent years the Dutch government has, however, implemented a number of significant measures aimed at keeping public finances sustainable with a view on the ageing of the population. This means that a lower degree of budgetary intervention will be required than was the case several years ago.
The growing number of refugees applying for asylum in the Netherlands will increase government spending; it is as yet unclear what the impact will be of this development. Although the budget deficit is still far removed from the well-known European Union’s 3-percent-of-GDP target (see Figure 6), the government, in reducing taxes in 2016, has pushed the European fiscal rules for the structural budget balance to their limit (Badir and Giesbergen, 2015). Strictly speaking, the rules therefore allow no scope for a higher budget deficit. Since these problems are not unique to the Netherlands but are prevalent across the European continent, the European Commission may decide to relax its enforcement of these rules. If this is not the case, cuts may be needed in other parts of the government budget. On balance, this will result not so much in lower government spending but in a shift in this expenditure, which means it will have no negative impact on short-term economic momentum.
Modest recovery of business investment
With economic growth having returned across many sectors of the economy, investments in business equipment might be expected to improve in tandem. Yet while there certainly has been some degree of growth, it is not particularly strong and occurs in only some segments of the economy. We estimate that total private investment will increase by 10¼% in 2015, following a growth rate of 4,9% in 2014. Although this may seem positive on the face of it, this growth is driven to a large extent by housing investments. Investment by businesses was limited in 2014 to the property sector (i.e. the above-mentioned housing investments), financial services, mining and the manufacturing industry. Investments in other industries either remained flat or contracted (see Figure 7). In 2015, investment continues to be driven largely by housing. In 2016, the growth in housing investment will level off, while business equipment will account for a larger share of the growth in private investments. We expect this growth to be divided more evenly across the various sectors of the economy, which means the recovery in investment in 2016 will be more in line with the current positive dynamic between the housing market, government finances and the wider economy.
The slow growth in business investment is related to the long economic downturn from which we have emerged. Production levels in many industries remain below those of 2008, which means that businesses can handle their growing production volumes using their existing capacity. It is no surprise, therefore, that businesses first want to see a further increase in both demand and capacity utilisation in order to feel completely secure in stepping up their investments. It is only when they feel sufficiently certain about the economic outlook that low interest rates could potentially play a role in accelerating investment growth in the business sector.
To date, outstanding loans provided by banks to non-financial businesses continue to decline.
The amount of the new loans issued are still lower than repayments, on account of the still-weak business investments. However, banks have noted an increase in the demand for loans. For the third quarter of 2015, banks saw the demand for loans among small- and medium-sized enterprises increase for the first time in six and a half years (see Figure 8). For the first time in nearly eight years, investments in fixed asset investment played a role in the increased demand for credit.
Although credit standards employed by banks in providing loans to small- and medium-sized enterprises have not been tightened for eight consecutive quarters, they have also not been relaxed. With investment expected to increase, next year will prove the ultimate test of whether the banking sector, along with alternative forms of financing and backed by various government initiatives, can sufficiently meet the business community’s financing needs.
But shouldn’t we further reduce debt first?
One of the main reasons the growth outlook for the Dutch economy was so subdued a few years ago was the Netherlands’ high gross household debt. While there has been only a modest decline in this debt in recent years, it remains on the high side, both from an historical perspective and as compared with other countries (see Figure 9). With both activity in the housing market and property values increasing, it seems that the reduction in mortgage debt in the Netherlands has come to an end.
Although it may appear odd that we will see no further deleveraging, the asset side of the household balance sheet may provide more relief than many would have believed in recent years. This side shows very substantial assets in the form of home values, pension reserves and private savings and investments (see Figure 10). However, the bulk of these assets are illiquid and could therefore not be properly employed to repay debt in recent years or to absorb a decline in income, resulting in lower activity in the housing market and a decrease in private consumption.
Furthermore, the assets are divided unevenly among the population, with older people generally holding more substantial assets and younger people being more inclined to have high debts. This can be explained by the fact that the younger demographic tends to not yet have had the chance to repay a large portion of their debt, has not benefited from substantially higher property values, and has only just started saving for their retirement.
A portion of the households faced with negative equity will want to restore the balance between their mortgage debt and the value of their home by making additional mortgage payments or by saving an amount which they can then use to repay their remaining debt upon selling the home. With property values on the rise, however, this group is shrinking again (Rabobank, 2015), while a larger group of households with remaining debt may be confident enough to take the plunge and purchase a new home.
On account of the high remaining household debt, the lack of liquidity and the uneven distribution of assets, the Dutch economy will remain vulnerable to a decline in property values and incomes in the years to come. But younger homebuyers are now starting off with lower debt, following the gradual reduction in the maximum Loan to Value (LTV) to 100% by 2018 and tighter rules for mortgage/income (LTI) ratios. Since the eligibility for tax deductibility of mortgage interest payments for those taking out new mortgages has been made contingent upon full repayment, these households will, moreover, repay their debt more quickly than was the case in the past.
At the same time, increased mortgage repayments are also resulting in a stronger concentration of assets in homes and pension funds than in the past. These constitute illiquid assets for which the pace of asset accumulation is largely institutionalised. Greater flexibility in pension accrual and a change in the tax treatment of homeownership could provide households with greater freedom to determine the pace with which they accumulate assets, and how they go about accumulating these assets.
Dutch remain avid savers
With the economy improving, people tend to be less inclined to save a larger portion of their income or repay their debt due to general uncertainty. Yet at the same time, reforms in the Dutch healthcare system and the lower funding ratios of many pension funds are causing anxiety among the population about the amount of their pensions and the extent to which healthcare costs can still be funded collectively in the future. This may prompt households to build a nest egg to secure their financial future.
We expect the individual savings ratio – defined as the percentage of disposable income not used for consumption – to remain roughly equal overall in 2015 and 2016. This puts it at approximately 2½ percentage points higher than the average during the five years leading up the crisis. However, aggregate savings will decrease somewhat as a result of the lowering of tax benefits for pension savings. Next to that, households are using a larger portion of their savings to invest in housing, causing the percentage of the income they use to accumulate liquid financial assets or to repay debts (i.e. net lending/borrowing) to decline somewhat following a substantial increase in this amount since 2009 (see Figure 11).
All told, while the savings decisions made by Dutch households in 2016 will not result in higher consumption spending, they have also stopped stifling growth as such. We expect volume growth in consumption to keep pace with the increase in real disposable income. As housing investment increases, a larger portion of household income is directly used for real investments, creating a direct increase in economic activity.
Increase in employment – and in the labour supply
The high unemployment rate is a clear weak spot in the economic outlook, and we do not expect this to change much in 2016 given the merely modest decline in this rate. Fortunately, however, the reality is somewhat more positive than it may initially appear: there has been undeniable job growth and this trend is set to increase next year. The reason that unemployment has not fallen as fast is the increase in the supply of labour.
This trend is clearly evident from the significant increase in the number of people who were not, or no longer, active in the labour market (i.e. who were neither employed nor looking for work) and who are currently seeking employment but have been unsuccessful in their search to date (see Figure 12). This includes people who stopped looking for work during the period of lower employment but who are now trying their luck in the labour market once again, along with those who have been more or less forced onto the labour market following the many reforms introduced in recent years. There are also a growing number of people who, following the increase in statutory retirement age, remain in the workforce longer than was the case in the past.
This large additional supply of labour will improve the Dutch economy’s long-term growth potential. Based on the assumption that the majority of job seekers will eventually find employment, it will take longer for a shortage in the labour market to slow down economic growth. But we are currently seeing the downside of this with the present high unemployment rate, which is declining only gradually.
We note that it will take some effort to ensure that job seekers will eventually find employment. While job seekers’ qualifications and the requirements set by employers in the Dutch job market are currently reasonably well matched, the education and skills of job seekers who were, until recently, inactive in the labour market may be less able to meet employers’ needs. If this is the case, additional policies will need to be introduced in order to improve these people’s chances of finding a job.
Alongside the economic downturn, the increase in wage costs since the crisis has also had a negative impact on the labour market. Since employers’ social security premiums increased since the crisis, labour costs have outpaced labour productivity in recent years, which has a negative impact on job growth. In order to raise unemployment to acceptable levels again, it would therefore be sensible to reduce employers’ expenses.
Years of catch-up growth
Despite economic growth in the Netherlands topping 2% in 2015 and 2016, we still need to be prepared for a consistently lower growth rate than we been used to since World War II (Erken et al., 2015).
In a country faced with an ageing of the population such as the Netherlands, growth in the working-age population is declining, and in approximately seven years from now this population of potential workers itself will start shrinking. Since the rate of labour participation in the Netherlands is already very high, an increase in this rate is not likely to significantly increase the supply of labour. As noted, the Dutch government has already made significant efforts to increase labour participation as much as possible. However, since the Netherlands has one of the highest rates of part-time employment in the world, Dutch people will, when it comes down to it, certainly be able to increase their number of hours. It is not possible to say at this stage whether the current influx of refugees will change the outlook for labour supply to any significant degree due to the uncertainty as to how this situation will develop and the level of assimilation of those refugees granted asylum in the country. In the best-case scenario, however, this will be a positive development that will manifest itself in the longer term. In any case, however, growth of the labour supply is set to become more of a challenge in the future.
As a result, economic growth will eventually become increasingly dependent on the increase in labour productivity. Given the already high level of the technologies used in the Netherlands, the high level of education of the workforce and an economic system which facilitates the relatively efficient utilisation of resources, the increase in labour productivity is restricted largely by global advances in technology. It is therefore important that businesses and individuals in the Netherlands can continue to gain maximum benefit from these developments in the future.
The potential growth of the Dutch economy is expected to end up between 1 and 1½ percent. This means that the significantly higher growth rates projected for 2015 and 2016 would indicate catch-up growth in these years. During the height of the economic crisis in recent years, we believed we had no reason to expect even this type of growth. With the domestic economy having found positive feedback loops in domestic demand, the Dutch economy may well, also beyond 2016, grow at a higher rate than potential growth. This will also be necessary in order to reduce the Dutch unemployment rate to the 4-5% level, which we believe is feasible.
If this will actually happen, of course, remains to be seen. Barring any unexpected measures taken by the new government that will take office in 2016 or 2017, the domestic momentum is certainly there and will likely be maintained. The many potential complications involving the international economy, however, create major uncertainties for Dutch export growth. For now, the Dutch economy looks to be heading in the right direction, and the process of looking ahead to the economy for the coming year and beyond has been far more enjoyable in this edition of Outlook than was the case for many years in the recent past.
Badir, M.C and B.C.J. Giesbergen (2015), “Budget Day 2015: tax reform was not invited to budget party”. Rabobank Special Report, 15 September 2015.
Erken, H.P.G., De Groot, E., and S. Koopman (2015), “Why growth keeps disappointing”. Rabobank Economic Report, 17 August.
Rabobank (2015), “Dutch housing market to maintain higher sales levels next year”, 5 November 2015.
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Outlook 2016 is a publication of Economic Research (ER) of Rabobank. The view presented in this publication has been based on data from sources we consider to be reliable. Among others. these include Macrobond, , NiGEM, Statistics Netherlands, Economic Policy Analysis, Vereniging Eigen Huis, De Nederlandsche Bank and Eurostat. The date of completion is 13 November 2015.
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.
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Abbreviations for sources: BIS: Bank for International Settlements, CBS: Statistics Netherlands, CPB: Economic Policy Analysis, DNB: De Nederlandsche Bank, IMF: International Monetary Fund, CEIC: Census and Economic Information Center
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