The Netherlands: economy continues to fire on all cylinders
Economic Quarterly Report
- The Dutch economy is expected to grow by 2% in 2016 and 2017
- Exports are suffering from the weak global economy, but are still growing
- Domestic demand continue to contribute to growth
- Labour market is still recovering, but has a long way to go
We expect the Dutch economy to grow by 2% both this year and next (table 1). As in 2015, the growth is broad-based, with contributions from both domestic demand and exports. While the international situation seems to have calmed down somewhat, the underlying international concerns have not gone away (see Global Economic Outlook). This means there is a real chance that economic growth will fall short of our current expectations.
Broad-based growth in the first quarter of 2016
With 0.5% GDP growth in real terms in the first quarter, the Dutch economy is clearly making progress after some weak quarters (figure 1). After two quarters of stagnation, private consumption is again contributing to growth. Housing investment rose strongly in tandem with the positive developments in the housing market, while business investment declined in the first quarter. Exports also increased strongly in the first quarter, which is somewhat surprising given the international uncertainties in recent months.
Exports still on track despite continuing international concerns
The growth in volume of Dutch exports in the past four quarters has been surprisingly strong given the slower growth in the global economy. This was due to strong growth in the export of services (figure 2), the majority of which relates to the export of the use of intellectual property (box 1). This high growth in services exports was responsible for the strong increase in exports during 2015 and the first quarter of 2016. As a result of the high level that exports attained at the beginning of 2016, the average level this year will be significantly higher than in 2015. This carryover effect will lead to relatively strong growth in total Dutch exports in 2016, and we expect total Dutch exports to grow by 4½% this year. The slower growth in the global economy, which is clearly visible in goods exports, will have less effect on total export growth. Without this powerful increase in services exports, export growth this year would be at least one percentage point lower. The same applies to imports, which are also being pushed up strongly by imports of services. The net effect of high growth in services exports on the current account balance and real GDP is therefore limited.
Box 1: Special role of intellectual property in services exports
In nominal terms, exports of services rose by 8.2% in 2015 compared to 2014, with 6.7 percentage points of this increase coming from the export of the use of intellectual property. This concerns payments received by Dutch companies for the use of intellectual property that they own, such as image rights related to franchises and trademarks, patents, computer software and audio-visual and artistic copyrights. It is a category of exports which is extremely difficult to forecast, its development in most cases probably does not correlate to the global economic cycle and it is largely driven by the fiscal climate in the Netherlands. The same fiscal climate was also responsible for services imports making a sizeable contribution to growth in 2015. On balance therefore, trade in the use of intellectual property does not add that much to Dutch GDP. However, this category does have a strong influence on the gross trade figures.
Despite an expected acceleration in the global economy in 2017, we expect export growth to slow next year. While growth in goods exports will accelerate, we do not think that the very high growth in services exports will continue. Total export growth in 2017 will therefore slow to 4%. Since the trade in services discussed in box 1 can be seen in both exports and imports, import growth will show the same pattern.
 Data on services exports are only available in nominal terms. The rest of this paragraph discusses the development of trade components in real terms.
Households are spending more, but are still cautious
One of the notable features of this period of economic growth is the increase in the volume of private consumption. This is due to higher real disposable household income, which is related to increased employment and higher real wages. People in work are also benefiting from the EUR 5 billion tax cut. Employment is expected to grow slightly faster next year, although wages will increase less in real terms as inflation will pick up again. There will also be no further tax cuts, so real disposable household income will rise somewhat less in 2017 than it did in 2016.
We expect to see a further increase in private consumption as a result of the strong increase in incomes, although the increase in consumption will be less than the increase in income in 2016 as well. Household savings will rise further, and savings will reach their highest level since 1998 (figure 3). Consumers may be somewhat less cautious next year as economic growth continues, but we believe that a high level of savings will become a permanent feature.
Box 2: The effect of savings on private consumption
Household savings is the portion of income that is not used for consumer spending. Savings as a percentage of income rose in 2009 due to the global financial crisis and the recession. Consumers have never really returned to spending since, and the level of savings has actually risen again since 2014.
Although there is still significant net equity in housing on a national scale, many households with a relatively high propensity to spend are still facing a situation of negative equity, that is, a mortgage debt that is higher than the value of their home. This group is declining as a result of the increase in house prices and mortgage repayments (Rabobank, 2016). However, with the slump in house prices still fresh in people’s minds, this does not mean that lower negative equity and an increase in surplus equity will be a strong incentive to increase consumption. Another point is that the tax deductibility of mortgage interest for new mortgages is linked to full repayment of the mortgage, while first-time buyers now have to fund a larger proportion of the purchase from their own resources as a result of the reduction of the maximum permitted ratio of a mortgage to the property’s value. This is also increasing savings prior to the purchase of a home.
Apart from the developments in the housing and mortgage market, reforms in health care and low funding ratios at the pension funds are changing perceptions that people have long relied upon. Heightened uncertainty and the belief that we will have to increasingly make our own arrangements for health care and retirement in future could also encourage more personal saving.
Overall, our view is that cautiousness will have the upper hand both this year and next. Consumption growth roughly correlates with the increase in disposable household income (figure 4).
Growth of private investment continues
Household savings are increasingly being used to invest in fixed assets. For households, this mainly concerns investment in housing. The fact that this investment is rising again as a result of the recovery in the market for existing owner-occupied homes (Rabobank, 2016) is a main driver of the broader economic recovery. The effect of the strong rise in investment in housing is very visible in the development of total private investment, which also includes business investment (figure 5).
As a result of the favourable outlook for transactions in the housing market, we expect to see housing investment rise by 12% this year. The rate of increase in transactions will slow next year, and growth is expected to subside to 4½%. The rising business capacity utilisation rate will gradually increase the need to invest in expansion. We expect the volume of business investment to increase by 4½% this year. Next year, growth will slow somewhat to 3%.
Structural deficit means a less rosy picture for government finances
The Dutch government’s finances continue to improve. The budget deficit fell to 1.8% of GDP in 2015 (figure 6). For the first time in 10 years, gross government debt declined both as a percentage of GDP and in absolute terms in 2015. Half of the decline in the debt level from 68.2% of GDP in 2014 to 65.1% of GDP in 2015 is due to the growth in GDP, and half relates to the decline in the absolute debt level. Further growth in the economy is expected to further reduce the budget deficit and the debt level in the coming years (figure 6).
However, this still does not meet all the European budgetary rules. Previously, the spring forecast from the European Commission (EC) showed that the so-called structural budget deficit was higher this year than the medium term objective (MTO; figure 7) and that it would not improve fast enough in 2017. In its country-specific recommendations, the EC called on the Netherlands to limit its deviation from the rules in 2016 and achieve an annual adjustment of 0.6% of GDP in 2017. According to the spring forecast around half of this is already planned, due to the Commission’s expected 0.3% improvement in the structural deficit in 2017. According to the Commission, additional measures amounting to approximately two billion euros still need to be introduced.
In the Stability Programme, the Dutch Cabinet announced that it was fully committed to the European budgetary agreements. After a year of tax cuts, the government will thus return to an austerity stance as soon as next year. The budgetary effort needed to comply with the rules is however significantly less than in 2013 and 2014.
Employment gets off to a false start this year despite positive outlook
Employment suddenly declined in the first quarter of 2016 (figure 8), a development that we find difficult to explain. Continuing economic growth, the monthly figures on the working population in employment and unemployed and the further increase in the number of vacancies (figure 9) are not consistent with this development. We are assuming that these figures will be upwardly adjusted or that there will be especially strong growth in the second quarter.
The rise in employment in 2015 was already large enough to reduce the number of people who have been unemployed for between one and two years. Only the group of people unemployed for more than two years increased in number last year. Another notable development is that the number of employees has risen faster than the number of self-employed persons over the past three quarters. Since the onset of the crisis in 2008, it has been the number of self-employed persons that has risen rapidly, while the decline in employment has been due to a decline in the number of people in employment (figure 10).
The increase in the number of employees however does not yet involve employees on permanent contracts or with the prospect of getting a permanent contract. While this group has not declined in number since the third quarter of 2014, it has not as yet increased. The job growth mainly concerns temporary workers or those on stand-by or temporary contracts, and employees in permanent or temporary jobs on zero-hour contracts (figure 11). The further recovery in the labour market that we expect may well lead to an increase in the number of people in permanent employment in the coming years. However, the long term trend towards an increasingly flexible labour market will probably mean that in the coming years permanent jobs will continue to be more scarce even with a durable economic recovery than was the case prior to the crisis.
The recovery in employment will also lead to lower unemployment in 2016 and 2017. Higher labour supply as a result of higher labour participation will however slow the fall in unemployment. On balance, we are forecasting unemployment to fall to 6¼% in 2016 and 6% in 2017.