Faltering global economy now also spreads to the Netherlands
Economic Quarterly Report
- The Dutch economy will grow by 1¾% in 2016 and 1½% in 2017
- Exports will make a relatively low contribution to growth in both years, mainly due to slower growth at important trading partners
- Consumers are still cautious, despite a strong increase in disposable income
- Low inflation is a cause for concern
- Employment is gradually recovering
- International uncertainties could further pressure growth
The Dutch economy is expected to grow in real terms by 1¾ per cent in 2016 and 1½ per cent in 2017 (table 1). Compared to the forecasts in our previous Quarterly Report, the increase in the volume of gross domestic product (GDP) will be ¼ per cent lower in 2016 and ½ per cent lower in 2017. This is mainly due to slower growth at the Netherlands’ major trading partners. The expected slowing of economic growth in the United Kingdom will hit Dutch exports relatively hard (see box 1). This lower increase in economic activity abroad will be reflected in lower growth in the volume of exports in 2016 and 2017 than we have become used to in the Netherlands in previous years. The domestic developments on the other hand look relatively positive by comparison. While the volume of private consumption this year is somewhat disappointing given the increase in household income, this is offset by strong growth in the volume of private investment. Growth of investment is expected to subside a little next year, but a larger increase in household consumption is expected.
While we have downwardly adjusted our growth forecast, there is a chance of more disappointing economic news due mainly to the geopolitical uncertainties that could damage economic growth in the Netherlands (see our Global Economic Outlook). There are also domestic uncertainties. The further decline in the coverage ratios of pension funds caused by the low level of interest rates make further curtailments of pensions likely in 2017, although according to the most recent indications the Cabinet will compensate pensioners for the resulting loss of purchasing power. There are also economic uncertainties associated with the elections to the Dutch House of Representatives in March next year. There would seem to be little budgetary room for sizeable stimulative measures from the government, while there may be uncertainty relating to policy with respect to the housing market and the Dutch membership of the EU. On the other hand, consumers will have on average more potential to increase their spending than has been the case in previous years. Whether they will actually do so is still debatable, given the high level of private debt.
Growth in the Netherlands still decent in the second quarter of 2016
According to the first provisional estimate from Statistics Netherlands (CBS), the Dutch economy increased in size by 0.6 of a percentage point in the second quarter of 2016 compared to the previous quarter. The growth was driven mainly by government spending and private investment (figure 1). Private consumption also rose, but we would have expected a higher increase in view of the rise in household income. Export volume was virtually unchanged, meaning that this time the external sector made only a small contribution to growth. The Dutch economy grew faster in the second quarter than the eurozone average GDP growth rate of only 0.3 of a percentage point. We expect Dutch GDP growth to moderate somewhat in the coming quarters, mainly due to lower growth of private investment and exports.
Dutch exports hit hard by global slowing of growth
After growth in export volume of 5 per cent in 2015, export growth will fall to only 2¾ per cent in 2016 and 2017. This is entirely due to slower growth at trading partners important to the Netherlands (see the Global Economic Outlook). There will be a sharp slowdown in growth in the United Kingdom this year and particularly next year, due to the result of the Brexit referendum (see box 1). Economic growth in the United States will also be much lower in 2016 and 2017 than in previous years. At the same time, the euro is significantly more expensive compared to other currencies than in previous years, meaning that the Dutch export sector can no longer rely on a positive effect from a relatively favourable development of competitors’ prices. Despite the lower export growth, there are still mainly downside risks for the export sector (see also the Global Economic Outlook).
Box 1: Dutch economy is especially vulnerable to effects of Brexit
The proposed departure of the British from the EU will lead to lower economic growth in the entire eurozone (see also Brexit vote lowers economic growth in the eurozone). The significant decline in growth in the UK and the weak pound will affect exports from other countries via the trade channel. In addition, the resulting uncertainty could damage consumption and investment. The effect on the Dutch economy will be greater than on the economies of most other European countries. This is mostly due to the more than averagely close trade relations between the UK and the Netherlands: after Germany and the US, the UK is the Netherlands’ most important trading partner (as measured by added value). The fact that the Netherlands is a very open economy only exacerbates this negative effect. Our forecast of much lower growth in the volume of exports in 2016 and 2017 compared to previous years is largely the consequence of lower growth in the UK.
Besides the trade channel, Brexit could also affect the Dutch economy through its effect on confidence. The initial confidence figures following the Brexit referendum present a mixed picture. Dutch consumer confidence fell in the first month after the Brexit result, but remained positive and at a higher level than at the beginning of the year. Producers initially appeared to take little account of the result of the Brexit referendum, but producer confidence took a sudden dive in August with its sharpest fall since 2011 (figure 2). The measure is however still above its long-term average. For now therefore, we expect only a modest negative effect from the Brexit result on consumption and production volume in terms of confidence.
The actual economic effects of Brexit on the Dutch economy will become clear in the coming months and years, and there is as yet little indication of this from the most recent actual figures. If the Brexit process proceeds smoothly in political terms, the economic consequences could also turn out not to be as bad as expected. However there is no certainty at this stage that this will be the case.
Consumers are still cautious
Since 2015, the volume of household consumption has been making a real contribution to economic growth for the first time since the crisis, and this rose last year by 1¾ per cent. The main cause was the strong increase in real disposable household income (figure 3). The increase was mainly associated with a strong rise in employment, a relatively strong increase in wages, mostly in the government sector, and lower than expected inflation. Given the high increase in household income in real terms, consumption growth was somewhat disappointing due to a strong rise in savings and/or debt repayments. The cautiousness of households is understandable, as private debt in the Netherlands is still relatively high and many households still have mortgages that are higher than the value of their homes. Many homeowners are therefore using some of their savings to make extra repayments on their mortgages.
Household disposable income is also rising strongly this year. Inflation is very low, wages are rising and the five billion euro tax cuts package introduced early this year is supporting net incomes to some extent. Households however continue to be cautious and are saving a significant portion of their extra income this year as well. Consumption growth in 2016 is thus expected to amount to 1¼ per cent. Incomes will rise by slightly less next year, but we do not expect to see any significant further increase in savings, meaning that consumption volume will rise by 1¾ per cent.
Box 2: The century of export-driven growth
Now that the global economy is cooling, the contribution of export volume to Dutch economic growth will also decline in 2016 and 2017 (figure 4). Next year, we actually expect exports to make their lowest contribution to growth since 2009. The average growth of the Dutch economy has been 1.3 per cent between 2000 and 2015. 0.9 of a percentage point of this growth can be attributed to exports of goods and services, while the remainder came from government spending. The private domestic sector has therefore on average made no contribution to economic growth since the beginning of this century. This is partly due to the fact that household disposable income has lagged economic growth. Given the fact that private investment has already strongly increased in recent years and households still have relatively high levels of debt, we do not expect to see any strong contribution from private domestic consumption in the years after 2017 either. We therefore have to hope that the global economy will pick up again, as otherwise it would seem that the government is the only party left that can generate stronger economic growth in the years to come.
Low inflation is a cause for concern
Dutch inflation has been extremely low for a long time. According to the European HICP measure, there was deflation of 0.6 of a percentage point in July, close to the lowest-ever level for this measure (figure 5). Deflation or low inflation is positive for real disposable household income, since wages in this case will clearly outpace inflation (figure 6). In our view however, the current low level of inflation is more of a cause for concern.
The fact that prices are now falling despite aggressive monetary easing suggests that there are structural problems with effective demand in the Netherlands. The low level of inflation is thus broad-based, which is confirmed by core inflation (excluding rent), that has been around zero per cent for several months. One explanation for the low level of effective demand in the Netherlands could be that there are still balance sheet issues in parts of the Dutch economy: as stated above, private gross debt is still high and many households are in a situation of negative equity. Rising house prices are providing some relief in this respect. But because there are now problems in another part of household balance sheets, namely reserves for retirement, a continued propensity to save is still logical even with low interest rates.
Balance sheet problems mean that falling prices are particularly concerning since there is a chance of a debt deflation spiral (Lukkezen et al., 2015): the resulting lower prices lead to higher debt in real terms, meaning that households will spend even less and prices will fall further.
We do not expect such a debt deflation spiral scenario to materialise at this stage. The negative effect of energy prices on the inflation figures will wane in the coming quarters, which will have an upward effect on the inflation rate. For this year, we expect average inflation of zero per cent, with a rise to 1 per cent in 2017. Although we are not forecasting a scenario of continuing deflation, inflation will remain low and well below the ECB’s target rate of 2 per cent.
Employment picks up again
The number of persons in employment rose by 36,000 in the second quarter of 2016. This is the strongest increase since the beginning of 2008 (figure 7). The increase in employment in recent quarters is entirely attributable to the private sector: employment in the non-commercial sector has actually contracted to some extent. Within the private sector, the largest part of the increase in employment has occurred in commercial services. Many of these jobs are temporary agency jobs, which is a sign of an early-cyclical recovery, but also suggests there is a structural shift to flexible workers (Dutch businesses turn more frequently to agency workers). Moreover, construction has not yet recovered from the heavy blows the sector has suffered since the financial crisis, although the second quarter this year saw a mild increase in employment in construction for the first time since 2011.
The recovery in the labour market is also visible in the unemployment figures. Since the peak in unemployment in early 2014, there has been a gradual decline in the number of unemployed persons (figure 8), actually with an acceleration in this decline in recent months. We expect unemployment to decline further in the rest of this year and in 2017, but at a more moderate rate. We also expect the growth in employment to be slightly less in 2017 in line with the lower economic growth. We are also forecasting an increase in the labour supply as a result of higher labour participation. Both these effects will moderate the decline in unemployment, which will amount to 6¼ per cent and 5¾ per cent of the working population in 2016 and 2017 respectively.
A recovery in the labour market is sorely needed, especially for the group of long-term unemployed. There has been a sharp increase in the number of this group since the crisis. Older working people, those aged between 45 and 75 years, have had a difficult time since the crisis (figure 9). While the number of long-term unemployed aged between 25 and 45 has fallen sharply in the past two years, the group aged between 45 and 75 remains stuck at a much higher level than it was before the crisis. This is partly due to policy measures such as the increase in the age of entitlement to state retirement pension (AOW), and higher wage costs have also played a role (see Long-term unemployment requires lower social insurance costs). The current recovery in the labour market and the fact that wage costs hardly increased at all in 2015 are positive developments in this context. However, the economic recovery is too weak to enable the group of older unemployed people to find work in large numbers. The next government should therefore take measures to improve structural economic growth, so that the older group of long-term unemployed will also find a job again.
Lukkezen, J., Jacobs, B. and Kool, C. (2015) Macro-economie bij balansproblemen en in de liquiditeitsval. CPB background document, 3 November 2015.
The Economic Quarterly is a publication of Economic Research of Rabobank and a co-production with Financial Markets Research. The date of completion is the 6th of September 2016.
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, ONS: Office of National Statistics, OECD: Organisation for Economic Co-operation and Development, CPB: Economic Policy Analysis, IMF: International Monetary Fund, ECB: European Central Bank, BoE: Bank of England, BoJ: Bank of Japan, Fed: Federal Reserve.
Abbreviations used for countries/regions: UK: United Kingdom, US: United States, JP: Japan, EZ: eurozone.
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