Dutch economy: consumption shows strong growth, wage growth lags behind
- Consumption and exports show solid growth
- Inflation is lower than expected
- Real wage growth is lagging behind
The crisis is fading fast in the rear view mirror ...
The Dutch economy continues to perform well. Both household consumption and exports are contributing to GDP growth, in line with our most recent forecasts. Unemployment has declined below five percent, but wage growth remains subdued and inflation would have to rebound strongly in the second half to match our 1.4 percent projection for 2017. Labour market slack outside of the regular unemployment figure may be having a stronger impact on wages than we had anticipated.
Turning to the recent data, household consumption increased 0.4 percent month-on-month and 2.2 percent year-on-year in May. It is likely that this trend will continue in the coming months. Consumer confidence, a leading indicator of consumption, racked up another gain recently, going from +23 in June to +25 in July. It is now at the same level as it was in June 2007 (Figure 1). Willingness to buy, which is a good predictor for the purchase of consumer durables, moved from +40 to +41.
Exports, meanwhile, grew by 1.1 percent m-o-m in May, with a 3.3 percent increase y-o-y. Manufacturing was up 1.2 percent m-o-m and 3.9 percent y-o-y. Producer confidence (Figure 2), a leading indicator for manufacturing, is back at its early-2008 level and lies above its 20-year average. Hence our expectation is that the positive momentum in manufacturing will be maintained.
... but its impact on the labour market lingers
Despite healthy GDP growth, inflation in June was just 1.0 percent y-o-y (Figure 3). This is below our forecast of 1.4 percent for 2017 as a whole. Declining wage growth is part of the reason. Indeed, wages are barely outpacing inflation, while we might expect real wages to increase, given that unemployment fell to 4.9 percent in June. Is there is a good explanation for this conundrum?
One of the potential causes of low wage growth is slack in the Dutch labour market outside of the regular unemployment figure. During the crisis, the so-called latent labour supply increased much more in the Netherlands than in other countries, as some of the unemployed gave up looking for a job. Now that the economy is picking up steam, they are returning to the labour force. We estimate that these workers ‘on the bench’ are equivalent to approximately five percent of the total labour force. Also, a sizable chunk of the labour force, over five percent, has a job, but wants to work more hours. Even as the officially unemployed become scarcer, an increase in labour demand can be partly met by using these latent sources of labour supply.
New government may spend more
Public finances are in good shape. In the first quarter, public debt fell below 60 percent and the government recorded a budget surplus. The current coalition negotiations may result in a government that will ease fiscal policy versus the baseline in 2018 and beyond, so that the budget surplus could be smaller than the 0.6 percent of GDP for 2018 that we predict. At the same time, it is unlikely that the fiscal balance will shoot back into deficit again, as the more hawkish Liberal Party and Christian Democrats would not agree to such a budget. Hence any fiscal worsening would be at most 0.6 percent of GDP in 2018.