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The Netherlands: consumption rebounds, inflation remains low

Economic Update

  • Dutch economy is experiencing a broad-based recovery
  • Consumption growth rebounds
  • Inflation remains low
  • Government finances improve further

Broad-based economic recovery

The Dutch economy is experiencing a broad-based recovery. Exports are doing well despite international uncertainties and domestic demand is strongly contributing to GDP growth. We expect the volume of GDP to grow by 2.2% this year and 1.9% next year (table 1). The most recent monthly figures support our view of a strong economic recovery: household consumption increased and confidence indicators remain at historically high levels. Inflation, however, dropped strongly in April and now is lower than what we had previously expected.

This month Statistics Netherlands (CBS) released revised data of GDP growth in previous quarters. Noteworthy is that the volume of Dutch GDP growth was upwardly revised for the year 2015, from 2.0% to 2.3%, making 2015 the year with the highest growth since 2007. GDP growth in the first quarter of 2017 remained unchanged in at 0.4% q-o-q (figure 1), a bit lower than previously expected. One reason was the disappointingly low growth of household consumption, probably caused by a sharp decrease in gas consumption due to warm weather in the first months of 2017.

Because the lower gas consumption in 2017Q1 is most likely to be temporary, we expect the growth of household consumption to rebound in the second quarter of 2017. The monthly consumption data for April support this view: consumption grew rather strongly with 0.5% m-o-m (own seasonal adjustment). We have a positive outlook for consumption because of rising jobs and wage growth combined with high consumer confidence. In our latest forecast we expect to see private consumption grow by 1.9% this year and then ease slightly to 1.7% in 2018 (table 1).

Figure 1: GDP growth by expenditures
Figure 1: GDP growth by expendituresSource: Statistics Netherlands
Figure 2: Consumers remain positive
Figure 2: Consumers remain positive Source: Statistics Netherlands

Confidence remains high

Our positive growth outlook is supported by the high confidence levels. Consumer confidence remained unchanged at +23 in June, a level last seen in 2007 (figure 2). The sub-indicator willingness to buy – an important predictor of future consumption - did increase compared to May. Producers also remain optimistic: producer confidence increased from 6.1 in May to 7.2 in June. Producer confidence remains at a significantly higher level compared to last year. Additionally, the Dutch PMI index is currently at the highest level in 74 months (58.6). The high producer confidence supports our view that manufacturing production will increase in the coming quarters.

Strong decline of inflation

After a strong increase of inflation in April due to temporary factors, the inflation rate subsequently declined in May from 1.4% to 0.7% (figure 3). A large part of the decline of inflation in May compared to April had to do with the lower price of holiday-related services due to the timing of the May and Easter holidays. In addition, the positive contribution of energy prices to the inflation became smaller in May because of lower y-o-y growth of oil prices. Inflation is currently lower than we had previously expected, partly because of a drop in oil prices in the last few months.

Inflation excluding rents and the volatile price movements of energy and food, also decreased in May and is now only 0.1%. Both the core inflation and headline inflation rate are low at the moment. If inflation doesn’t increase in the coming months, we will need to reconsider our inflation forecast of 1.4% for 2017 as a whole.

Figure 3: Strong drop in inflation
Figure 3: Strong drop in inflationSource: Statistics Netherlands
Figure 4: Government budget surplus increases
Figure 4: Government budget surplus increasesSource: Statistics Netherlands

Government finances keep improving

Table 1: Key data for the Netherlands
Table 1: Key data for the NetherlandsSource: Statistics Netherlands, Rabobank

The government ran a 1%-surplus in the first quarter (figure 4). Both corporate and labour income tax receipts grew compared to a year ago, while expenditures remained the same. And for the first time in 6 years government debt fell below 60 percent of GDP, the general debt target set by the Stability and Growth Pact. This is the result of both the budget surplus as well as the sale of several government-held financial assets. The positive state of Dutch government finances probably plays a role in political parties taking their time in the government coalition negotiations. There is less of a rush compared to 2012, when the government deficit was over 4% of GDP; then a cabinet was formed in less than two months.

Martijn Badir
RaboResearch Netherlands Rabobank KEO
+31 88 726 7864

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