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Strong economic recovery good for the Netherlands, as long as it does not lead to complacency

Economic Quarterly Report

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  • Last year, the Dutch economy recorded the highest rate of growth since the crisis
  • In 2017, the economy is expected to speed up further with growth of 2.3 per cent, driven by the strongest growth in consumption since the start of the century
  • Consumption growth is expected to be more moderate in 2018, causing GDP growth to fall again slightly to 2.0 per cent
  • Exports will grow steadily in both years but at a lower rate than before the crisis
  • Unemployment will decrease further in 2018 to an average of 4.6 per cent
  • There are many risks that could adversely affect growth due to uncertainties in the international arena, particularly in 2018 and thereafter
  • The next cabinet must not be unduly optimistic: the current growth figures signify a temporary revival and growth is expected to drop back again in 2018. Reforms and investments designed to structurally bolster growth are therefore necessary (see the chapter on policy)

In 2016 the real Gross Domestic Product (GDP) of the Netherlands grew by 2.1 per cent. This is the highest growth rate recorded since 2007 and it followed growth of 2.0 per cent in 2015. Such figures show that the Dutch economy is experiencing a period of strong recovery. The growth was broadly based in both years: significant contributions were made not just by exports but also by household consumption and investments in housing.

Economic growth in 2017 is expected to be even higher than in 2016, at 2.3 per cent, despite a much more modest contribution from investment in housing (table 1). This strong economic growth is mainly thanks to household consumption, which will make the biggest contribution this year since the turn of the century (figure 1). Disposable income will continue to grow substantially in 2017 as many people will obtain new jobs and wage growth will outstrip inflation. Consumer confidence is also currently at its highest level since the crisis, which means that households are also expected to spend the additional income. In 2018, growth in disposable income and consumption will be more moderate as employment growth weakens and inflation increases somewhat. Even so, at 2.0 per cent economic growth will still be high in the Dutch context.

In addition we are expecting a budget surplus in both 2017 and 2018. Employment will grow further, causing the unemployment rate to fall both this year and next, reaching an average of only 4.6 per cent in 2018. This is in spite of the expected increase in the supply of labour.

Despite these positive figures, there is little reason for the next cabinet to lean back and be complacent. The Netherlands is exposed to large risks in the international arena (see ‘Global Economic Outlook’) that could hit Dutch exports hard, and consequently economic growth as well. Incidentally, we estimate the structural potential annual growth rate in the Netherlands at 1.2 per cent in the long term. In the short term, economic growth may fluctuate around that rate. At present, the growth figures are substantially higher than our estimated structural rate of growth of only 1.2 per cent per annum[1]. We are therefore assuming that in the longer term, after 2018, economic growth will gradually fall back if there is no change in policy, with barely any increase in households’ purchasing power. It is therefore extremely important for the next cabinet to make the economy beware of reversing economically sensible reforms implemented in recent years, particularly in healthcare and in the state pension retirement age (see the chapter on policy). structurally stronger through visionary investments in R&D, innovation and education combined with comprehensive reform of the tax system.

Figure 1: In 2017, household consumption makes strongest contribution to growth since 2000
Figure 1: In 2017, household consumption makes strongest contribution to growth since 2000Source: Statistics Netherlands, Rabobank
Table 1: Key data the Netherlands
Table 1: table with key data for the NetherlandsSource: Rabobank

Footnote
[1] For the calculations underlying the estimate of the potential growth rate, see Rabobank, 2016.

Uncertainties in international economy concern important trading partners of the Netherlands

Exports grew by 3.5 per cent in 2016 and we expect to see similar growth in 2017 and 2018 as well. Thus exports are expected to grow steadily, but the rate of growth is substantially below the average before the crisis (figure 2). A negative factor for the growth in Dutch exports is the pressure on demand for imports in the US and the UK in both 2017 and 2018, as these countries are important trading partners for the Netherlands. The pound’s depreciation is making Dutch export products relatively expensive for households and businesses in the UK. The US economy is expected to grow substantially next year but the growth will primarily be in domestic investment and consumption.

Figure 2: Export growth less than before the crisis
Figure 2: Export growth less than before the crisisSource: Statistics Netherlands, Rabobank

In the longer term, the risks are mainly likely to have a negative effect (see Outlook). We are getting ever closer to the actual Brexit and the associated uncertainties. A hard Brexit with trade restrictions would reduce the volume of exports to the UK from the Netherlands. The policy pursued by Trump could potentially result in a trade war, which would be downright harmful for the Netherlands as an open economy.

Inflation is rising due to increasing oil prices

Inflation rose sharply in January 2017 compared with December 2016, to reach 1.6 per cent (figure 3). Such a figure, which comes close to the ECB inflation target of almost 2 per cent, gives the impression that consumer prices could soon spiral out of control. However, an examination of the underlying trends shows that the upsurge in prices is mainly due to temporary factors. In recent years, energy and fuel prices have exerted almost permanent downward pressure on prices due to lower oil prices. Oil prices are now slowly rising again; the price of a barrel of crude North Sea Brent oil was even 78 per cent higher in January 2017 compared with one year earlier. This is a large part of the explanation for the big increase in inflation in January. Indeed, core inflation (inflation excluding food, energy and rents) is still less than 1 per cent. This shows that the economy is emerging from a state of underspending.

Figure 3: Inflation is rising due to increasing fuel prices
Figure 3: Inflation is rising due to increasing fuel pricesSource: Statistics Netherlands

In the course of this year, the effect of the year-on-year increase in oil prices is expected to fall out of the inflation figure. Fuel and energy prices will therefore no longer be pushing inflation up. Consequently, inflation for 2017 is expected to end up below the current rate, at an average of 1.3 per cent. Next year, inflation will climb to 1.5 per cent as the output gap is expected to gradually close and the labour market is expected to become tighter. The additional demand in the economy and the tight labour market will cause wages to rise and producers to increase their prices, which will exert upward pressure on inflation.

Consumers and producers are full of confidence again

Confidence indicators also show that we are in a phase of strong economic recovery: both consumer confidence and producer confidence rose in February 2017 to their highest levels since the crisis (figure 4). Consumer confidence fell to very low levels in 2012 and 2013; this was related in part to falling house prices and the sharp contraction in the economy compared with the Netherlands’ neighbours. Net consumer confidence is now positive again and comfortably above the long-term average, probably in part thanks to the recovery of the economy and the housing market. A particularly good sign is that the number of households saying this is a good time to make major purchases has reached its highest level since the start of the century. That is often a good predictor of growth in household consumption.

These extreme mood swings reflect the large fluctuations in the Dutch economy. The Dutch economy suffers more than its neighbours when there is a headwind but also experiences more of an upturn when there is a tailwind. This extreme volatility is not desirable. The next cabinet needs to take real action and limit the underlying macroeconomic instability in Dutch pensions and the housing market, for instance (see the chapter on policy).

The trend in producer confidence has also been upwards since 2013, with substantial increases in recent months. Furthermore, the Purchasing Managers’ Index (PMI) has risen sharply in the past few months; in February it reached 58.3 (anything above 50 means growth), the highest value for the entire eurozone. The PMI for the Netherlands in February 2017 even showed the biggest increase in production volumes in manufacturing since July 2006 and the largest growth in employment for six years. The high PMI value makes it likely that GDP growth will be strong in the first quarter of 2017 (figure 5).

All in all, both consumers and producers currently seem relatively unaffected by the international uncertainties. The outlook for the short term is accordingly favourable.

Figure 4: Both consumers and producers are as optimistic as they have ever been since the crisis
Figure 4: Both consumers and producers are as optimistic as they have ever been since the crisisSource: Statistics Netherlands
Figure 5: PMI points to high growth in Q1 2017
Figure 5: PMI points to high growth in Q1 2017Source: Statistics Netherlands, Markit
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