RaboResearch - Economic Research

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Netherlands: good prospects for further economic growth; coalition agreement near

Economic Update

  • Dutch economy keeps on growing at solid pace
  • There is an upside risk to our growth forecast for the third quarter due to strong consumption and PMI data in recent months
  • Unemployment is now falling fastest among elderly workers
  • Agreement between future coalition partners is near
  • Tax cuts on wages are likely; pension reform is delayed

Dutch economy firing on all cylinders

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

The Dutch economy continues to experience a strong and broad-based economic recovery. The second quarter showed the highest growth in ten years at 1.5 percent (i.e. 6 percent annualized) and recent monthly data confirm the positive momentum.  The economy is firing on all cylinders, with consumption, exports and investments all contributing. Furthermore, the upturn in the housing market is driving residential investment.

We predict growth to hit 3.3 percent in 2017 and we expect growth to slow to 2.4 percent in 2018, as the Dutch economy returns to full capacity (table 1).  

Upside risk to GDP forecast from strong consumption and PMI data

Figure 1: September PMI at near-record level
Figure 1: September PMI at near-record levelSource: Markit

The most recent economic data suggest that GDP growth in the third quarter could be higher than our current estimate of 0.5 percent. Month-on-month consumption growth in July picked up to 1.2 percent, rather than moderating after the strong second quarter, as we had expected. Momentum (3m/3m change) is now 1.6 percent (more than 6 percent annualized), the highest growth in more than ten years. There was also good news on the side of producers. Dutch PMI increased from 59.7 to 60.0 in September, the second-highest score since 2000 (figure 1). 

Unemployment falls further

Figure 2: Unemployment down to 4.7 percent
Figure 2: Unemployment down to 4.7 percentSource: Statistics Netherlands

The economic recovery continues to manifest itself on the labour market as well. In the second estimate of the second quarter, employment growth was revised upward: 53,000 jobs were added instead of 51,000. Further gains in employment and a concurrent fall in unemployment continued into the third quarter. In August unemployment rate fell to 4.7 percent (figure 2), bringing the average so far this year to 5.0 percent, the same as our forecast for the average for the whole of 2017. Consequently, here too the risk is that our forecasts will need to be revised to reflect the surprising strength of the Dutch economy.

A sign of the strong cyclical nature of the economic recovery is that unemployment is now decreasing fastest in the 45-75 age bracket. These workers are more likely to be on permanent contracts and therefore the last to be laid off in a recession. At the same time, they are also last to be hired when the economy is in full swing, as, symmetrically to what happens during a downturn, employers generally first turn toward (typically younger) workers on flexible contracts to meet their demand for labour.

Still no new government, pension reforms likely deferred

It has been over six months since the highly publicized Dutch parliamentary elections took place. Although many financial market participants breathed a sigh of relief when it turned out Geert Wilders’ PVV (Freedom Party) had not won the election, the fragmentation of the Dutch political landscape has resulted in protracted negotiations for a new government. After the VVD (Liberals), CDA (Christian Democrats) and D66 (Liberal Democrats) failed to reached an agreement with Groenlinks (Greens) they started exploring a coalition with CU (ChristianUnion). Media reports indicate that a coalition agreement will be reached before the end of October.

With the formation process apparently approaching its conclusion, there have been more leaks about the content of the agreement. Media reports indicate that the four negotiating parties want to reform the tax system by reducing the number of income tax brackets from four to two. This would lower the tax burden on households by five billion euros. In addition, plans exist to introduce a congestion tax on trucks. New spending is also on the horizon: infrastructure investment will likely increase by two billion euros and defence expenditures by one and a half billion euros annually. 

On some other important issues the negotiators have apparently not managed to agree. There have been reports that pension reform will be left out of the new government’s reform plans. The parties would apparently prefer to have the Social and Economic Council (SER) restart its stalled attempt to agree on an advice to the government. The SER is an important institution in Dutch social and labour market policy. In it government-appointed experts and representatives from the labour unions and employers try to hammer out a collective position that is then frequently adopted as government policy. This process helps to foster a consensus on reforms, but can be quite protracted especially on controversial topics such as pensions.

Government finances in good shape, but little fiscal space left

The new government inherits a clean fiscal house from the current government. After years of budget deficits, the Netherlands recorded a 0.4 percent surplus in 2016. Thanks to the surplus and to the denominator effect, public debt as a percentage of economic activity has now fallen below 60 percent. Despite the budget surplus, the new government has limited fiscal space. The cyclically-adjusted deficit as calculated by the European Commission is -0.2 percent in 2018, whereas the EU norm is -0.5 percent. Since the Netherlands is unlikely to deviate from the EU budget rules, increased spending on new initiatives will have to be financed either by higher taxes or by cuts elsewhere.

Jesse Groenewegen
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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