RaboResearch - Economic Research

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The Netherlands: enjoy the view from the peak

Economic Update

  • This year will probably see the top of the business cycle in the Netherlands
  • A tight labour market could lead to rising wage growth and inflation
  • Real wage and jobs growth, together with wealth and confidence effects, are supporting consumption growth
  • House prices continue to rise rapidly, but a decline in home sales could put pressure on residential investment
  • Signs of a growth slowdown in the rest of Europe pose a risk to export and GDP-growth in the Netherlands

The Dutch economy continues to do well thanks to strong consumption growth backed by rising real wages, more jobs and rapid increase in house prices. However, with housing sales declining, the direct economic impact of the housing boom may be waning. Meanwhile, the European economic cycle appears to have peaked, resulting in a more modest outlook for exports. 2018 could well be the peak of the cycle in the Netherlands. The ride down the hill might still be fun, however. Especially for consumers, as they may still benefit from higher wages.

Labour market continues to tighten, inflation around the corner?

The Dutch unemployment rate declined to 3.9% in March, reaching its lowest point since 2009. This is not far off from the 3.6% it reached at the peak of the last economic cycle in 2008. That has led many to ask why we aren’t seeing higher wage growth and inflation. Indeed, at 1.8% wage in March growth is only half of its mid-2008 rate of 3.6% y-o-y; while inflation, at only 1.0% y-o-y, is only a third of its 3.2% high point in 2008. However, the low point in 2008 may not be the appropriate point of comparison. The unemployment rate first declined to 3.9% in late 2007 when wage growth was 2.3% y-o-y and inflation 1.9%. Earlier in 2007 wage growth had been as low as 1.6% and inflation a mere 1.1%. Developments pre-crisis illustrate that wages and inflation respond with a lag to unemployment, but can move up rapidly once the labour market is tight enough. While the 2007 experience suggests some upside to price pressures, there are other reasons to be cautious. Wages, and particular inflation, have been slow to pick up in other countries that experienced their recovery earlier, like the US and Germany. Furthermore, during this cycle there are more workers who are self-employed or on a temporary contract. Their first priority may be to negotiate for a fixed contract, rather than to ask for higher wages. We expect wage growth to move above 2.5% in the course of this year and inflation at 1.6% for the year as a whole. The latter forecast is under threat from the low realisations so far this year.

Figure 1: Labour market: is 2018 like 2007?
Figure 1: Labour market: is 2018 like 2007?Source: Netherlands Statistics
Figure 2: Decent fundamentals for consumption
Figure 2: Decent fundamentals for consumptionSource: Netherlands Statistics

Multiple drivers behind consumption growth

The surprisingly low inflation turnouts are actually good news for the purchasing power of consumers. As a result real wage growth has improved over the last year. Consumption also continues to be supported by employment growth, which has been around 2% y-o-y since 2016. Indeed, this has likely been the most important driver of consumption since 2016. As the labour market tightens the pace of jobs growth is likely to slow, but real wage growth will probably become a more important factor in driving consumption. Apart from income, wealth and confidence effects are also likely to continue to underpin consumer spending. In January and February combined, consumption rose 1.9% y-o-y, compared to our forecast of 2.1% for 2018 (see our Economic Quarterly for a full set of forecasts).

Figure 3: Declining home sales risk to investment
Figure 3: Declining home sales risk to investmentSource: Statistics Netherlands
Figure 4: Export growth may have peaked
Figure 4: Export growth may have peakedSource: Statistics Netherlands

The housing market boom is moving

Residential real estate in the Netherlands continues to appreciate rapidly. The national index rose 8.6% y-o-y in March. Under the surface, however, there are signs of shifts in the market. The fastest price increases are no longer in Amsterdam and Utrecht, but in The Hague and Rotterdam. The supply of houses in the bigger cities appears to be drying up, resulting in rising prices but declining sales. We expected the rest of the country to pick up the slack in sales, but this has yet to happen, so our forecast of a modest increase in annual sales is under threat. This also puts our outlook for residential investment at risk, because it is more closely tied to housing transactions than prices.

Main growth risks still from abroad

While the domestic economy is generally in good shape, the risks continue to come from abroad. We have written at length about the potentially severe consequences of Brexit, trade conflicts and geopolitical events for the highly globalizes Dutch economy with its large trade and financial exposures. More recently, however, the signs, like the declining Ifo index, that the business cycle may be peaking in Germany and other parts of Europe may be a more imminent – but less extreme - risk to the Dutch economy. We expect a declining contribution of the trade balance to GDP growth during the course of this and next year.


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