RaboResearch - Economic Research

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Dutch economy approaching the top of the business cycle

Economic Update

  • The Dutch economy has fully recovered from the crisis
  • In 2018 and 2019 growth will remain high and the Dutch economy will reach the top of the business cycle
  • The capacity utilization of industry is at the highest level since the crisis
  • Producer confidence is at the highest level ever measured
  • Government finances are solid despite the government pursuing pro-cyclical policies
  • Inflation remains strikingly low, although we expect a faster price increases this year
Table 1: Key figures the Netherlands
Table 1: Key figures the NetherlandsSource: Rabobank and Statistics Netherlands (CBS)

In 2017 real GDP is expected to have grown by 3.2 percent, the highest growth in ten years. We think the output gap is now practically closed, so the period of catch-up growth after the crisis has finally come to an end and a new phase is unfolding: a phase were the economy is approaching the top of the business cycle. This means low unemployment and increasing inflation.

We expect GDP growth of 2.8 percent in 2018 and 2.2 percent in 2019 (table 1). This is well above our estimated potential growth rate of around 1.2 percent, which means the chance of economic overheating is increasing. This is also visible in the development of unemployment and inflation: the unemployment rate will decline to 3.8 percent in 2019 and inflation will increase to 2.6 percent, partly due to VAT increases.

Producer confidence reaches highest level ever

Industrial capacity utilization increased further in January 2018 and is currently at pre-crisis levels (figure 1). According to a Statistics Netherlands (CBS) survey, labour shortages are now the biggest obstruction to production, not a lack of demand. This is a clear signal that the economy is doing well and that the labour market is tightening.

Confidence indicators suggest the economy will accelerate. In January of 2018 industrial producer confidence reached the highest level ever measured (figure 2). Producers are very positive about the expected business activity in the coming three months. They are also very satisfied with their order position. Because of these figures, together with the high level of the PMI, we expect strong economic growth to continue.

Figure 1: Capacity utilization increases
Figure 1: Capacity utilization increasesSource: Statistics Netherlands (CBS)
Figure 2: Producer confidence at highest level ever measured
Figure 2: Producer confidence at highest level ever measuredSource: Statistics Netherlands (CBS)

Highest budget surplus since the beginning of this century

Statistics Netherlands published its first figures for government finances in 2017Q3. The four-quarter rolling sum of the Dutch government budget balance improved to 1.2 percent of GDP in 2017Q3. This is the largest budget surplus this century (see figure 3). This was mainly caused by lower government expenditure, a result of the extensive budget cuts in recent years. Strong GDP growth also aided the health of government finances, by increasing tax income and reducing spending. Because of the government surplus and the sale of financial assets, the Dutch debt ratio declined to 57% of GDP in2017Q3.

Figure 3: Highest budget surplus since 2001
Figure 3: Highest budget surplus since 2001Source: Statistics Netherlands (CBS)

The new coalition was also aware of the favourable state of the government finances, and decided to further increase spending and reduce taxes in the coming years. Politically it’s understandable that the government wants to reduce taxes and increase spending after years of budget cuts and reforms. However, the timing is rather unfortunate. When there was an economic downturn the government reduced spending. Now that the economy has finally recovered, the government plans to boost the economy even further. It’s this kind of policy that amplifies the already volatile economic cycle of the Netherlands.

Inflation remains low

The Dutch HICP inflation rate declined to 1.2% in December 2017, compared to 1.5% in November (figure 4). The main reason for the lower inflation reading is the smaller contribution of fuel prices. Core inflation remained low at 0.7%.

Figure 4: Core inflation remains low
Figure 4: Core inflation remains lowSource: Statistics Netherlands (CBS)

Low inflation could be a result of subdued wage growth in the Netherlands, which seems to be partly caused by structural factors. Still, we think the increasing scarcity on the labour market will lead to higher nominal wage growth in 2018 and especially 2019. We expect HICP inflation to increase to 1.8 percent this year. In 2019 increases in some value added taxes will see companies raise their prices, which means inflation will further increase to 2.6 percent.


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