RaboResearch - Economic Research

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Dutch economic boom to continue

Economic Quarterly Report

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  • We expect the Dutch economy to grow by 3.1 percent in 2018 and 2.5 percent in 2019
  • All expenditure components will contribute to growth
  • The global economic recovery continues to boost exports
  • A number of countries offer trade and investment opportunities for Dutch companies
  • At the same time, a geopolitical conflict, Brexit or a possible trade war could have a major adverse impact on the Dutch economy
Table 1: Key figures for the Netherlands
Table 1: Key figures for the NetherlandsSource: Statistics Netherlands. Rabobank

The good times continue for the Dutch economy. In 2017 GDP racked up 3.1 percent growth and we forecast another 3.1 percent growth in 2018 (table 1). The last time we saw more than three percent growth two years in a row was in 2006 and 2007. These rates are well above our estimate of potential economic growth. Consequently, we expect unemployment to fall further and inflation to increase. 

We have increased our projections for economic growth in 2018 and 2019 vis-à-vis our previous forecasts. This is in part because we have revised upwards our residential investment outlook.

Growth all-around

Dutch economic growth is broad-based, both this and next year. Household consumption should grow by 2.1 percent in 2018, which means faster consumption growth than we saw last year. Three factors underlie this trend. First, healthy employment growth could drive unemployment down to 4.0 percent in 2018 (figure 1). Unemployed workers who find a job see their incomes go up immediately and labour market tightness drives up wages for workers who already have a job. In addition, with consumer confidence at a high level (figure 2), consumers are no longer postponing purchases of durable goods. 

Figure 1: More jobs. fewer jobless
 Figure 1: More jobs. fewer joblessSource: Statistics Netherlands
Figure 2: Consumer confidence at a high level
Figure 2: Consumer confidence at a high levelSource: Statistics Netherlands

The high level of consumer confidence also relates to the third driving factor behind the positive development of household consumption, the housing market, which has now fully recovered from the crisis in most parts of the country. Rising home prices increase home equity, which boosts household consumption. Furthermore, sales of existing homes typically results in some additional consumption and residential investment related to home furnishing, repair, redecoration and renovation. The housing market saw a record number of homes being sold in the last quarter of 2017. Our housing market economists recently revised upwards their forecasts for home sales. which is reflected in higher residential investment and GDP in our new forecasts.

In addition to stronger housing investment. we also see business investment contributing positively to growth; producer confidence is currently at an all-time high. The economy will also receive an additional bump from the spending measures in the government coalition agreement. Finally, exports are doing well, growing by 4.5 percent in 2018 in our forecast. Imports are increasing somewhat faster, but because the volume of exports is so much larger, the contribution of net exports to growth is still positive.

Opportunities abroad

Due to solid growth in the rest of the world, there are many opportunities abroad for Dutch entrepreneurs and firms. We expect demand for Dutch products to continue to grow in the coming years. But which countries might Dutch firms choose when they expand abroad?

The answer to this question depends on whether firms want to invest or export. In case of investment (for example by opening production facilities abroad) factors such as the business climate, political stability and the position of said country in the economic value chain are important. Based on an analysis (in Dutch) of these factors we think the following countries are attractive destinations for Dutch foreign investment: Chili, Costa Rica, Uruguay, Poland, Hungary, Croatia, Georgia, Qatar, UAE and Malaysia. These countries perform relatively well on all the factors we consider.

For exports it is important to consider how exactly demand for Dutch products will develop in the future. Economic growth, expressed as a change in value (rather than a percentage), is an important measure for determining in which countries export opportunities are present for Dutch firms. Distance is also important because our analysis (in Dutch) shows that this is an important trade barrier. Therefore, major opportunities for Dutch firms present themselves relatively close-by, in Europe. But we also expect firms will see expanding exports to large high-growth markets further away, for example China, Nigeria, UAE, Brazil and India.

Global risks

International trade is a double-edged sword for the Dutch economy. Because of its dependence on foreign markets, the Dutch economy is benefiting from the current global economic expansion. But this dependence also means that the Netherlands has a lot to lose in case of a negative shock to world trade from geopolitical events, Brexit or trade barriers.

Regarding geopolitical events, it is not just an actual shock that could affect the Dutch economy, such as an escalation of tensions in the South China Sea, a conflict in the Middle East or a trade war. The risk of a geopolitical event in itself has macroeconomic implications. In an earlier publication we estimated that Dutch economic growth is about half a percentage point lower than it would be without the current global geopolitical tensions. This has to do with the fact that firms are more reluctant to invest than they otherwise would be, because they factor the risks of escalation in certain geopolitical hot spots into their decision-making. So economic growth might have been even higher at the moment. were it not for geopolitical risk.

Aside from risk, there are several concrete (geopolitical) events that will hit Dutch growth. The most important is Brexit. The impact is unknown. but a scenario analysis we performed earlier shows that a ‘hard’ Brexit scenario, in which the United Kingdom will trade with the EU on the basis of standard WTO-rules, would cumulatively cost the Dutch economy about 4 percent growth until 2030. But even a ‘soft’ Brexit. which would include a transition period and eventually a free trade agreement between the UK and the EU, would cost the Netherlands about 3 percent growth in the long run.

In addition to Brexit, we are also keeping a close eye on the developments surrounding US trade policy. A worsening of trade ties with the US would also negatively affect the Dutch economy.

Conclusion

The Dutch economy is currently performing well and we expect growth with remain above potential this year and next. The global political situation poses a challenge, but there are also many opportunities to be found abroad for Dutch firms and the Dutch economy.

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