RaboResearch - Economic Research

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The Netherlands: labour market tightens further, but price pressures subdued

Economic Update

  • The Dutch economy will likely grow 3.0 percent this year
  • Producer confidence seems to stabilize; consumers more gloomy about the economy
  • Tens of thousands of new jobs were created in the past months
  • We expect GDP to increase by 2.3 percent next year
  • Inflation is also expected to rise significantly in 2019, while it is currently trailing behind the rest of the Euro area

The Dutch economy continues to expand despite mixed news on consumer and business confidence. Jobs growth has been especially strong in the past months, the unemployment rate has dropped to the lowest level in more than nine years, whereas the vacancy rate has reached record highs. Nevertheless, nominal wage growth has failed to pick up significant momentum. A mitigating factor for real household income is that inflation has been trailing behind the Euro area average this year and might very well turn out a tad lower than previously anticipated.

Consumer confidence slides; producer optimism rebounds

Table 1: Economic forecasts The Netherlands
Table 1: Economic forecasts The NetherlandsSource: Rabobank

Many European countries have seen producer confidence on a downward trajectory after historic highs in the beginning of the year. The Netherlands is no exception, with the index peaking in February this year, but declining ever since (see figure 1). With Brexit woes and Donald Trump’s tweets as probable culprits, producers have become less optimistic not just about how well their current order books are filled, but also about the future business they expect. The biggest scare might be behind us: in September producer confidence declined only slightly; October really broke the trend: producers signalled they are more positive about both their order books and expected activity. Whether this is a temporary rebound after half a year of steep decline, or whether producer confidence is stabilizing at this above average level remains to be seen. For 2019 we do expect business to expand their investments, although less rapidly than in 2018 (table 1).

Figure 1: Slight uptick in expected activity
Figure 1: Slight uptick in expected activitySource: Macrobond
Figure 2: Consumers are catching up
Figure 2: Consumers are catching upSource: Macrobond

Compared to producers, Dutch consumers long stayed remarkably optimistic: the headline confidence index peaked in the spring of 2017 at 26, the highest level since the turn of the century, and has been around that level for more than a year. It wasn’t until August of this year that they have become more hesitant. Expectations about economic developments in the coming year have declined especially quickly in the past months (see figure 2). Confidence is still well above historical levels though, and households still seem more than willing to spend their money: in August consumption rose 2.2% y-o-y, following July’s 2.8%. It is therefore unclear whether declining consumer confidence signals rising worries or is simply a normalization after near record high optimism.

Dutch economy keeps churning out more jobs

Figure 3: Stable low unemployment 25-45 year olds
Figure 3: Stable low unemployment 25-45 year oldsSource: Statistics Netherlands (CBS)

Job growth in the Netherlands is also still remarkably strong, with seasonally corrected employment 2.3% higher y-o-y this past September. In combination with a record number of job vacancies in the second quarter of 2018, this seems to be pulling more people into the labour market. Graduates, for example, and those previously on the side lines of the labour market are now keen to try their luck which in previous months might have inflated youth unemployment. The number of unemployed workers has therefore been only very slowly inching downwards, with the unemployment rate remaining virtually unchanged at 3.9% after March. Finally, however, it seems to have budged: in September it dropped to 3.7%, the lowest rate since early 2009. This seems mainly due to rising employment among all but the youngest members of the labour force (see figure 3). So far this year the unemployment rate averaged 3.9%. We expect job growth to remain strong throughout the rest of this and next year, with unemployment to drop to 3.6% in 2019 on average. Together with slightly less optimistic but still confident consumers, job growth is expected to push consumer spending 2.7% higher in 2019, following an equally strong 2018 with an expected 2.8% consumption growth.

Inflation still below Euro area average

Figure 4: Inflation rising
Figure 4: Inflation rising  Source: Macrobond

Every rose has its thorn though, as it’s not just employment that is increasing but also the number of companies complaining that a shortage of labour is holding back business. This is an important reason we expect growth to slow next year. Despite the tightening labour market, pressure on wages and indirectly on consumer prices have lagged. So far this year Dutch employees have been able to collectively bargain for a 1.9% contractual wage rise, not much more than 2017’s 1.4%, even though unemployment has dropped from around 5% to below 4. Meanwhile inflation has been below the Euro area average this year (see figure 4). Statistics Netherlands (CBS) has recently even downwardly adjusted inflation figures for the past months. While we expect consumer prices to rise 1.7% on average this year, it is possible that the Netherlands will undershoot a tad and realize a yearly average of only 1.6%. This would appear welcome news to Dutch consumers – real wages are expected to slightly rise – as 2019 will bring a VAT hike. That will likely push inflation in the Netherlands well above the Euro area average, with consumer prices expected to rise some 2.5%.

Nic Vrieselaar
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2216 2257

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