The Netherlands: still summer, but the days are getting shorter
- The Dutch economy will likely grow 3.0 percent this year
- But there are more-and-more signs of a slowdown
- Confidence is waning
- A shortage of labour is beginning to constrain the expansion
- We expect GDP to increase by 2.3 percent next year
- The new Dutch state budget confirmed the healthy fiscal outlook, especially compared to other developed countries
The Dutch economy continues to grow strongly, but more and more signs point towards a slowdown. Business and, more recently, consumer confidence indicators appear to have peaked. Labour shortages are one factor constraining growth, but wage growth and inflation are still conspicuously absent. Despite this, the coalition government has trumpeted that almost everyone will be better off next year, based to an important degree on uncertain forecasts of higher wage growth. The new budget saw a substantial deterioration of the cyclically-adjusted budget deficit, with little to show for it by way of structural reforms. Nevertheless, with debt likely to decline below half of GDP, the Netherlands is in good fiscal shape by international standards.
Output growing rapidly, but confidence looks to have peaked
Dutch GDP growth was revised up in the second quarter, leading us to slightly revise our forecasts. We now expect 3.0 percent growth this year. Household consumption, residential and business investment are driving growth (see table). Consumption growth is likely to hold up into next year, as jobs growth has been strong and unemployment is very low. Nevertheless, more forward looking confidence indicators appear to be topping out (figure 1). Concerns about international trade tensions and, particularly, Brexit may be playing a role in the souring of confidence from its earlier highs. Such uncertainty tends to lead to businesses delaying investment, which is one reason we expect capital expenditure growth to slow. In the housing market, an important driver of the Dutch business cycle, affordability is deteriorating, contributing to a decline in home sales. While we expect prices to rise further, the turnaround in sales will likely lead to a decline in residential investment in existing houses, which will also be hit by next year’s VAT hike (figure 2).
Supply side to constrain growth
Another factor that is likely to contribute to a slowing economy next year is a shortage of labour (figure 3). Unemployment is already below 4 percent. About a third of the companies in the services and construction sectors say that a shortage of labour is the primary factor holding back business. The service sector experienced similar constraints during the previous peak in the business cycle, but for construction and industry self-reported labour shortages are much more acute. Back then annual wage growth peaked above 3 percent. Perhaps it should be no surprise then that the CPB, the public, but politically independent, economic and state budget forecasting agency, expects gross wages to accelerate sharply next year (figure 4). This is a big part of the CPB projection that the median household will see a 1.5 percent increase in their real income next year, a forecast enthusiastically shared by the coalition government when it announced its first budget in mid-September. The CPB’s wage forecasts have fallen short in recent years; like Germany and the United States, which led the Netherlands in the cyclical upswing, wage growth has been more muted than expected. By claiming credit for an uncertain forecast that it does not entirely control, the coalition government risks public disappointment it cannot afford, given its narrow parliamentary majority.
Few surprises, or progress, in the new budget
The unveiling of the new budget offered few surprises. Between the plans that had already been announced in last year’s coalition agreement and what was leaked in the week before, the main thrust of the budget was clear. The cabinet has used up most of its fiscal space right at the start of its term to reverse some of the belt-tightening that happened during the recession. The cyclically-adjusted budget deficit according to the EU definition has deteriorated to just under the EU 'limit' of 0.5% of GDP. That leaves little fiscal space for potentially expensive reforms of the pension system and to meet the government’s climate goals. Nevertheless, the non-adjusted fiscal balance is in surplus and government debt expected to decline below 50% of GDP. Compared to most other countries in the EU, or indeed among advanced economies, Dutch state finances are in good health. More importantly, the long tradition and deep commitment to maintaining healthy government finances remains and is shared across the political spectrum and the electorate.