RaboResearch - Economic Research

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Dutch economy continues to grow, but starts to fray at the edges

Economic Quarterly Report

  • We expect the economy of the Netherlands to grow 2.9% this year
  • Consumers are spending more, companies are investing strongly and residential construction is picking up, which pushes housing investment
  • We do assume that the housing market will contribute less to growth compared to previous years as the number of sales of existing homes is declining
  • Starting in 2019 we expect growth to moderately slow down to 2.3% for next year
  • Expansionary government policy is likely to further push household expenditure, but as in 2018 higher consumption and investment will lead to more imports
  • Internationale trade is therefore expected to negatively contribute to economic growth in 2018 and 2019
  • Meanwhile producers have lost some of their optimism, which is expected to lead to a lower growth of business investments
  • Moreover, the increasingly tight labour market can act like a brake on production growth in certain sectors, for example in construction

From an international perspective the Dutch economy is performing rather well: gross domestic product (GDP) grew by 0.6% q-o-q in the first quarter, followed by 0.7% in the second quarter. This puts Dutch growth figures ahead of those of large European economies like Spain, Germany and the United Kingdom. We are expecting that the Netherlands will be able to keep up with last year’s pace and forecast a 2.9% GDP growth. This is among others due to rising consumption and companies investing more.

For 2019 we are a bit more cautious: we expect 2.3% GDP growth. Without further investments, the Netherlands will reach the limits of its growth potential. The first signs of this can already be seen: more and more employers are complaining that they can’t find staff, while residential construction has trouble growing, leading to a lower contribution in growth of housing investments. Meanwhile growing business investments and an expected uptick in consumer spending will not just lead to higher domestic spending but to higher imports as well. International trade will therefore slightly hinder economic growth in 2019 like it’s expected to do in 2018.

Table 1: Key figures on the economy of the Netherlands
Table 1: Key figures on the economy of the NetherlandsSource: Statistics Netherlands (CBS), Rabobank

Business investments on the rise, but confidence is under pressure

Dutch companies have invested strongly in first half of 2018, and for the year as a whole we expect a growth of business investments of around 6%. This is among others due to rising utilisation rates of capacity and because a growing proportion of companies are signalling that they have trouble recruiting new staff or are short on supplies and machines. This can boost further investments in capacity and productivity. It is good to realize though that the scarcity of labour and supplies could act as a brake on further production growth in certain sectors as it could hinder companies from taking on additional projects and customers at once. This seems to be the case in for example the construction sector.

Figure 1: Producers less optimistic
Figure 1: Producers less optimisticSource: Statistics Netherlands (CBS)

For 2019 we’ve downwardly adjusted our forecast for business investment, among others because producer confidence – while still positive – has been declining in recent months. Producers are especially less optimistic about future business (see figure 1). Possibly this is due to uncertainties surrounding a future with Donald Trump in the White House and the Brits planning to exit the European Union. Such global uncertainties can put pressure on the willingness of firms to strongly invest. That’s why for 2019 we expect business investments to grow 3.4%.

Housing investments contribute less; labour market may act as a brake on further growth

After a prolonged downturn during the crisis, housing investments have rebounded remarkably fast in the past years. For 2018 we expect a further growth of 6.6%. We anticipate that more homes will be remodelled this year and that more new homes will be built. But we expect that after this year will be the last of the upswing we’ve seen in the past years: for 2019 we expect a significantly lower growth of housing investments of 1.9% (see figure 2). Recently we have downwardly adjusted our sales forecast for the Dutch housing market because of scarcity, rising prices and declining confidence among prospective buyers.

Figure 2: Housing investment growth declining
Figure 2: Housing investment growth decliningSource: Statistics Netherlands (CBS), Rabobank

For newly-built homes the outlook is also less positive than in previous years: after a rapid rise in the past years, the number of building permits issued has stagnated in the first half of this year. As written earlier in this quarterly report, a lack of people, materials and capacity seems to play a role in this. We therefore assume in our forecasts that construction of new homes will only marginally increase in the coming years to around 75,000 houses per year. This is significantly less than the roughly 88,000 homes that the government coalition and the construction sector are aiming for to solve the housing shortage in the country.

More permanent jobs, higher spending

Figure 3: Consumers are still very confident
Figure 3: Consumers are still very confidentSource: Statistics Netherlands (CBS)

Despite producers’ burgeoning doubts about the future, consumers appear to still be in good spirits (see figure 3). And they certainly aren’t tightening their purse strings, as they spent considerably  more in the first six months of this year than in the first half of 2017. And that is hardly surprising: unemployment dropped below 4% earlier this year and is on a steady course to break the pre-crisis record low. For 2019 we expect that just 3.6% of the Dutch labour force is without a paying job, which would be the lowest level in at least fifteen years.

Figure 4: Permanent contracts back in vogue
Figure 4: Permanent contracts back in vogueSource: Statistics Netherlands (CBS), Rabobank
Note: rolling four quarter average
Figure 5: Previous quarter a fixed-term contract, now…
Figure 5: Previous quarter a fixed-term contract, now…Source: Statistics Netherlands (CBS), Rabobank
Note: rolling four quarter average

The increasing scarcity of labour also seems to spearhead a moderate rebound in the number of people in permanent jobs. In the second quarter of this year there were some 194,000 more workers with a contract for an undetermined length of time, than there were in the second quarter of last year (see figure 4). This increase seems to be due not just because employees with a permanent contract are losing these jobs less frequently, but also because there is a small rise in the number of fixed-term workers that transition into permanent jobs (see figure 5).

This can be quite a boost for the confidence of those that were previously in temporary jobs. Consumption in the Netherlands is further expected to grow due to tax cuts by the current governing coalition. Because the Netherlands has an open and relatively small economy, this extra consumption does mean – in addition to higher internal production growth – increasing imports. Because Dutch consumers are expected to spend more than their counterparts in the Netherlands’ key trading partners, we expect exports to be unable to keep up with rising imports. For 2018 and 2019 this means that international trade will very moderately hinder economic growth.

Rising prices, stagnating wage growth

Given consumers’ strong confidence and the high rate at which (permanent) jobs are created, we expect consumer spending to grow 2.6% in both 2018 and 2019. That’s quite an increase compared to previous years, but is simultaneously a small downward adjustment compared to previous expectations. This is among others due to the fact that we expect a tad higher inflation, which undermines consumers’ spending power.

Figure 6: Prices of goods rising quickly
Figure 6: Prices of goods rising quicklySource: Statistics Netherlands (CBS)

In the past months inflation has been steadily rising: in August the European Harmonized Index of Consumer Prices (HICP) broke through the 2% mark for the first time in almost two years (see figure 6). Goods have become especially more expensive in recent months, but price inflation in services has also gone up. Therefore we now assume 1.7% inflation for 2018 instead of 1.6%, and 2.5% instead of 2.4% for 2019.

Figure 7: About zero
Figure 7: About zeroSource: Statistics Netherlands (CBS), Rabobank

Due to these rising prices little remains of the growth in collective-labour-agreement wages. Admittedly these have been growing at a higher pace than last year, but in real terms they have been hovering around zero per cent for about a year now. Additionally, wage growth hasn’t been increasing in recent months. While these figures do not for example take into account quicker workplace promotions due to high labour demand, lackluster wage growth and rising consumer prices could undermine growth of Dutch workers’ purchasing power. Despite such concerns, we do expect that the rate at which consumer spending rises in 2018 and 2019 will for the most part still be dictated by the growing number of jobs, the high levels of confidence among consumers and the proposed tax cuts of the current governing coalition.

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

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