RaboResearch - Economic Research

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The Netherlands: Government debt down almost 5 percentage points

Economic Update

  • Dutch government debt declined significantly over the past years to 52.4 percent
  • Government spending could provide a welcome boost to the economy
  • Industry, on the other hand, is expected to provide only a minor contribution to economic growth this year
  • Consumer confidence fell further below zero
  • But we expect the high employment rate to offset the decline in consumer confidence
  • And that consumption will continue to grow this year

Government spending boosts economic growth

We expect economic growth in the Netherlands to slow down in 2019 to 1.7%, compared to 2018’s 2.7%. Declining net export growth and lower private consumption growth contribute to the economy losing steam. Business investments are also anticipated to expand less quickly, but with an expected 3.1% growth it remains a strong stimulus for the economy in 2019. This also applies to government consumption: it is expected to grow by 2.4% in 2019. A year ago we dispraised this expansion as pro-cyclical, but the downturn since then could prove government consumption growth as a welcome boost to the economy.

Table 1: Economic forecasts The Netherlands
Table 1: Economic forecasts The NetherlandsSource: RaboResearch
Figure 1: Declining government debt
Figure 1: Declining government debtSource: Eurostat, Statistics Netherlands (CBS)

The government certainly seems to have fiscal room for increased consumption and investment: Statistics Netherlands (CBS) calculated that ‘The Hague’ was running a budget surplus of 1.5% in 2018, some 11 billion euros. That makes it the second year in a row in which the government spends less than it collects. Meanwhile public debt has dropped substantially in 2018 and is now 52.4% of GDP (see figure 1). This is comfortably below both the Eurozone average and the EU’s budget rule of 60%. This gives the Netherlands a better starting position than other European countries if risks such as a hard Brexit or escalating trade tensions materialize in the coming years.

Industry losing steam

Figure 2: Producer confidence stationary
Figure 2: Producer confidence stationarySource: IHS Markit/NEVI, Statistics Netherlands (CBS)

Producers are still quite optimistic: their confidence barely budged in March and remains well above 0 (see figure 2). But producer confidence tells only part of the story: it reflects producers’ expectations, whereas the purchasing manager’s index (PMI) more accurately gauges companies’ actual performance. And the PMI has been on a downward trend for a year now. While still positive, it does point to slower output growth.

Figure 3: Production looking stagnant
Figure 3: Production looking stagnant Source: Statistics Netherlands (CBS)

The first signs of this seem already apparent in the manufacturing sector: January saw output rebound from a steep December dip, but on average production hasn’t grown much the past year (see figure 3). This is not surprising, as companies are already running at high capacity, and are signalling among others scarcity of labour as hindering production. Given that unemployment, just 3.4% in February, is anticipated to remain low it doesn’t look like filling in vacancies will get easier. Pile on slower exports, and industry is expected to contribute less to economic growth this year. On the other hand high capacity utilization rates and low unemployment might spur investments from companies that wish to expand, which is why we expect business investments to grow 3.1%.                    

Consumers increasingly pessimistic

Figure 4: Decline in consumption and confidence
Figure 4: Decline in consumption and confidence Source: Statistic Netherlands (CBS)

Growing concerns about the Brexit, more and more news about the economy losing steam, rising energy expenses, a VAT rate hike which has helped push inflation above negotiated wage rises: whatever the cause, consumers are getting increasingly pessimistic. In March consumer confidence dropped to -4. In previous months that sliding confidence did not seem to have made a noticeable dent in consumers’ willingness to spend, with household spending growing an impressive 2.5% in 2018. In January however, consumption growth dropped to just 0.9% y-o-y, the slowest expansion since 2016. We will closely monitor consumption in the next months, as January’s figure is below our expectation. We anticipate the record-high labour participation rate to offset lower consumer confidence and to spur spending in 2019 to 1.6% more than in 2018.


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