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The Netherlands: First hairline cracks seem to be visible

Economic Update

  • The Dutch economy is still expanding but with mixed signals
  • Employment and consumption keep increasing
  • But the manufacturing sector is showing weakness
  • This is a worldwide phenomenon and it is likely to continue
  • Although still at low levels, it’s worth noting that the number of bankruptcies has started to creep upwards in recent months

The Dutch economy is still growing. Employment improved again with a record high participation rate in June. Moreover, total investments expanded year-on-year, house prices kept raising and consumer confidence slightly improved. Combined with the increasing employment, the optimism probably stimulated households’ consumption, which grew considerably in May with 2.4 percent on a yearly basis. All in all we expect the economy to grow with 1.7 percent this year, mostly driven by domestic spending.

The first hairline cracks

Figure 1: Production has peaked
Figure 1: Production has peakedSource: Statistics Netherlands (CBS)

While the Dutch economy is still gradually expanding, the first hairline cracks seem to become visible. Even though both the number of vacancies and employment increased in the manufacturing sector in the first quarter, the sector appears to be losing steam. Manufacturing -representing around 11% of Dutch GDP- is producing at a high level, but y-o-y output growth has been weak since December and negative since March (see Figure 1). The sector’s turnover shows more or less the same picture: turnover has been declining on a yearly basis since November 2018 and stagnated only in April 2019. Given Dutch manufacturers’ integration in global supply chains, the cause is likely to be external. Indeed, the slowdown is not limited to the Netherlands: the US-China trade war, and the ongoing uncertainty around Brexit and its potential impact seem to be weighing on production and sentiment worldwide. On top of that, the slump in Germany’s automotive production seems to have impacted manufacturing in other parts of the Eurozone.

Weakness in manufacturing is expected to continue

We do not see the circumstances for substantial improvement in Dutch manufacturing in the coming months and forecast only a small increase in the sector’s added value of 0.3% for 2019 as a whole. Geopolitical tensions are not expected to fade anytime soon. With the recent election of Boris Johnson as the new British PM chances of a hard Brexit have increased. Meanwhile there appears no quick fix for the trade conflict between China and the US. It is therefore not surprising that in July the Eurozone’s manufacturing PMI dropped further to 46.5 -heavily weighed down by Germany- indicating declining production. The Dutch PMI paints a slightly more optimistic picture, but the sector’s weakness is also reflected by its recent slowdown (Figure 2). Although the index stagnated in July and remained at June’s level of 50.7 -therefore still pointing towards an increase in production- it is at its lowest level in six years. The Eurostat confidence indicator gives a similar view: Dutch manufacturing is weak, but the picture is less gloomy than for other European countries. Because even though producer confidence declined in the Netherlands, in July it stayed above its long-term average, while producer confidence in France and Germany dipped below their long-term average. Given the integration in the global supply chain, it is a cloudy picture for demand for Dutch products.

Figure 2: PMI at six-year low
Figure 2: PMI at six-year lowSource: IHS Markit
Figure 3: Dutch producers’ confidence not below long-term average yet
Figure 3: Dutch producers’ confidence not below long-term average yetSource: Eurostat

Other signals also point to lower growth

Figure 4: Bankruptcies are creeping up again
Figure 4: Bankruptcies are creeping up againSource: Statistics Netherlands (CBS)

Besides the decline in manufacturing production, it is worth noting the slight increase in bankruptcies. Although at low levels, the number of bankruptcies it has been creeping up again in recent months, after having decreased for roughly four years (based on 12-month moving average). Furthermore, other sectors are growing at a slower pace compared to last year.

Lize Nauta
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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