RaboResearch - Economic Research

The Netherlands: Again amongst the quickest growing countries of the Eurozone

Economic Update

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  • The Dutch economy grew faster than expected in the third quarter
  • Exports remained relatively strong despite slowing world trade growth
  • These strong exports have contributed to the third quarter revival of manufacturing
  • Prices of existing houses were up because of continuous scarcity
  • We expect future growth to slow down due to external and internal risks

In the third quarter of 2019, the Dutch economy grew by 0.4% q/q; slightly faster than we had expected. This made the Netherlands again one of the fastest growing countries in the Eurozone. Growth was, amongst others, supported by increased government consumption (+0.5% q/q), private consumption (+0.2% q/q) and exports (+1.1% q/q). Investment growth, however, was down 0.2% q/q in the third quarter. But this was after three quarters of growth, two of which were relatively strong. Investments are usually volatile and we thus shouldn’t read too much in this quarterly decline, but we do expect slower investment growth next year. This will result from the slowing world economy, and domestic issues due to nitrogen and PFAS soil pollution. Dutch consumers, however, are expected to continue to support economic growth. A tight labor market means that employment is very high, supporting household income. Contractual wage increases have recently gained speed, and next year will see a further reduction in the tax burden for households, slightly increasing real disposable incomes. Additionally, consumer confidence remains above its long-term average. All in all, we expect that the Dutch economy will continue to grow, but at a slower pace.

Manufacturing revival in the third quarter

In the third quarter Dutch exports grew by 1.1% q/q. This is a strong figure in light of the slowing growth in world trade (figure 1). We expect the muted global economic outlook to eventually weigh on Dutch exports growth in the coming quarters.

Strong exports have most likely contributed to the revival of the manufacturing industry, which showed a solid performance in the third quarter. Growing at 1.6% q/q, the sector left behind three quarters of declining production. It therefore contributed positively to Dutch economic growth for the first time this year. Moreover, manufacturing production is nearing its record-high level of the beginning of 2018 (figure 2). The manufacturing revival is linked to the strong exports of the third quarter, since a lot of Dutch manufacturing goods are exported. However, as we foresee that export growth will slow, we also expect this manufacturing revival to be only temporary. The latest figures on both the Dutch manufacturing PMI and producer confidence support this view: The Dutch PMI fell to 49.4 in November, crossing the level of 50 and thus pointing towards a decline in output, for the first time since June 2013. In addition, producer confidence declined to 2.8 in November, also signalling that the third quarter’s manufacturing revival may be of a temporary nature.

Figure 1: World trade continues to decline
Figure 1: World trade continues to declineFigure 1: World trade continues to declineSource: Netherlands Bureau for Economic Policy Analysis (CPB)
Figure 2: Manufacturing revival
Figure 2: Manufacturing revivalSource: Statistics Netherlands (CBS)

Housing market dominated by scarcity and nitrogen issues

Scarcity in the number of homes available for sale keeps adding to higher prices and lower sales. Prices of existing homes were up 6.1% y/y in October, whereas sales declined by 16% y/y after a short revival in the third quarter. Moreover, the end of this persisting scarcity does not appear to be in sight: the number of building permits issued declined by no less than 23.8% y/y in the third quarter due to capacity constraints and problems with nitrogen and PFAS soil pollution (figure 3). So far, around 39,600 permits have been issued in 2019, which is nowhere near sufficient to alleviate the shortage in the housing market. We therefore expect further price increases –although at a slower pace – and slightly fewer home sales next year.

Table 1: Economic forecasts for the Netherlands
Table 1: Economic forecasts for the NetherlandsSource: Rabobank

Construction output grew at a solid pace in the third quarter. And because approximately two years pass between issuing a building permit and handing over a house, it will take a while before the sector feels the full impact of the decline in building permits. But the PFAS and nitrogen problems are already causing delays in infrastructure and construction projects and we expect negative growth numbers for the construction sector next year. We also see that the number of bankruptcies in the construction sector is starting to rise, albeit from a very low level (figure 4). Continuing labor shortages in the sector, which firms indicate as an obstacle to their business operations, seem to play a role. Moreover, business confidence in the construction industry fell sharply.

Figure 3: Decline in building permits issued continues
Figure 3: Decline in building permits issued continuesSource: Statistics Netherlands (CBS)
Figure 4: Bankruptcies in the construction sector are slowly rising
Figure 4: Bankruptcies in the construction sector are slowly risingSource: Statistics Netherlands (CBS)
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