RaboResearch - Economic Research

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The Netherlands: Economic risks now also have a Dutch origin

Economic Quarterly Report

  • Economic growth in the Netherlands is expected to decline to 1.2 and 0.8 percent in 2020 and 2021
  • Slower global growth and expectations of a downturn in the United States mean that export growth will be modest
  • At the same time, uncertainty in relation to the nitrogen issue is affecting public and private investment in the Netherlands
  • We do however expect households to increase consumption due to lower taxes, higher wages and a higher proportion of people working on permanent contracts
  • In the longer term, the prospect is less rosy due to the aging population, meaning that an agenda for sustainable growth and general well-being is desirable

In 2019 the Dutch economy produced figures that stood out positively in an international context, since the Netherlands continued to outperform most of the other large eurozone economies through the third quarter on the back of higher investment and other factors. But the economy is no longer producing the sort of rapid growth seen in 2017 and 2018: due to the sharp decline in the growth of world trade and lower private and public consumption, we expect GDP volume growth to decline to 1.7 percent.

Figure 1: The spending components that support (or do not support) growth
Figure 1: The spending components that support (or do not support) growthSource: CBS, forecasts by RaboResearch

We expect the economy to slow further in 2020 and 2021, to GDP growth of 1.2 and 0.8 percent respectively. The first reason for this is that we see no fundamental solution to the US-China trade conflict at this time. Secondly, world trade will be affected by the imminent downturn in the United States. This will affect not only exports from the Netherlands, it will most likely also make entrepreneurs less prepared to invest. Finally, we expect public and private investment to fall off in 2020 and 2021 due to the issues relating to nitrogen. So in the coming period, the Dutch economy will have to rely mainly on household consumption and government spending (see figure 1).

Table 1: Key data for the Netherlands
Table 1: Key data for the NetherlandsSource: CBS, forecasts by RaboResearch
Note: f = forecast

Consumption to support growth

We expect households to spend around 1.8 percent more in 2020 than in 2019, raising the rate at which consumption is growing. This is partly due to the tax cuts the Dutch government is proposing, which will give households more to spend. Another boost to purchasing power, and therefore consumption, will come from the development of wages in real terms. These are expected to increase faster next year, since CLA wage growth is still relatively high due to the tightness in the labor market while inflation is considerably lower. Last year, wage growth in real terms was still dampened by inflation because due to the VAT increase and higher energy taxes, the prices paid by consumers rose on average by more than CLA wages (see figure 2).

Figure 2: Wage growth gaining pace
Figure 2: Wage growth gaining paceSource: Statistics Netherlands

Lastly, Dutch private consumption may also be boosted to some extent by the increase in security of employment. If you are more sure that you will keep your job, you are more likely to entertain the idea of purchasing big-ticket items. And after falling for years, the proportion of Dutch people employed on a permanent contract has risen again, from 60.7 percent in the third quarter of 2018 to 62.1 percent in the third quarter of 2019. 

On the other hand, we expect growth in employment to decline further as a result of the weakening economy, a trend that is already underway (see figure 3). Since labor supply is rising faster than employment, for example due to newly graduated students, unemployment will increase slightly. We are forecasting 3.7 percent in 2020 and 4.0 percent in 2021. This will put a brake on consumption. The threat of pension reductions in 2020 has been avoided by most pension funds, but this may well lead to greater cautiousness among older consumers. We therefore expect the increase in household consumption to decline to an average of 1.2 percent in 2021.

Figure 3: Growth is slowing
Figure 3: Growth is slowingSource: Statistics Netherlands, processed by RaboResearch
Note: this is the four-quarter average of the quarter-on-quarter change

Apart from household consumption, we think that government spending will be an important pillar of economic growth in the years to come. We are forecasting an increase in government spending of 1.9 percent in 2020, followed by a further increase of 2.0 percent in 2021. The Dutch government has announced sizable increases to spending in recent months, with additional resources for among others defense, youth care and the legal system with effect from 2020 being announced on King’s Speech Day. Not only that, the Dutch government announced in its Fall Memorandum that it would allocate a one-off sum of one billion euros to ‘urgent social problems’, such as the pressure of work in elementary education. It is notable that the government will pay for this additional spending out of its ‘underused’ budget, due for instance to healthcare costs being lower than estimated. In 2020 as well, we expect the government not to be able to spend its full budget, partly due to the tightness in the labor market. If it does succeed in this, this could mean that economic growth will be slightly higher than we currently estimate.

Double whammy for investment: global malaise and the nitrogen crisis

Even though businesses and governments have invested billions of euros more in the first three quarters of this year than in the previous year, we are considerably more downbeat regarding investment in the Netherlands in the coming years. We expect only modest growth in total investment in 2020, to be followed by a decline in 2021. As regards private investment, this is partly due to the weaker global economy, since this gives businesses less reason to expand in the near term. Manufacturing in particular is feeling the downturn in the global economy due to its reliance on exports. This was already visible in the industrial production figures this year, and capacity utilization appears to have peaked (figure 4). Unsurprisingly, confidence in this sector has been declining for some considerable time (figure 5).

Figure 4: Industrial capacity utilization has peaked
Figure 4: Industrial capacity utilization has peakedSource: OECD
Figure 5: Declining confidence in industry
Figure 5: Declining confidence in industrySource: DG ECFIN, Macrobond

In addition, both private and public investment is suffering from the Dutch policy on nitrogen emissions and the land polluted with per- and polyfluoroalkyl substances (PFAS). This has put many construction projects on hold. The Dutch government has now announced a new standard for PFAS that should offer relief to many projects, but there is still much uncertainty with regard to the policy on nitrogen, despite recently announced measures. This will not only affect the construction sector, it will be felt in other sectors as well. For instance, if entrepreneurs wish to invest in new offices, production facilities, distribution centers or stabling facilities.

Furthermore, the uncertainty appears to have accelerated the decline in the number of construction permits for new-build homes. So we expect housing investment in 2020 to increase by less than previously estimated, and now to actually decline in 2021. Finally, it is hard to imagine that the government can fully achieve its ambitions with respect to infrastructure projects, meaning that we also expect government investment to decline in 2020.

Trade surplus shrinks due to lower exports

Figure 6: Imports growing quicker than exports
Figure 6: Imports growing quicker than exportsSource: CBS, forecasts for 2019, 2020 and 2021 by RaboResearch

Year in, year out, the Netherlands exports more than it imports, but its trade surplus has narrowed somewhat this year as a result of higher consumption and investment. For each euro of extra exports to other countries, there have been 1.17 euros of extra imports in the first three quarters of 2019. We also expect import growth to exceed export growth in the coming years (see figure 6). This will negatively affect economic growth. In both years, this will be because household consumption is expected to increase relatively rapidly, as a result of which the Netherlands will import more. At the same time, the trade conflict between the United States and China, combined with the slower growth expected in important trading partners such as Germany and the United Kingdom mean that demand for Dutch goods and services will increase less rapidly. 

In our view, this will become more visible in 2021, since we expect the United States, a major destination for Dutch exports, will enter a short economic downturn towards the end of next year. Additional downside risks for Dutch exports lie in Brexit and global trade tensions. Trade could markedly improve if there is a breakthrough in the trade conflict between China and the United States, or indeed more clarity regarding the future relationship between the United Kingdom and the EU.

Unsustainable pattern, investment in sustainable growth is needed

Given the poor outlook for exports and investment, it is encouraging that private consumption and government spending will support economic growth in the next two years. But this is not a sustainable pattern for the longer term. Productivity growth is not only slower in the Netherlands than it has been in previous decades, it is also failing to keep pace with the rate of growth in other developed countries. According to both our own structural growth model and the medium to long-term projection of the Netherlands Bureau for Economic Policy Analysis (the CPB), economic growth will fall to around 1 percent per year in the next decade.

In our view, the government has a major role to play in increasing this structural growth, since investment in basic research and education are essential for this to be achieved. Our calculations indicate that an investment of 50 billion euros in research and education could ultimately add value amounting to 80 billion euros. Businesses also have an important part to play in increasing productivity. SMEs have opportunities for operating more productively by adopting new technology, such as the use of big data for business decisions.

Investment is also needed to make the Dutch economy more environmentally friendly. The Netherlands currently emits more greenhouse gases per resident than most other EU countries. Here too, research will be needed to develop the new technology for this. The government can moreover offer society a ‘point on the horizon’. Businesses will benefit from clear and consistent policy targets on innovation and the climate, so that they understand what investments they need to make. A focus on regions rather than the Netherlands as a whole could be helpful, since this is the level at which clusters of knowledge appear. Attention to regional and national general well-being can make an important contribution, since knowledge-intensive regions such as Brainport can continue to attract knowledge workers in

Nic Vrieselaar
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2216 2257
Ester Barendregt
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 51828489
Menno Middeldorp
Head of RaboResearch Rabobank KEO
+31 6 8389 9872

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