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The Netherlands: Growth declining to its potential level faster

Economic Update

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  • Economic growth in the Netherlands is expected to decline faster than expected, from 2.5 percent in 2018 to 1.8 percent in 2019
  • Although unemployment reached the lowest level in more than fifteen years at the end of 2018, the rise of real wages is still somewhat lacklustre
  • It also appears exports took a hit in the last quarter due to a decline in foreign demand
Table 1: Economic forecasts The Netherlands
Table 1: Economic forecasts The NetherlandsSource: RaboResearch

The Dutch economy continues to expand, but we do anticipate that the rate of growth is moving quicker to its potential level than previously thought. We expect GDP growth to decline from 2.5% in 2018 to 1.8% in 2019. In 2020 we forecast a further slowdown to 1.7%. While this is still above trend, it is clear that economic growth is starting to run out of steam. We still expect household spending, business investment and government spending to push growth throughout 2019, whereas we anticipate housing investment to remain flat. This follows a very rapid expansion in the past years of up to 20%. Meanwhile domestic demand is growing faster than foreign demand, meaning that net trade will probably weigh on GDP growth.

Unemployment briefly hits record low

After having been tantalisingly close to a record low for some time, the seasonally adjusted unemployment rate finally dropped to 3.5% in November. That is the lowest figure in over 15 years. In December unemployment increased a tiny bit again however, by no less than three hundredths, to 3.6%. This is also the level that we expect for 2019 as a whole.

Figure 1: The labour market is ever-tightening
Figure 1: The labour market is ever-tighteningSource: Statistics Netherlands (CBS)

Previously we saw that rising employment figures were often masked by the sometimes equally rapid expansion of the Dutch labour force, but that trend appears broken in the third quarter. Job growth was still relatively strong, with almost 41,000 more people holding down jobs between October and December (see figure 1). Labour force growth seems to slightly taper off though, implying that the well of untapped labour potential might slowly be running dry. If this is indeed the case, this would mean that employers –of whom 26% already complained in the Q4 that a shortage of labour is holding back their business– will have an even harder time of finding people.

Despite such labour market tensions, collectively negotiated wages still seem somewhat subdued: on average in 2018 they have risen by 2.1%, with inflation trailing not far behind at 1.6% (see figure 2). The resulting real wage growth of 0.5% is significantly less than in 2008 or 2009, even though labour market figures are not that dissimilar. Subdued wage growth could be one of the reasons that consumers have become less optimistic over the last couple of months. Admittedly, consumer confidence was still above its historical average in December (see figure 3), but the rapid trend downwards has made us slightly more cautious about household consumption in the first three months of 2019. On balance though, we expect household consumption to continue to be an important driver for growth this year. Further increasing real wages, despite a VAT hike since January, an income tax cut and strong employment numbers are expected to push consumer spending by 1.6% in 2019.

Figure 2: Positive real wage growth
Figure 2: Positive real wage growthSource: Macrobond
Figure 3: Rapid decline in consumer confidence
Figure 3: Rapid decline in consumer confidenceSource: Statistics Netherlands (CBS)

Weakness abroad is hurting Dutch exports

Figure 4: Slowdown in manufacturing production
Figure 4: Slowdown in manufacturing production Source: Statistics Netherlands (CBS)

While consumers have lost some of their confidence, that of producers has kept rebounding. Producer sentiment had been on a downward trajectory between June and September, but despite the slowdown in economic activity abroad and regardless of ongoing geopolitical tensions, producers have become more optimistic since October. A fall in the average manufacturing PMI from 59 in the third quarter to 57 in the fourth quarter of 2018 –which is still very high– suggests that manufacturing production did slowdown though. And a weakening in manufacturing production growth from 3.5% y/y in October to 2.1% y/y in November strengthens this view (see figure 4). Weakness in several of the Netherlands’ main trading partners in Europe in the last three months of 2018 is expected to have suppressed Dutch manufacturing output and export growth to some extent. As a result, we have lowered our GDP forecast for 2018Q4 by 0.1pp to 0.5% q/q, resulting in 2.5% GDP growth for 2018 as a whole – a tad lower than the 2.6% previously anticipated.

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