RaboResearch - Economic Research

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Netherlands: Producers less optimistic, slowdown in growth of investments expected

Economic Update

  • The outlook for the Dutch economy remains relatively stable in a persistently unstable environment, but a trade war or hard Brexit could harm growth
  • We expect slower growth in business investments given weakening daily manufacturing production since early 2019 and falling confidence among purchasing managers and producers
  • We do expect higher growth in housing investments in the coming quarters, due to rising numbers of newly built homes and homes sold
  • Consumer confidence is picking up despite limited real wage growth: consumers are now neutral
  • We expect stronger consumption growth for the remainder of 2019

Despite ongoing tensions abroad –the US-China trade war, new elections in the UK, and Italian budget deficits causing headaches in Brussels— the outlook for the Dutch economy continues to be relatively stable. Factors supporting domestic demand this year include the record-low unemployment level and higher government spending. Even though exports currently remain on track, any escalation of international (trade) tensions could harm Dutch growth. And as import growth is expected to outpace export growth, net trade will contribute negatively to economic growth in 2019 (figure 1).

Figure 1: Lower, but Stable GDP Growth Expected
Figure 1: Lower, but Stable GDP Growth ExpectedSource: Statistics Netherlands (CBS), RaboResearch
Figure 2: Declining Confidence among Producers
Figure 2: Declining Confidence among ProducersSource: Statistics Netherlands (CBS), Ifo Institut

Higher Investments in Q1, but Slowdown Expected

Total investments increased even more strongly in the first quarter of 2019 than previously estimated. Statistics Netherlands revised the figure upwards from 2.0 to 2.7 percent. Noteworthy was the strong increase of business investments of 4.3 percent q/q in Q1. This might be the result of high industry utilization rates and low unemployment, prompting firms to invest more in order to keep increasing output. Utilization rates remained high in April, therefore supporting further business investment growth in the second quarter. However, looking forward we expect businesses slow down the pace of their. Dutch average daily manufacturing output has been performing weakly since the start of 2019 and was again down m/m in April. In addition, in June industry purchasing manager sentiment declined to the lowest level in six years. With a score of 50.7, the PMI needle is only just hovering near low growth. Moreover, producer sentiment is at its lowest level since the end of 2016, although still above its long-term average (figure 2). The decline in the headline index is mainly due to negativity about future output, probably due to ongoing trade tensions causing uncertainty in export-oriented industries. Sentiment among German producers also decreased further in June: the Ifo Business Climate Index has dropped below its long-term average. This may result in lower demand from Germany, potentially weighing on Dutch business investment growth.

Housing investments were less positive than expected, as they were revised downward by Statistics Netherlands to -0.9 percent q/q rather than +0.9 percent q/q. This is more in line with the significantly lower number of homes built in Q1. For the coming quarters we expect housing investments to pick up due to two factors. Firstly, the number of newly built homes increased in April and May. Secondly, and surprisingly, sales of existing owner-occupied homes also grew (figure 3) particularly in May (+8.1 percent y/y). This could result in higher investments in, for instance, kitchens, extensions, and renovations.

Figure 3: Home Sales Surprise
Figure 3: Home Sales SurpriseSource: Dutch Land Registry (Kadaster)
Figure 4: Consumers Pick Up Expenditure
Figure 4: Consumers Pick Up ExpenditureSource: Statistics Netherlands (CBS)

Consumer Pessimism Appears to be Receding

While first-quarter private consumption was relatively weak, April saw Dutch households spend 1.8 percent more y/y. This is in line with our expectation of stronger consumption growth for the remainder of 2019. Household spending is supported by a record high labor participation rate and a moderate increase in real wage growth. We expect the latter to be driven by an income tax cut and incidental wage growth. Collectively negotiated wages, on the other hand, are still being outclassed by inflation, despite the latter dropping from 3.0 percent in April to 2.3 percent in May. The fact that consumer pessimism appears to be receding could further support consumption growth . The headline index for consumer sentiment rose to zero in June after spending four months in negative territory. Consumer confidence is now back above its 20-year average of -3 (figure 4).

Table 1: Economic forecasts for the Netherlands
Table 1: Economic forecasts for the NetherlandsSource: Rabobank
Lisanne Spiegelaar
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 88 726 7864

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