The Netherlands: Disappointing consumption
- Dutch economy grew by 0.5 percent q-o-q in first three months of 2019
- High temperature, and thus lower energy consumption, suppresses consumption growth
- Dutch households also spent less on services
- Newly negotiated wages show steeper wage increase, but on average they are still below inflation
- For the increase of the real wage employees depend on incidental wage rises
- Supply-side stagnation on the housing market: permits for the construction of new homes on a three-year low
Economic growth remains on track
The Dutch economy grew 0.5% qoq in the first three months of 2019. This is the same rate of expansion as in the last quarter of 2018 and is slightly higher than the 0.4% we had expected. Growth was driven in particular by investments in fixed assets: those increased a whopping 2.1% qoq, and contributed 0.4%-points to past quarter’s GDP growth. Government consumption also significantly contributed (0.1%-points) as it rose by 0.5% qoq. Consumers on the other hand didn’t join in: they spent just 0.1% more qoq. Quite meagre compared to the 0.5% in the last quarter of 2018.
Meanwhile Netherlands’s closest trade partners showed solid economic growth and, with a lurking Brexit, British companies have ramped up their stocks (figure 1). This led to exports growing by a decent 0.8% qoq. They were outpaced by imports however, which increased 1.6% qoq, possibly as a result of the strong rise in fixed investments – which are usually largely imported from abroad. As a result, net trade made a negative contribution to economic growth in the first three months of 2019. Overall, the Dutch economy continued to grow at a respectable pace at the start of the year. This is broadly in line with our expectations: solid growth in the first half of 2019, which will taper off in the second half due to, among others, an increasing labour shortage.
Weakening consumption growth
The low qoq growth rate – and the equally unimpressive yoy growth rate of just 0.7% (figure 2) - of private consumption in the first quarter of 2019 might look surprising at first sight, given that employment kept rising to almost 10.6 million jobs in Q1. But mother nature showered us with sunshine in the first months of the year: it was 2.1 degrees centigrade warmer than a year earlier, temporarily suppressing energy consumption. But this does not explain the entire slowdown: we also notice a drop in the consumption growth of services. That fell to 1.9% yoy in the first quarter of 2019, about half a %-point lower than the rate of expansion we were used to in 2018. And we have reasons to believe that household expenditure will continue to grow at a lower level in 2019 compared to 2018. Firstly the imbalance between inflation (3.0% HICP in April) and rises in collectively negotiated wages (2.2% in May) is eating away at household’s purchasing power, see figure 3. Although figures from employer association AWVN on newly negotiated collective labour agreements point to higher wage growth, official figures don’t show this development yet. Moreover, on average negotiated wages stay well below inflation. Employees rely on incidental wage increases to get to a minor increase of their real wages.
Furthermore, consumer confidence remained stable, but is still negative. The headline index was -3 in May- which is the average of the last 20 years– and points towards lower consumption growth (see figure 2. Finally, with unemployment being at records low levels, there is not much room for further rises in employment. Combined with only moderate wage rises this is holding back overall income growth.
Housing market: supply side stagnation
The housing market in the Netherlands is characterized by a major shortage in homes, helping prices reach record levels. And recent figures from Statistics Netherlands (CBS) show that this shortage won’t be tackled anytime soon: the number of newly constructed homes is already lower than a year before and the number of permits for new-to-build homes was at a three-year low this past quarter, see figure 4. One of the main reasons appears to be the trouble construction companies are having finding new employees, next to relatively few available building sites. The scarcity on the housing market is expected to lead to further price hikes -in April prices were still 7.7% higher yoy. But with sentiment on the market having turned sour, we expect price growth to taper off slowly in the second half of 2019: we expect an average 6% yoy price increase this year.
As we expect sales to decline by some 6% in 2019 (first quarter sales were down 9%) and with lacklustre construction, one would expect housing investments to start stagnating. Oddly this does not seem to be the case yet though: they rose 0.9% qoq in the first quarter of 2019. If it’s not construction, it might be new kitchens, new bathrooms and the likes that have pushed these investments. This could be a result of the high number of sales of existing homes in 2017 and 2018, combined with low unemployment and ongoing economic growth. Despite this ‘renovation-renaissance’ we currently do expect housing investment growth to slow down this year.