RaboResearch - Economic Research

Dit artikel is ook beschikbaar in het Nederlands

Economic growth in the Netherlands will depend more heavily on government spending

Economic Quarterly Report

  • GDP growth in the Netherlands will fall back to 1.6 percent in 2019 and 2020, close to the structural growth rate and above the eurozone average in both years
  • Net exports will decline due to lower global trade
  • A hard Brexit or escalation of trade tensions could make this development worse
  • The domestic economy continues to be generally positive
  • More than in previous years, economic growth will depend on government spending

The Dutch economy has now passed the high point in the cycle, and growth in 2019 and 2020 will be close to its structural rate. We expect GDP volume to grow by 1.6 percent in both years, which is lower than our previous forecast. The downward adjustment for 2019 is mainly because we are less optimistic regarding exports. The development of global trade is under pressure, and as an open economy, the Netherlands is particularly exposed to this. If we actually have a hard Brexit (the chances of which remain uncomfortably high) or international trade tensions escalate, the Dutch economy will also be negatively affected.

Figure 1: Greater contribution to growth from the government
Table 1: Economic forecasts for the NetherlandsSource: CBS, RaboResearch

In the meantime, Dutch demand for foreign products and services is growing faster than the reverse, meaning that the Dutch trade balance is deteriorating[1]. Furthermore, we expect consumer spending and business investment to continue to support growth this year and next, but to a lesser extent than last year (figure 1). Moreover, the contribution from housing investment will be negligible, as this is expected to stagnate. Economic growth in the Netherlands this year and next will therefore be more reliant on government spending, which will now provide a welcome boost at this point in the cycle. However, this means that any over- or underspend of the government budget will have a relatively large effect on GDP growth.

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

[1] Due to realized trade figures in 2018 that impact the growth figures for 2019, export growth is higher than import growth in 2019. The same effect causes a positive growth figure for housing investment in 2019.

Net exports will not drive growth in the years to come

The slower growth in the Netherlands is not unique: growth in most of the eurozone economies moved to a slower rate in the course of 2018. Italy is actually in recession, while Germany only just avoided a recession at the end of last year. In most of the eurozone countries private consumption has fallen. There have also been problems in the auto industry as a result of the new emissions standards, which has affected suppliers as well. But the most serious problem, and probably less temporary in nature, has been the weak condition of trade. European exports suffered from the weaker growth in global trade, in which geopolitical tensions most likely played a part. We expect global economic growth to decline further in the coming years. Actually, we expect to see a mild recession in the US in 2020. With domestic demand increasing faster at the same time, only a limited contribution from net exports in the Netherlands is expected in the coming years. There are also still serious risks surrounding the departure of the United Kingdom from the EU. A hard Brexit would substantially affect the Dutch economy through (among other things) trade relations. Increased trade tensions between the US and the EU would also be negative for Dutch exports. And the same applies indirectly if there is an escalation in the conflict between the US and China.

Consumption growth stabilizes

Household spending is forecast to rise by 1.5 percent this year and next. This means consumption growth will be significantly lower than in 2018, but also that it will remain relatively strong compared to the past fifteen years (figure 2).

Household income is still rising, amongst others because employment will continue to increase. The economy is indeed still growing and producers are still expecting to increase production (figure 5). We do however expect the increase in employment to slow. Many people have found a job in the past years, and the pool of people who are still employable is now drying up. This will most likely make it more difficult for businesses – 26 percent of which are already complaining that a shortage of people is limiting their activities – to find workers. Part of the increase in employment will be filled by older people working for longer due to the increase in the state pension age. At the same time, the inflow of new employees such as recent graduates is expected to remain steady. Partly as a result, the total labor supply will rise slightly faster in 2020 than the number of jobs. The result is that unemployment is expected to increase slightly from next year, from 3.6 percent in 2019 to 3.7 percent in 2020.

Nevertheless, unemployment will remain at a low level compared with other years (figure 3). We therefore expect labor market tightness to lead to nominal wage growth this year and next. The tax cuts planned for 2019, and the larger cuts planned for 2020, will moreover positively affect households’ ability to spend. Among other things, the measures concern the gradual introduction of a two tax bracket system for income tax and changes to the employed persons’ tax credit. Part of this higher income will be offset by higher prices, which increase significantly, especially in 2019. The increase in the low VAT rate, duties and energy taxes and rising costs of labor are expected to push inflation up to 2.3 percent this year. Next year, inflation will likely fall back to 1.7 percent. Altogether, we expect households to be slightly better off and that purchasing power will increase modestly next year.

Developments in the housing market also affect consumption, but there are two contradictory dynamics at work here. On the one hand, the continuing rise in house prices has a positive effect because homeowners feel better off. This can lead to an increase in consumption. On the other, the decline in the number of housing transactions reduces spending by households on new furniture or televisions for instance, as these high-ticket items are often purchased when people buy a house.

Figure 2: Consumption growth declines, but remains at a reasonably good level
Figure 2: Consumption growth declines, but remains at a reasonably good levelSource: Macrobond, CBS, RaboResearch
Figure 3: More and more people in work, less and less unemployed
Figure 3: More and more people in work, less and less unemployedSource: Macrobond (BIS)

Much lower consumer confidence

Figure 4: Consumers more pessimistic
Figure 4: Consumers more pessimisticSource: Macrobond, IMF, RaboResearch

Given the favorable developments in the labor market, it is notable that consumer confidence has fallen so sharply in recent months. In February, this index actually fell below zero for the first time in four years (figure 4). The weaker economic growth in the Netherlands and the rest of Europe could explain why consumers have become more pessimistic on both the economic climate and their own financial situation. In addition, consumers are not only facing higher prices on average, they are also seeing many different price increases. Shopping is more expensive due to the VAT increase, energy bills will be higher this year and health care premiums were raised with effect from 1 January. Consumers thus may perceive inflation to be higher than it actually is. In addition, there is still a lack of clarity regarding important policy issues and the effect of this on peoples’ wallets. For example, the reform of the pensions system and the costs of the energy transition. In this respect, it is good that the Cabinet is providing more clarity regarding its climate policy, such as a proposed tax on CO2 emissions for the most polluting businesses. At the same time, the Cabinet has announced that households will pay lower energy tax with effect from 2020. These proposals could give consumer confidence a positive impulse. But it is unlikely that Dutch people will be as optimistic as they were in the first half of 2018. They will probably be more cautious when it comes to making big ticket purchases and they may save a bit more.

Increase in private investment slows

Figure 5: Producers still mainly positive
Figure 5: Producers still mainly positiveSource: CBS

The contribution of private investment to economic growth is also expected to weaken. Business investment is still likely to continue to increase after a couple of weak quarters in 2018. High levels of capacity utilization in industry suggest that investment is needed if producers wish to increase production. In addition, producers are still mostly positive and producer confidence is still above the historical average, despite the decline seen last year (figure 5). But it cannot be denied that continuing trade tensions, uncertainty over Brexit and the general slowing of growth in the Netherlands and other countries will affect confidence among producers, and therefore probably also their propensity to invest.

We are less optimistic with respect to the development of housing investment: over the next two years, we expect this to remain more or less at the same level as at the end of 2018. Construction companies are finding it difficult to hire new personnel and the number of building permits granted is stagnating. The decline in existing home sales also implies that investment by Dutch people in for example renovation will also decrease.

Will the government take up the slack?

Figure 6: GDP growth more dependent on government spending
Figure 6: GDP growth more dependent on government spendingSource: Macrobond, CBS, RaboResearch

More than in previous years, economic growth in 2019 and 2020 will depend on government spending, which it seems will provide a welcome boost at this point in the economic cycle. Not only is there the prospect of a higher increase in government spending and investment, mainly in education, infrastructure and defense, government spending also has a higher weight in general GDP growth (figure 6). Private consumption, private investment and net exports will on the other hand contribute less than in previous years (figure 1). This means that any over or underspend of the government budget will have a relatively large effect on GDP growth. In 2018 the government spent over EUR 3.7 billion less than permitted under the agreed spending ceiling, partly due to delayed infrastructure projects and lower than budgeted care costs. To the extent that this is due to shortages of personnel, there is the risk that the government will find it difficult to actually effect all its planned spending this year. On the other hand, government spending could rise by more than we currently expect. After all, the government has the room to increase spending under the budgetary rules.

Ester Barendregt
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 51828489
Carlijn Prins
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455

naar boven