RaboResearch - Economic Research

Dit artikel is ook beschikbaar in het Nederlands

The Netherlands: Prices go up more than negotiated wages

Economic Update

  • Consumer confidence stops falling: the headline index increased from -4 to -3
  • Unemployment lower than before 2008 crisis, still negotiated wages are lower than inflation
  • Investing in productivity is needed because of low unemployment and a high utilisation rate
  • Producer confidence is up and positive, meanwhile the PMI has decreased

Recent figures support our expectations for lower economic growth in the Netherlands this and next year of respectively 1.7 and 1.6%, compared to last year’s 2.7% (see table 1). Consumer confidence, for example, has rebounded slightly but is still negative. And spending finally appears to reflect this increased caution as consumption has been tapering off in the past months. Similarly the housing market is showing more and more signs of normalisation: sales were already trending downward, but are now accompanied by less steep price increases than in previous years.

Table 1: Economic forecast the Netherlands
Table 1: Economic forecast the Netherlands Source: RaboResearch

Consumers appear less eager to spend

The plunge in consumer confidence, which started in the summer of 2018, appeared to have come to a halt in April. The headline index increased slightly from -4 to -3. But it is clear that consumers are still predominantly pessimistic. Household spending appears to have caught on: consumption growth was significantly lower in January and February, although this is in part due to the warm weather (see figure 1).

Figure 1: Consumption growth slowing
Figure 1: Consumption growth slowingSource: Statistics Netherlands (CBS)
Figure 2: Prices rising rapidly
Figure 2: Prices rising rapidlySource: Statistics Netherlands (CBS)

The bout of pessimism among Dutch households is somewhat puzzling given the record high labour participation, but we have argued before that uncertainty about Brexit and a weaker growth outlook could weigh heavier in the minds of consumers. This might be compounded by an absence of significant increases in purchasing power: households now spend 32% on basic necessities such as housing and food, a recent study by Statistics Netherlands (CBS) found. In 2008 this was just 29%. With this in mind, the stabilization of consumer confidence in April is remarkable, especially given that inflation has started to outstrip collectively negotiated wage rises. Consumer prices increased a whopping 2.9% in March, partly due to higher value added taxes, compared to wage growth of 2.2% (see figure 2). However, even with the relatively low wage growth the amount of strikes decreased in 2018 in relation to the year before, according to Statistics Netherlands (CBS).

Figure 3: Lower among all ages
Figure 3: Lower among all agesSource: Statistics Netherlands (CBS)

It is surprising really that collectively negotiated wages are trailing so much behind inflation: in March just 307,000 people were officially unemployed, some 3.3% of the Dutch labour force. Both figures are at historical lows. Meanwhile Statistics Netherlands (CBS) reported that the number of part-time employees who are looking to increase their working hours has dropped significantly. The well of labour, in other words, is running dry. We therefore currently do expect real wages to grow in 2019, but rather than from collective wage rises we anticipate this growth will mostly be due to incidental wage increases. Employers might for example be more willing to promote individual employees in an effort to keep them, and better business results could lead to higher bonuses. All in all, we expect the combination of pessimism among consumers but record low unemployment and modest real wage growth to boost consumption in 2019, although at a slower pace than in previous years. We expect households will spend 1.6% more this year.

Producers are investing more

Figure 4: Not much room left
Figure 4: Not much room left Source: Statistics Netherlands (CBS)

The constricted labour market might also be an impulse for businesses to invest in labour productivity. Especially since high utilisation rates among Dutch producers might be another factor in holding back further output growth in industry: the utilisation rate rose to 84.3% in the first quarter of 2019, coming from 83.9% in the last quarter of 2018. To avoid capacity constraints from both labour and capital, producers will have to increase their investments in either labour productivity or capital – or both. Indeed, we saw that business investments in fixed tangible assets were up by 7.5% y/y in February.

Spending might further be spurred by optimism among producers: their confidence was already positive, and increased a tad in April. Besides producer confidence we look at the PMI. Last month this dropped to 52,0. It’s the lowest point in nearly three years. So currently purchasing managers have tipped the scale towards an expectation of growth.

Moreover, Brexit has been postponed; out of sight, out of mind? That could at least temporarily be the case, but it remains a risk to Dutch exporters, just as a significant and broader economic slowdown in the Eurozone. The recent six year low of Germany’s Ifo-index is worrisome in regard to the latter. However, the economic growth is up a bit in the Eurozone.

Boyd Biersteker
RaboResearch Data Science Rabobank KEO

naar boven