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The Netherlands: Domestic risks becoming more prominent

Economic Update

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  • In May the Dutch Council of State ruled that the program for tackling nitrogen does not meet European regulatory requirements
  • As a result, domestic risks have become more prominent
  • The tight labor market and the tax reductions announced for households are keeping consumption on track
  • But the persisting industrial weakness and the growth slowdown in Dutch imports and exports point toward an economic slowdown

For some time, we have been closely watching the external threats facing the Dutch economy like the Brexit and the trade war. But domestic risks have become more prominent since the May Council of State ruling that the program for tackling nitrogen (PAS), which relates to granting construction permits for example, is insufficient to meet European regulatory requirements. 

The government has promised more clarity about a new approach on 1 December. Until then it’s difficult to estimate the impact of the Council of State’s decision on economic activity, but it seems inevitable that it will weigh on the 2020 forecast. Especially for the construction sector. for example, in August the number of building permits granted declined to a 4-year-low (Figure 1). 

Figure 1: Construction permits granted at 4-year-low
Figure 1: Construction permits granted at 4-year-lowSource: Statistics Netherlands (CBS)
Figure 2: Dutch industry follows eurozone
Figure 2: Dutch industry follows eurozoneSource: Statistics Netherlands (CBS)

The Council of State’s ruling is not the only factor putting downward pressure on the construction sector: the slowdown of the Dutch economy in general would already have impacted the sector’s growth. However, we expect that following the Council of State’s ruling the sector’s production will decline in 2020.

The economic slowdown is also reflected in the industrial sector: in August the weakness of Dutch industry persisted with a decrease of 0.8 percent y-o-y.  Moreover, the Dutch manufacturing PMI moved to 50.3 - a six-year-low - in October. Weak industrial performance is not limited to the Netherlands as it is in line with the industrial performance of the eurozone (Figure 2). Remarkably though, Dutch producer confidence did not decline any further in recent months. However, ongoing weakness in world trade is expected to weigh on the sector’s production in 2020.

In general, we foresee a slowdown in most sectors, reflecting the economic slowdown. However, the business service sector is expected to outperform the others in 2020 and support economic growth. In particular we expect the information and communication sector to take the lead, with a 4 percent y-o-y increase in 2020.

The music keeps playing partly because of consumption

The economy and most Dutch sectors are moving into a lower gear, but the labor market remains very tight and the vacancy rate is at a record high, supporting household demand. This, in combination with growing house shortages, is also reflected in continued strength in the housing market: in the third quarter of 2019, prices of existing houses increased by 6.3 percent y-o-y. However, the latest figures on household consumption growth – at 1.4 percent y-o-y in August – are more moderate than last year. Consumer confidence is in line with this picture: it is lower than last year but has fluctuated around its long-term average since the beginning of this year (Figure 4). Our expectations for household consumption toward and especially beyond the end of the year remain fairly positive, as contractual wage growth increased, the effect of the 2019 VAT increase on inflation will phase out, and the government plans tax reductions for households in 2020.

Figure 3: Vacancy rate at record high
Figure 3: Vacancy rate at record high Source: Statistics Netherlands (CBS)
Figure 4: Consumers keep spending
Figure 4: Consumers keep spendingSource: Statistics Netherlands (CBS)

But the rhythm is slowing down

Figure 5: Slowdown in Dutch exports and imports
Figure 5: Slowdown in Dutch exports and importsSource: Statistics Netherlands (CBS)

Although consumption is still on track, we saw three-month y-o-y average import and export growth move toward a half percent in August (Figure 5). This is the lowest increase in roughly three years, mirroring the continuing decline in world trade growth in August. Together with the slight increase in bankruptcies[1], albeit still at a low level, it shows that the economy is cooling down. 

All in all, we see the Dutch economy still gradually expanding but at a lower rate. This year’s economic growth will be mostly supported by consumer spending and investment. But the decreasing growth in Dutch international trade and weak industrial production reflect an economy that is shifting to a lower gear. We expect a year-on-year growth of GDP of 1.7 percent in 2019. Domestic developments related to the Council of State’s ruling are likely to weigh on our GDP forecast for 2020, currently at 1.4 percent.

Table 1: Economic forecast
Table 1: Economic forecastSource: Rabobank

Footnote
[1] At 12-month moving average

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