The Netherlands: Government stimulus to counter external weaknesses
- The Dutch economy continues to grow, supported by strong domestic private consumption, higher business investments and a high employment rate
- However, global weakness remains visible in manufacturing and worrying recent figures on economic activity in the Eurozone
- In this context, the government announced substantial tax cuts and additional expenditure effective next year
- This most likely supports private consumption
- Whether the government will be able to execute their planned expenditures is related to labor market shortage
Amid increasing global weakness, the Dutch economy continues to grow. Consumption, investment growth and employment remain high. Nevertheless, Statistics Netherlands (CBS) has revised downward GDP growth realized in Q2 2019, leading to a statistical adjustment of our forecast for GDP growth this year by -0.1% to 1.7%. Specifically, realized export growth was revised downwards, resulting in a smaller contribution of the trade balance to GDP growth. This is unsurprising considering weaker international demand, with export growth (+1% y/y) being outpaced by import growth (+3.3% y/y) in July. The global economic slowdown also remains visible in manufacturing. Dutch average daily manufacturing production showed negative year-on-year growth in July for the fifth month in a row, despite a slight month-on-month increase (+0,5% m/m). Yet Dutch producer sentiment continues to be positive and above the long-term average (Figure 1). However, latest figures for German and Eurozone manufacturing PMIs point to further output decline and the Netherlands is unlikely to be immune to these developments.
Government announces spending boost
In its recent new budget plans, the Dutch government announced additional spending for diverse purposes as well as substantial tax cuts for households of EUR 3bn (on top of those already announced in the coalition agreement of 2017). This is estimated to result in a median purchasing power increase of 2.1% and may lead to a 0.1% higher GDP growth in 2020 according to the CPB Netherlands Bureau for Economic Policy Analysis. The burden reduction is a welcome relief for households, considering the realized median purchasing power increase last year amounted a meager 0.3% (and is forecast by the CPB Netherlands Bureau for Economic Policy Analysis to reach 1.2% this year) and the historically high collective tax burden. It could also prove to be an impulse to consumer sentiment, which was down to a negative -2 in September (Figure 2) amid ongoing reports about the escalating US-China trade war, parliamentary turmoil in the UK on Brexit, and – domestically - potential pension cuts. However, despite the more negative sentiment, consumer spending remains on track. In July private consumption was up 1.7% y/y. The tax cuts announced may provide further incentive for household consumption next year.
The government also announced a financial impulse of EUR 2bn (of which EUR 350mln in 2020) to alleviate housing market tensions. The scarcity of supply continues to put strain on the housing market, resulting in higher prices and lower sales. In August, house prices were up by 5.7% y/y and sales down by 6.3% y/y (Figure 3).
Domestic risks threatening planned public expenditure
It is, however, unlikely that the government’s planned expenditures will all be executed as per the budget. Currently the government is struggling to spend money to execute their plans, mainly due to labor market shortages. This – together with windfall tax receipts - resulted in a higher than expected non-adjusted fiscal surplus in the first half of 2019. At the end of July, it amounted to 1.8% of GDP, already way above the target of 1.2% for 2019. Since the labor market is expected to moderate only slightly in the course of next year, it is unlikely that the government will make up for this in the second half of 2019 and 2020. It also remains to be seen whether the financial resources attributed to the housing market will quickly find their way into the economy, as the number of building permits remains on a downward trajectory, worsened by the nitrogen ruling of the European Court of Justice. Moreover, the construction sector is still suffering from personnel shortages.
State finances currently on safe ground
Currently, the Dutch state finances are well within the EMU limits, with a fiscal balance of 1.8% of GDP and government debt of 50.9% of GDP in Q2. Government debt is expected to decline to 49.2% of GDP by the end of this year. Therefore, the coalition currently has the means to execute the financial impulses announced in the new budget. However, the plans will result in a substantial reduction of the budget surplus. Moreover, the cyclically-adjusted budget deficit will worsen to -0.4% of GDP in 2020, very close to the medium-term objective of -0.5% of GDP. Therefore, spending out of the suggested EUR 50bn investment fund may not be feasible without breaching this limit.