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The Netherlands: Keeping up appearances

Economic Update

  • In the second quarter the Dutch economy expanded quicker than those of most large European countries
  • The slowdown abroad is still noticeable though, with industrial output declining for three quarters in a row
  • Rumours that the government coalition wants to increase spending in the coming years could therefore proof to be a well-timed impulse
  • It’s unclear if they are able to indeed spend more: government consumption already looks to be heading for slower growth than planned
  • The tight labour market, with a record high participation rate, could have a part in this

Compared to Germany’s and Britain’s gloomy numbers, recent figures for the Netherlands were remarkably positive: the Dutch economy grew 0.5% q/q in the second quarter. This was supported by rising investments, household consumption and, surprisingly, rising export growth. The latter seems to be the result of a strong increase in re-exports and cross-border sales of services. This isn’t proof that the Netherlands are immune to international weakness though, as the Dutch industry has been losing steam for months now. Sure, the outlook for the Dutch economy is still positive, with high employment supporting household consumption. But this is based on the assumption of an orderly Brexit, which is by no means certain.

Figure 1: Stark contrast
Figure 1: Stark contrastSource: Statistics Netherlands (CBS), Eurostat
Figure 2: Producer confidence still positive
Figure 2: Producer confidence still positiveSource: Statistics Netherlands (CBS), IHS Markit

Industrial output declining

Between April and June industrial output declined for the third quarter in a row, with a 0.9% q/q contraction. This isn’t as severe as in Germany, but the outlook for Dutch industry isn’t bright though: Germany’s Ifo index has dropped to its lowest figure since 2009 and there are signs that the industrial woes are impacting the wider German economy. As the Netherlands’ main trading partner, this could have graver consequences for the Dutch industry. And while the Dutch manufacturing PMI rose to 51.6, usually pointing towards some expansion in the coming months, the figure was positive in the past quarters as well, despite output in fact declining recently. On top of that chances are higher that trade tensions between the US and China will grow, rather than decrease. Finally Brexit, including the risk of a no deal scenario, still hangs over the market. This could further damage producer confidence and exports. We therefore anticipate a minor negative trade balance for 2019.

Consumption rose strongly

Worries about Britain leaving the EU, or crashing out of it, could explain the small drop in consumer confidence in August. This also applies to the news about the growing conflict between China and the US, threats of pension cuts and rumours about negative saving rates. After all, consumers were more pessimistic about both the economic climate and their own financial situation. But for now private consumption remains strong: households spent an impressive 0.8% q/q more in the second quarter. This appears to be the result of rising employment. Never before has such a large share of people between the ages of 15 and 75 been employed, with a participation rate of 68.8% in July. This is driving up households’ disposable income. High inflation, 3.1% in August, could throw a spanner in the works for further consumption growth tough, as collectively negotiated wages are still trailing behind at 2.7% y-o-y. We therefore expect households to expand their consumption at a slower pace than in 2018.

Figure 3: Small decrease in consumer confidence
Figure 3: Small decrease in consumer confidenceSource: Statistics Netherlands (CBS)
Figure 4: Construction fails to pick up
Figure 4: Construction fails to pick upSource: Statistics Netherlands (CBS)

A fiscal impulse?

On budget day (17 September) the government, which recorded a public debt level of 50.9% of GDP in the first quarter, will reportedly propose increased spending and investments, and possibly a tax cut in the coming years. Such plans would support, among others, growth-friendly investments in infrastructure and the construction of new homes. Given the headwind from abroad, this could prove to be a well-timed boost for the Dutch economy. Meanwhile stimulating the construction of new homes could be welcome news for the many people who have difficulty finding affordable housing given the large shortage of homes in the Netherlands. Especially now that the number of building permits has been declining, despite high demand for new homes, further pushing up both rents (+2.5% y/y) and house prices (+7.0% y/y in July). Of course in this stage the plans are mainly rumours. It remains to be seen what concrete actions follow from them, just like it is the question if the government will actually be able to invest or consume more. This year it already looks like government expenditure is rising slower than planned, as the government also appears hampered by the tight labour market. In the second quarter, government consumption fell by 0.1% q/q.

Table 1: Economic forecasts for the Netherlands
Table 1: Economic forecastsSource: Rabobank
Carlijn Prins
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455
Nic Vrieselaar
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2216 2257

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