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Weaker international demand slowing Dutch economy

Economic Quarterly Report

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  • The growth rate of the Dutch economy is expected to slow this year and next
  • Lower growth abroad is becoming visible in the Netherlands too: exports are growing less than imports
  • Government spending also looks like it will be lower than planned this year and in 2020
  • But consumers are spending more and investment is rising

The rate of growth of the Dutch economy has significantly outpaced many other European countries over the past six months. The Netherlands is expected to continue to outperform the eurozone in the rest of 2019 and 2020, but the global slowdown is definitely becoming visible. Industrial production is in a declining trend, and we expect growth in exports to fall short of growth in imports this year and next. We are therefore forecasting growth of 1.8 and 1.4 percent in 2019 and 2020 respectively. This is significantly slower than in 2018, when gross domestic product was up 2.6 percent. Our forecast for growth in 2020 has also been adjusted downwards.

Figure 1: Private spending driving growth
Figure 1: Private spending driving growthSource: Statistics Netherlands, RaboResearch
Table 1: Economic forecasts for the Netherlands
Table 1: Economic forecasts for the NetherlandsSource: Statistics Netherlands, RaboResearch

Consumption

It is not surprising that private consumption will continue to support growth this year and next, as there have never before been so many Dutch people aged between 15 and 75 in paid work. Not only that, employers are still looking for people: there were a record number of 34 vacancies for every 1,000 employees in the second quarter (see figure 2). This tightness in the labor market is starting to gradually push up wage growth. Wages in collective labor agreements were up 2.7 percent in August, the biggest increase since 2009. We also expect households to benefit from the scarcity of labor through incidental wage growth in the form of promotions or periodic increases. Structural and incidental wage growth will probably offset high inflation, which is running at an average of 2.7 percent this year through the end of August. Together with the easing of the tax burden at the beginning of the year and the high level of labor participation, the scant growth of wages in real terms still means that households have a bit more disposable income, as a result of which consumption is increasing further in 2019 (see figure 3).

Figure 2: People are in demand
Figure 2: People are in demandSource: Statistics Netherlands
Figure 3: Consumption still growing
Figure 3: Consumption still growingSource: Statistics Netherlands

Unemployment is expected to increase slightly next year, from 3.4 percent this year to 3.6 percent in 2020. This is because we expect employment to increase less rapidly than labor supply, due to the weakness internationally. This could affect demand for people in export-oriented sectors, such as industry. But the labor market will stay tight, and wages are expected to continue to rise. The Dutch government is also planning to cut taxes again in 2020, and inflation will probably be significantly lower than this year due to the waning effect of the increase in VAT. This means that overall, households will once again have more disposable income in 2020 and therefore will again increase their consumption.

If the Cabinet does announce additional tax cuts, this could of course boost household consumption even further. There is a downside risk in the threat of pension reductions, meaning that many older people could have less disposable income. Consumer confidence could be negatively affected by uncertainty about future income, which - whether reductions happen or not - could further pressure growth in consumption.

Private investment

Investment was up strongly in the first half of the year. Not only by the government, businesses too appear to be more willing and able to invest, for instance in increasing their production capacity and employee productivity. Investment in housing has also increased recently, apparently due to a slight rise in the number of new homes delivered in the past six months. Renovations could also be playing a greater role, since quite a few Dutch people are looking to move house, but are often unable to do so because of the tight housing market.

We expect the pace of increase in total investment to slow slightly in the rest of 2019. The number of development permits granted has declined in recent months, and the contraction in the industry has been accompanied by slower growth in many other sectors. Together with lower demand from key trading partners and the continuing uncertainty regarding trade conditions internationally, this could significantly reduce the readiness of many entrepreneurs to invest.

Figure 4: Development permits fall further
Figure 4: Development permits fall furtherSource: Statistics Netherlands, processed by RaboResearch

In addition, the tight labor market could frustrate the investment plans of both businesses and government. Replacing outdated machinery or investing in new software will be less dependent on the labor supply, but this does not apply to activities such as laying new roads or building a new factory. The effect of the recent nitrogen ruling on investment is also still unclear. For now, it looks as though many projects, also in the house-building industry, have been put on ice.

Trade

The expectation that consumers and businesses will increase spending this year and next also implies that more goods and services will be imported from abroad. We are forecasting import growth of 2.9 percent, with a further increase of 3.3 percent in 2020. On the other hand, growth in exports by Dutch businesses is expected to be lower than this, due among other things to slower growth at key trading partners, including Germany and the United Kingdom (see also our piece on global developments and the eurozone (in Dutch), as well as the long-running conflict between the United States and China. The international slowdown is already apparent, especially to entrepreneurs in industry, as they have seen their production decline in the past three quarters. We are forecasting export growth of 2.2 percent, with an increase of 2.6 percent in 2020. Since export growth is lagging import growth, the developments in trade are expected to pressure GDP growth in 2019 and 2020.

There is moreover a risk of further escalation of international trade tensions. Not only because the Netherlands is linked into global value chains, but also because increasing acrimony could further damage world trade as a whole. Furthermore, there is the potential for a conflict between the EU and the US over the auto industry. The timing and the exact terms on which Britain leaves the European Union could also seriously affect our trade prospects (see Box 1). On the other hand, the government in Germany is under pressure at home and abroad to increase its investment. This could offer a boost for Dutch entrepreneurs, for whom Germany is usually the most important trading partner.

Box 1: Hard Brexit also a hard knock for the Netherlands

Our forecast still assumes that Britain’s exit will be postponed again and that the United Kingdom (UK) will finally leave the EU in early 2023 in an orderly fashion. However, there is still a significant risk of a hard Brexit on October 31st. Since the UK is the third-largest export destination for the Netherlands, how Brexit ultimately pans out will significantly affect the Netherlands as well.

Recently we showed that the economic consequences of a hard Brexit could be very negative for the UK itself. The impact ultimately depends on the extent to which trade barriers actually increase. For 2019 and 2020, we estimate that a hard Brexit will lead to a 5 to 6 percent drop in GDP compared to an orderly Brexit. Trade tariffs and additional non-tariff barriers such as procedures around the border will hurt British trade and investment. The economic damage will be even more severe in the longer term, since investment in areas such as productivity are falling behind.

Obviously, this will affect the Netherlands as well. If we have a hard and disruptive Brexit, we estimate this will reduce economic growth by 0.2 of a percentage point in 2019 and 1.2 percentage points in 2020 (see figure B1). Growth will hold up reasonably well in 2019, but will decline to close to nil in 2020 as a result of Brexit. The impact in 2020 will be felt mainly in lower exports, especially to the UK (figure B2). Dutch products will become more expensive for British people, and increased trade barriers will make British products more expensive in the Netherlands. The higher costs of trade could pressure investment and lead to higher unemployment. Together with higher inflation, this could also reduce household consumption.

This forecast is subject to a high degree of uncertainty. A no-deal Brexit could cause serious volatility in the financial markets, exacerbating the consequences for the Netherlands as well. On the other hand, the government could take measures to mitigate the negative effects for citizens and businesses. All these factors mean that there is considerable uncertainty regarding the full impact of a hard Brexit in general, and on the Netherlands in particular.

Figure B1: Effects of a hard Brexit on the Dutch economy
Figure B1: Effects of a hard Brexit on the Dutch economySource: Statistics Netherlands, RaboResearch
Figure B2: Lower exports with a hard Brexit
Figure B2: Lower exports with a hard BrexitSource: Statistics Netherlands, RaboResearch

Government spending

Figure 5: Government debt below the EU standard
Figure 5: Government debt below the EU standardSource: Statistics Netherlands

At the moment, government spending looks as though it is going to fall well short of what was planned this year. Spending actually declined slightly in the second quarter compared to the previous quarter, as shown in the first report from Statistics Netherlands. This may be due to the tightness in the labor market, since the lion’s share of government spending comprises the wages of civil servants, educators and health care workers. And in health care, the level of vacancy has risen by nearly 21 percent between the second quarter of 2018 and 2019. The question is thus whether the government is able to spend. We have accordingly downgraded our forecast for government spending, and expect an increase in spending of 1.1 percent in 2019 and 1.9 percent in 2020. Public spending rose by 1.6 percent in 2018.

The tight labor market could also pose a challenge for any further planned investments by the Cabinet. The government has the room for this due to the low interest on Dutch government paper and its relatively low debt level, and in view of the sluggish development of labor productivity in the Netherlands, additional investment could be welcome. But it remains to be seen whether this can provide a boost to the economy in the short term. If the Cabinet succeeds in achieving its planned spending in the end, this would mean that growth may be higher than we currently estimate.

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