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The Netherlands: Lockdown and weak global demand hurt economy

Economic Update

  • Consumption fell sharply again in May: in particular, less money was spent on services
  • Unemployment rose quickly in June to 4.3 percent
  • Daily manufacturing production declined even more sharply in May than the month before
  • The Dutch owner-occupied housing market is not yet showing signs of a corona-impact, but we do not expect it to escape the crisis

With social distancing and working from home as much as possible now being the norm in the Dutch society, producers and consumers are trying to find their way in this ‘new normal’ situation. Even though the virus is still classified as ‘under control’, the infection rate (R0) and the number of infections are flaring up somewhat. However, at the moment the Dutch government deems it unnecessary to (re-)impose stricter rules. Provided there is no second wave and second lockdown period, we still expect Dutch GDP to decline by 5.7 percent in 2020. Recovery in 2021 will be limited at +2.8 percent due to weak demand from abroad and sharply rising unemployment depressing domestic activity (table 1).

Table 1: Economic forecasts
Table 1: Economic forecastsSource: Statistics Netherlands and RaboResearch

Consumption hurt by lockdown, unemployment on the rise

Although from 11 May some ‘intelligent lockdown’-rules were eliminated, among others the closure of primary schools, day cares and businesses involving physical contact services such as hairdressers, the first ten days of May were still part of the most stringent ‘intelligent lockdown’-phase. It is therefore unsurprising that private consumption dropped again in May, by 12.8 percent year-on-year: somewhat less than the historic drop in April, but still second largest drop ever recorded (figure 1). Consumption of services such as restaurants, theatres, gyms and public transportation dropped by 22.4 percent year-on-year, showing the inability of consumers to spend money on services due to the closures. Despite consumer confidence appearing to have bottomed out and most restrictions being lifted, we expect only a slow recovery as unemployment is expected to further increase in coming months.

Figure 1: Lockdown pushed consumption down
Figure 1: Lockdown pushed consumption downSource: Statistics Netherlands
Figure 2: Rising unemployment becomes visible
Figure 2: Rising unemployment becomes visibleSource: Statistics Netherlands

In June the number of registered unemployed rose sharply by 74 thousand, which pushed the unemployment rate from 3.6 percent in May to 4.3 percent in June (figure 2). Uniquely, parallel to unemployment rising, employment rose as well. This is due to an increase in the labor force as those who lost their jobs earlier in the coronacrisis but did not register as unemployed, have apparently started looking for work again in June, making them officially unemployed. Some of them indeed found work as lockdown measures were relaxed, but tens of thousands did not. We expect unemployment to rise further to 6.8 percent at the end of 2020 due to an increase in bankruptcies and reorganizations. Currently, these are still very limited as reorganizing takes time and because the Dutch government is still providing substantial support to businesses. These support measures, together with declining tax income, already caused the cash balance of the Dutch government to decline to a negative 12.2bln euros in June, and government (non-EMU) debt to rise by 40bln euros since March. Despite the large deterioration of public finances, the government still has fiscal space to potentially continue support measures after the second package ends October first.

Manufacturing industry not expected to recover this year

Figure 3: Tumbling manufacturing production
Figure 3: Tumbling manufacturing productionSource: Statistics Netherlands

Seasonally adjusted daily manufacturing production was down 11.9 percent year-on-year in May, following a year-on-year decline of 10.5 percent in April (figure 3). As Dutch manufacturing sites did not have to close down during the height of the international lockdown period, this drop in production is mainly a reflection of weaker demand in global supply chains. On a positive note, Eurozone trade partially recovered in May, with exports having increased 10.2 percent month-on-month and imports 6.5 percent month-on-month. The outlook is of course very dependent on the further course of the COVID-19 pandemic. Although manufacturing producers are still very pessimistic about their current order books, they are gaining back some optimism about the future. Producer confidence rose from -15.1 in June to -8.7 in July, as the indicator on expected activity returned to a positive 1.1. Moreover, Eurozone manufacturing PMI’s are carefully finding their way back up and point towards future output growth in July. This could prove to be positive news for next month’s Dutch PMI, which increased to 47.9 in July. But despite some small signs of recovery in these confidence indicators, our outlook for the manufacturing industry remains gloomy: we expect to see a decline of 10 percent year-on-year in 2020, mainly due to a lack of opportunities to make up for lost production due to persistent weak demand from abroad. This will also drag down Dutch exports, which we expect to shrink by 7.2 percent year-on-year in 2020 (table 1).

No signs yet of a corona-impact on the Dutch owner-occupied housing market

In the first six months of 2020 owner-occupied houses became 4.5 percent more expensive. Moreover, home sales were up 6.6 percent compared to the first half of 2019. This lack of a corona-impact on the owner-occupied market can be explained by the fact that there are a few months between signing a provisional sales contract and the registration of the sale by the notary at the Land Registry. Therefore, those homes registered as sold in June (17,722), were likely already provisionally sold in March, when the full impact of the coronacrisis had yet to be experienced. We do expect the housing market to take a hit, though: we expect lower demand for owner-occupied homes from prospective first-time buyers and subsequent-time buyers due to rising unemployment or fear of losing income. Moreover, we also expect fewer buy-to-let investors due to a decline in demand for (international) student-, tourist- and expat-housing. As opposed to the owner-occupied market, the Dutch rental market is already showing signs of a corona-impact, with rental prices in the biggest cities declining and supply of rental homes increasing.

Figure 4: House prices still full steam ahead
Figure 4: House prices still full steam aheadSource: Statistics Netherlands

Overall we expect home sales to start declining in the third quarter and to end up at around 195,000 transactions this year, compared to 219,000 last year. Less demand will also result in lower price pressure. We expect prices to start declining in the fourth quarter of 2020. This year, prices will still be higher year-on-year due to the strong first half year realizations – possibly even more than the 5.6 percent we had penciled in-, but next year we expect to see a price decline of around 2.9 percent year-on-year.

Lisanne Spiegelaar
RaboResearch Netherlands Rabobank KEO
+31 88 726 7864

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