RaboResearch - Economic Research

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Dutch economy to return to pre-corona level in mid-2022

Economic Quarterly Report

  • The second wave of corona is causing a new dip, but much less deep than during the first wave
  • The Dutch economy is expected to contract by 4.2 percent over the whole of 2020
  • Some degree of restrictive measures will continue to be needed during much of 2021, despite the availability of corona vaccines
  • Rising unemployment and lower business reserves will hinder the normalization of consumer and business spending in 2021
  • Dutch exports will pick up due to a broader global economic recovery, but will suffer from Brexit
  • Economic activity will therefore moderately grow in 2021, at an expected rate of 2.4 percent. We are also forecasting 2.4 percent growth in 2022

Second wave has less impact

The Dutch economy has so far proved to be more robust than previously expected, partly thanks to tens of billions of government support. The recovery in the summer months was relatively strong, unemployment did not rise as fast as previously expected and home sales increased. But at a time when the economy had still not fully recovered from the first wave of corona, the second wave was already at hand. The economic impact of this second wave appears to be less deep though. Consumption has fallen by less than during the first wave, and international value chains have been less disrupted this time. We therefore expect to see a milder decline in economic activity in the fourth quarter than that seen in the first two quarters of this year. Over 2020 as a whole, we expect to see a contraction in the Dutch economy of 4.2 percent.

Table 1: Economic forecasts for the Netherlands
Table 1: Economic forecasts for the NetherlandsSource: RaboResearch, CBS

Vaccines make an easing of restrictions possible

In our baseline, we assume that corona vaccines will be available from the first quarter of 2021 and that the Dutch population can be vaccinated in phases from then on. In combination with today’s more extensive testing capacity, the corona measures can then be gradually eased. As a result, economic activity is expected to pick up again. But we assume that the measures will remain relatively strict in the first quarter of 2021. The recovery next year will thus take longer to get going than in the summer months of 2020 (figure 1). We expect the measures be similarly strict as those in the summer of 2020 in the second quarter of 2021. Further substantial easing is not likely to occur until the second half of 2021, because limited measures will probably continue to be necessary until a high proportion of the population has been vaccinated.

Figure 1: Full recovery in mid-2022
Figure 1: Full recovery in mid-2022Source: RaboResearch, CBS

Rising unemployment and lower business reserves will also hinder normalization of consumer and business spending in 2021. And although exports will pick up on the back of a broader global economic recovery, the Dutch economy will suffer from the worsening of trade relations with the United Kingdom post-Brexit. We therefore expect the Dutch economy to grow by around 2.4 percent in 2021. This will recoup some, but not all of the damage caused by the corona crisis.

The economic recovery will continue in 2022. We expect unemployment to decline again in that year and anticipate economic activity to return to pre-corona levels in mid-2022. The economy will probably grow by 2.4 percent in 2022.

Recovery of consumption slowed by measures and rising unemployment

Figure 2: Impact of second wave is less deep
Figure 2: Impact of second wave is less deepSource: RaboResearch, CBS

Household consumption was hit hard in the first quarter of 2020 due to the outbreak of the corona virus and the lockdown measures. This was followed by a strong, but not full, recovery. The fall in consumption as a result of the second wave is less severe (figure 2). Therefore, we expect consumption to fall by 6.9 percent in 2020.

Consumption is expected to pick up to some extent again in the first quarter of 2021, as we currently assume that the corona measures will be slightly less strict on average over the quarter. But measures of some sort will still be needed for a large part of the year, since it will be months before everyone is vaccinated. In addition, we expect unemployment to rise further in the coming months, further slowing the recovery in consumption next year. The number of vacancies will probably decline and reorganizations and bankruptcies will increase. After all, many businesses have now lower reserves, and there is overcapacity in the economy. Furthermore, we expect government support to be scaled back in the course of next year.

Unemployment will probably gradually subside again in 2022, which will positively influence household consumption in that year. The weaker labor market and lower business reserves will also restrict the room for wage growth, further limiting the recovery in consumption in 2021 and 2022. All in all, we expect consumption to increase by 3.1 percent in 2021 and 4.3 percent in 2022.

Outlook for unemployment better than previously expected

Figure 3: Unemployment to peak at year-end 2021/early 2022
Figure 3: Unemployment to peak at year-end 2021/early 2022Source: RaboResearch, CBS

While we still expect unemployment to increase, we have downwardly revised our unemployment expectations. In our current forecast, the peak of unemployment will be lower than previously thought, at around 5.5 percent at the end of 2021 (figure 3). We had previously forecasted that the peak would be close to 7.0 percent. There are various reasons for this. Firstly, unemployment has risen by less than previously expected, and even declined slightly in September and October. This was most likely due to strong government support and a stronger recovery in the third quarter. The government has also announced that it will continue its  job retention scheme until the summer of 2021 and has shown it is prepared to be flexible regarding emergency support. We also think that businesses will be cautious in reducing their labor force by too much, with the end of the pandemic in sight and the extremely tight labor market until the beginning of this year still fresh in memory.

Recovery in business investment slowed

Business investment collapsed in the first half of 2020 due to the corona outbreak. After an incomplete recovery in the third quarter, business investments will most likely decline again in the fourth quarter. Over 2020 as a whole, we therefore expect a decline of 8.2 percent. Heavy drops in revenue, overcapacity and a high level of economic uncertainty are likely to lead to investments being postponed or canceled.

Figure 4: Producer confidence has partially recovered
Figure 4: Producer confidence has partially recoveredSource: Statistics Netherlands

We expect business investment to rise by 2.1 percent in 2021. Producer confidence has started to rise again in the past six months, although the index is still well below its historical average (figure 4). In addition, the end of the crisis is approaching now that effective vaccines appear to be within reach. This may prompt businesses to resume some of their postponed investments next year. Revenues will also increase as the economy becomes more open again. At the same time, business reserves have fallen as the support from the government does not cover all their costs. This will slow the recovery in investment in 2021. We expect the recovery to continue in 2022 and business investment to increase by 5.9 percent.

Catch-up in healthcare spending

The corona crisis is also affecting government spending, especially on healthcare. In the first wave, spending dropped sharply because much of the regular care could not take place. This concerned amongst others delayed operations or physiotherapists who were not able to provide treatment. In the second wave as well, it appears that hospitals are not able to operate at full capacity. We accordingly expect government spending to decline by 0.6 percent in 2020. There will be some catching up with respect to this postponed care next year, with an increase in government spending of 3.2 percent. The costs of corona vaccines and the vaccination of the population will also be paid for by the government, although the cost of this will be relatively limited. We expect government spending to rise by 2.3 percent in 2022.

Regarding government investment, the problems related to hydrogen will continue to put a brake on infrastructure projects. Municipalities may also have lower budgets for infrastructure due to lower income. The investment fund will however boost the economy in the coming years. We estimate that government investments will rise by 3.8 percent in 2020, followed by 0.8 percent in 2021 and 1.3 percent in 2022.

Trade is recovering, but Brexit is causing damage

Figure 5: Manufacturing continues to improve
Figure 5: Manufacturing continues to improveSource: Macrobond, Markit

In the first half of 2020, exports were negatively affected by a fall in demand from our major trading partners and disrupted value chains. We expect exports to suffer again in the second corona wave, but the decline in the fourth quarter will probably not be as severe as during the first wave, as there is less disruption in international value chains this time. In addition, the decline in economic activity in many of our major trading partners, such as Germany, France, the US and China, is expected to be lower as well.

The economies of our major trading partners will also recover in the coming years, as a result of which Dutch exports will pick up again. The coming deterioration in the trade relationship with the United Kingdom will however be something of an obstacle for a trade recovery. We estimate there will be an increase in exports of 5.0 percent in 2021 and 4.9 percent in 2022.

An increase in consumption by Dutch households and businesses and in exports will also lead to an increase in imports. We are forecasting growth of 5.1 percent in 2021 and 6.7 percent in 2022.

Our estimates are subject to significant uncertainty

The development of the number of infections, and therefore the duration and intensity of the measures in both the Netherlands and the rest of the world, is still a major uncertainty in our estimates. The economic damage could turn out to be worse if the measures are tightened further and/or last longer than we currently expect. For instance, as a result of a rapid rise in the number of infections, or if a vaccine takes longer to become available or is less effective than currently expected.

On the other hand, if the Dutch population can be vaccinated more quickly than we currently expect, economic growth will probably pick up faster than we are currently forecasting. The same will apply if there are big advances in the applicability of rapid testing.

Carlijn Prins
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455

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