Phase two of the recovery takes hold as economy is re-opened
- The Dutch economy is reopening more rapidly than previously communicated by the government and this goes hand in hand with a pick-up in economic activity
- Following a pause in the recovery during 20Q4 and 21Q1, we expect a return to growth in the second quarter
- Looking ahead, we expect that the Dutch economy will grow by 3.5% in 2021 and 3.7% in 2022 (Table 1). This 2021 figure is lower than we previously forecasted but this is entirely due to revisions made by Statistics Netherlands to previously released GDP numbers
The Dutch economy is reopening more rapidly than previously communicated by the government on the back of a steep decline of new infections and lower occupation of ICU beds (Figure 1). Nearly anything that can be done at 1.5 meter distance is no longer subject to restrictions. Firms active in battered sectors, such as the events, cultural and sports sector, can now operate at full capacity, provided that visitors show proof of a negative test or vaccination. The vaccination pace was scaled up significantly in recent weeks and currently 83.6 doses per 100 inhabitants have been administered. Every person willing to receive a vaccine should have received a first jab by mid-July. The new ‘delta variant’, which was first detected in India, can still throw a spanner in the works though. Multiple clusters have been identified in the Netherlands and RIVM expects this variant “will become the dominant strain over the course of the summer”.
The reopening of the economy goes hand in hand with a pick-up in economic activity. Following a pause in the recovery during 20Q4 and 21Q1, we expect a return to growth in the second quarter and forecast that GDP grew by 2.1% q/q. Rabobank’s transaction data shows consumption picked up significantly in April and May, as measures hindering services requiring close proximity were alleviated and in-store shopping no longer required an appointment. People especially spent more on hospitality, clothing, jewelry and sports. Rabobank’s transaction data also indicates that private consumption was 1% higher in May than in the same month two years ago. In April, private consumption was still 9.2% below its April 2019 level. Meanwhile, exports were 9.7% higher than two years ago and grew by 25.7% y/y in April - machines and transport equipment exports grew rapidly in particular. Imports also grew by 21.5% and were 9.4% higher than during the same month in 2019. The economic recovery has sparked some concerns about inflation which rose to 2.0% in May (HICP), but we believe this uptick in inflation is only transitory.
The labor market continued its steady recovery in May (Figure 2). The unemployment rate dropped to 3.3% - just 0.4ppts shy of its March 2020 low. Moreover, the number of vacancies has been on the rise while the number of employed persons rose slightly in May. Just 48.000 fewer people were employed than during the pre-corona high in January 2020. However, it’s not all sunshine and roses. 390.000 part-time employees wanted to work more hours in 2021Q1 compared to 319.000 a year before. Moreover, employment and participation levels among young people (aged 15-25) are still well below pre-corona levels (Figure 3).
Looking ahead, we expect that the Dutch economy will grow by 3.5% in 2021 and 3.7% in 2022 (Table 1). This 2021 figure is lower than we previously forecasted but this is entirely due to revisions made by Statistics Netherlands to previously released GDP numbers. 21Q1 GDP growth was revised downwards from -0.5% to -0.8% q/q. On the other hand, 20Q4 growth was adjusted upwards to 0.0% q/q meaning the Netherlands technically escaped a second corona recession.
The outlook for the Dutch economy is favorable and we expect robust growth in the quarters to come. Producer confidence reached an all-time high in June. Consumers have also become increasingly confident and are particularly upbeat about the economic situation in the coming 12 months (Figure 4). We expect that the economy will be back at pre-corona levels in the third quarter of this year, which is earlier than in other European countries. The government recently extended support until the end of 2021Q3 but also communicated that for the time being it will not extend support after 2021Q3. We also expect support will be phased out after Q3. As a consequence, unemployment is projected to rise mildly in the upcoming quarters and will peak at 4.2% in 2022Q2.
Talks about new coalition government in deadlock
Meanwhile, talks about a new coalition government remain deadlocked. The current stalemate is mainly the result of a fragmented lower house following the March elections. As a consequence, five parties are needed to reach a majority. To break the stalemate the two largest parties were asked to start drafting a coalition agreement. At a later stage other parties can sign on and propose adjustments and additions. Whether the attempt to break the deadlock is effective remains to be seen given the substantial differences between some of the potential coalition members.