RaboResearch - Economic Research

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Dutch economy making robust recovery from corona crisis

Economic Quarterly Report

  • We’ve revised our forecasts for the Dutch economy upwards: we now expect growth to arrive at 3.8 percent (up from 2.3 percent) this year and at 3.7 percent (up from 3.5 percent) in 2022
  • In the third quarter of this year, we forecast that the Dutch economy will be back at pre-corona levels, which is earlier than other European countries
  • The outlook for consumption, investments, government spending and international trade is favourable
  • Inflation will be tempered in 2021 due to the rent freeze but there is a risk that inflation will be higher than expected due to a combination of cost-push and demand-pull inflation
  • The new government coalition that is currently being formed must address a number of urgent issues: the housing market, the energy transition, reform of the tax and benefit system, and investment to boost productivity

Positive developments

There are multiple positive signals that the Dutch economy will make a strong recovery from the corona crisis. The pace of vaccinations has accelerated in the past months and outgoing Minister of Health Hugo de Jonge assumes that by mid-July every adult who wants a vaccination will have had a jab.

Against the backdrop of the encouraging pace of vaccination, a sharp drop in the number of infections, and a lower hospitalisation rate, the Dutch government has already taken steps to relax the lockdown restrictions in many areas. The vaccines available also seem to be effective against corona virus mutations.

Although considerable uncertainties remain, our assumption is that all lockdown measures will be lifted in Q3, and that economic activity will be in full and unfettered swing in Q4. We therefore do not expect a further extension of government support measures.

Forecasts revised upwards

Our forecasts for the Dutch economy have been revised upwards: we expect growth to arrive at 3.8 percent for this year (was 2.3 percent) and at 3.7 percent for next year (was 3.5 percent, see Table 1). This means that in Q3 2021, the Dutch economy will have completely recovered from the losses incurred during the corona crisis (see Figure 2), one quarter earlier than we originally expected. For 2022, we expect that the economy will return to its pre-corona crisis growth path. However, the strong recovery in 2021 will spill over into the 2022 growth figure (carry-over effect).

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

The prospects for the Dutch economy are brighter than for most other European countries. We expect to see a full economic recovery at the end of this year for Germany, and in mid-2022 for France. Spain, Italy and the United Kingdom are not expected to fully recover until 2023.

Figure 1: Economic activity in the Netherlands will be back at pre-corona crisis levels in Q3
Figure 1: Economic activity in the Netherlands will be back at pre-corona crisis levels in Q3Source: RaboResearch, Statistics Netherlands (CBS)
Figure 2: Consumption still way below pre-corona crisis level
Figure 2: Consumption still way below pre-corona crisis levelSource: Statistics Netherlands (CBS), RaboResearch

Robust recovery in household spending

In the first quarter of 2021 household consumption was still around 10 percent lower than before the corona crisis (see Figure 2). However, Rabobank transaction data shows a strong rebound in private consumption in March, April and May (see Figure 3). In this period some sectors were allowed to (partially) reopen, for instance, hairdressers, retail and hospitality. We expect the rebound to continue as more parts of the economy are opened up. We therefore forecast a rise of 2.6 percent in private consumption for 2021. In Q4 2021, the level of household spending will return to pre-corona crisis levels. Carry-over effects from the strong recovery in 2021 will prop up growth of private consumption in 2022 to 6 percent. More positive expectations of Dutch consumers about the economy, their personal financial situation and making major purchases are supporting a robust recovery in household spending.

Figure 3: Upturn in consumption started in March
Figure 3: Upturn in consumption started in MarchSource: RaboResearch, Statistics Netherlands (CBS)

The assumptions underlying our forecasts exclude any additional catch-up effects in household spending, despite the strong increase in private savings (EUR 50 billion) deposited at Dutch banks since the outbreak of the corona virus in the Netherlands. A RaboResearch report (in Dutch) shows that these extra savings come from a limited group of households, which tend to be those with above-modal incomes. Higher-income households generally have a lower marginal consumption elasticity than low-income households, which means that they spend less of every extra euro they earn. Furthermore, we expect a slight rise in unemployment from the second half of this year as government support measures are phased out, which will dampen consumer spending. We project a gradual rise in unemployment with a peak of 4.2 percent in the second and third quarters of 2022. Finally, in the next two years the level of inflation will probably be slightly up on 2020, which will hamper household purchasing power (see more below). If households do choose to spend some of their additional savings, consumption levels could come out higher than currently anticipated.

Government spending on the increase

Whereas consumer spending (necessarily) remained well below the pre-corona level, government consumption was already 0.8 percent higher (see Figure 2), despite a contraction in Q1 2021 that was probably related to lower regular medical care in the first quarter. We expect that the backlog in regular healthcare procedures will be cleared during the rest of this year. Additionally, spending on locations for corona testing and vaccination will have a slight positive impact. We therefore forecast growth of 2.4 percent in 2021 and a further 2.3 percent rise in government consumption for 2022.

Investments already above pre-corona crisis level

Total investments – by business, the public sector and in housing – already exceeded pre-pandemic levels in the first quarter of 2021 (see Figure 2). The outlook for government investments for the coming two years is favourable, mainly due to additional investments from the Dutch National Growth Fund (Nationale Groeifonds), on which more later. That said, the nitrogen issue, which is still hampering national public sector infrastructure projects, could be a downside risk for the government investment outlook. Local government infrastructure budgets may also come under pressure following the partial evaporation of income flows from municipal parking fees and tourist taxes. Overall, we expect that government investments will rise by 6.6 percent in 2021 and by 3.0 percent in 2022.

Figure 4: Steep rise in confidence
Figure 4: Steep rise in confidenceSource: Statistics Netherlands (CBS)

The general outlook for business investments is also favourable. The mood among Dutch manufacturers has been gradually brightening since the sharp drop in confidence in April 2020 (see Figure 4). In May 2021, producer confidence even reached its highest point in three years. Economic activity is picking up again as the Netherlands and countries around the world continue the phased relaxation of their corona restrictions. Businesses in some sectors have of course experienced a drastic drop in turnover and had to dig deep into their reserves. That said, government support measures have helped to keep most businesses afloat and we expect a relatively limited increase in the number of bankruptcies, despite the phasing-out of support measures envisaged after the third quarter of 2021. We therefore expect business investments to rise by 5.5 percent in 2021, with a further rise of 1.7 percent in 2022.

International trade makes positive contribution

In the first quarter of 2021, export and import levels were still below the pre-corona crisis level (see Figure 2), but both components are expected to regain that ground by the end of the year. Dutch businesses will benefit from recovery in the global economy this year and next. Mass vaccination programmes will go hand-in-hand with the lifting of corona restrictions by key trading partners whose economies will reopen again. We therefore forecast 6.9 percent export growth in 2021, with a further rise of 5.5 percent in 2022.

Since Dutch households and businesses are expected to increase their spending in the next two years, imports are also likely to grow. We forecast a 6.3 percent rise in imports in 2021 and a further 5.8 percent rise in 2022. On balance, international trade is expected to contribute positively to economic growth in the Netherlands this year and next.

What about inflation?

Against the backdrop of a strong recovery, there is growing concern about inflation. Inflation, i.e. the rise in the general price level of an economy, is expected to pick up this year, but can still be considered relatively mild. We forecast a rise of 1.8 percent in 2021 and 1.7 percent in 2022. The temporary freeze on social housing rents (from 1 July 2021 to 30 June 2022) will exert strong downward pressure on inflation, which could well mask price trends in other items in the consumer basket.[1] The price of some goods and services, such as hotel stays, fuel, clothes, and furniture, have already risen steeply in the past few months. Other products and services are also expected to become more expensive in the near future.

Figure 5: Input prices rocket in eurozone
Figure 5: Input prices rocket in eurozoneSource: HHWI, Eurostat, Macrobond, RaboResearch

There are currently two factors at work in respect of price rises: cost-push inflation and demand-pull inflation. For manufacturers cost-push inflation involves higher production costs, such as higher prices for raw material or more expensive intermediates. The corona crisis caused major disruptions of global supply chains, prompting shipping delays, queues at ports, higher container costs, shortages of raw materials (such as steel, copper and timber) and of intermediates (e.g. semi-conductors). In the first four months of 2021 alone, the price of raw materials in the eurozone was 25 percent higher than at year-end 2020 (see Figure 5). In particular, the prices of inputs for agriculture and manufacturing, iron ore and timber are currently between 60 and 120 percent above the long-term average. Ultimately, manufacturers will pass on part of the higher costs of production by raising prices to customers.

Demand-pull inflation occurs when demand for products and services exceeds supply. As mentioned above, we expect private consumption to rise in the coming period because people will have more opportunities to spend money on previously prohibited activities: visiting restaurants and bars, going to museums, the zoo, the movies, and, possibly later this year, festivals or major events. Demand for some of these services will be higher than supply, which will push up prices. In addition, disruptions of international supply chains will also impact the availability of some durable consumer goods.

Alternative scenario

In a different scenario, inflation could also end up much higher in the next two years, for instance, if the inflation expectations rises. In this scenario trade unions will bargain for higher nominal wages to compensate for rising inflation and prevent a deterioration of real wages. In response, employers will raise price to compensate for higher wage costs and prevent a deterioration of markups. This wage-price spiral could exert substantial upward pressure on prices over a longer period (see alternative scenario in Figure 6).

Figure 6: Inflation is relatively mild in baseline forecast
Figure 6: Inflation is relatively mild in baseline forecastSource: RaboResearch, Statistics Netherlands (CBS), Macrobond

It is also possible that international value chains will continue to be disrupted over a longer period of time than we are currently anticipating. This would exert addition pressure on prices. Another possibility is that international businesses will increasingly choose to shorten their international value chains, as these have been proven vulnerable over increasing geopolitical tensions and the pandemic. Such a development will certainly increase robustness of supply chains, but would also raise the costs of production and, consequently, feed into higher inflation.

Looking ahead

What policy measures will be necessary in the near future? Given the prospect of robust recovery of the Dutch economy, we feel that additional government stimulus is not necessary. In fact, this would very likely intensify the upward pressure on inflation, as developments in the US economy clearly illustrate. Noteworthy, the robust rebound in the Dutch economy has been achieved with relatively small corona support packages compared to many other countries (see Figure 7). The rise of public debt in the Netherlands is therefore significantly smaller than in many other countries (see Figure 8).

Figure 7: Corona support in the Netherlands smaller than in many other countries
Figure 7: Corona support in the Netherlands smaller than in many other countriesSource: IMF, Macrobond, RaboResearch
Figure 8: Limited rise in Dutch government debt
Figure 8: Limited rise in Dutch government debtSource: IMF, Macrobond, RaboResearch

Should government support be extended?

The decision of the Dutch government’s to extend the support packages in the third quarter enables healthy firms to continue their operation until the economy is fully reopened in the fourth quarter. However, we believe that continuation of the support beyond the third quarter is unnecessary, and that the government should communicate this clearly. After all, if the (major) lockdown measures are lifted after the summer and healthy companies can stand on their own two feet again, it will be time to get back to business as usual with the normal economic dynamics. Although the share of zombie companies in the Dutch economy appears to be relatively low compared to other European countries, continuation of the support measures could turn the looming prospect of zombification into reality in some parts of the economy. RaboResearch will publish an extensive report on zombie companies later in the summer.

Still a lot on the plate

Of course, after the support measures are withdrawn the government will still have more than enough on its plate. Following the general election in March, the new government coalition has still not been finalised. When formed, the new government will have to clear the backlog of pressing issues that have piled up on various issues. Top of the list are addressing severe inequities in the housing market, getting to grips with the energy transition and reforming the complex income tax and benefits systems.

Once installed, the new government will also need to focus on raising potential economic growth of the Netherlands. Before the corona crisis, the Netherlands had a productivity problem which was masked by favourable employment trends. Average annual productivity growth fell by half in the period from 2010 to 2019 compared to the period from 1980-2007 (0.7 percent and 1.5 percent, respectively).

Figure 9: Investments in R&D would substantially strengthen economic growth
Figure 9: Investments in R&D would substantially strengthen economic growthSource: RaboResearch based on Statistics Netherlands (CBS), Macrobond, Penn World Tables, Conference Board

A EUR 20 billion National Growth Fund (Nationaal Groeifonds) was established by the previous Dutch coalition government (known as Rutte III) to reinforce the structural economic growth of the Netherlands. The investments will be earmarked for infrastructure, sustainability, knowledge, innovation, and research and development (R&D). If the Netherlands were to put that money towards clearing the R&D shortfall vis-à-vis the leading countries, it would give a major boost to the economy (see Figure 9). But within five years, the Growth Fund would be exhausted. Therefore, we advocate a more ambitious investment agenda and a structural commitment to reserving funds to stimulate (green) innovation, education and entrepreneurship. As the Netherlands emerges from the corona crisis, this would generate sufficient economic growth to address societal challenges such as climate change, rapidly ageing population and rising costs of care. All these actions align with a broader vision of welfare which, in our view, should be given higher priority on the agenda of the new Dutch government coalition. After all, history shows that GDP usually takes the first hit in a crisis, followed only later by welfare indicators (see this report in Dutch). In other words, the rate of recovery for broader welfare aspects is much slower following periods of severe crisis.

[1] Trends in housing rents are relatively highly weighted as inflation coefficients in the Consumer Price Index (CPI) issued by Statistics Netherlands (CBS). 80 percent of all rental property in the Netherlands is in the social rental sector. Total rent represents an 8 percent share of the CBS consumer spending basket. Simultaneously, CBS allocates a rental amount to owner occupiers that is equivalent to the rent a consumer would have to pay if they lived in rental accommodation. This is allocated a 15.8 percent share in the CBS consumer spending basket. In total, the housing component determines almost a quarter of the total CPI, 80 percent of which is determined by trends in social housing rents.

Hugo Erken
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650
Carlijn Prins
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455

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