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Dutch economy getting back to ‘new’ normal

Economic Quarterly Report

  • We’ve revised our forecasts for the Dutch economy upwards: for this year we now expect growth to arrive at 4.2 percent (up from 3.7 percent). Our growth forecast for next year remains unchanged at 3.7 percent.
  • Recovery is stronger in the Netherlands than in other European countries; as a result, Dutch GDP will be above pre-corona levels in the third quarter.
  • Even more striking than the gradual growth in consumption, investments, and government spending is the strong growth in international trade.
  • Inflation is rising gradually but is not expected to bring any shocks.
  • The Dutch government’s announcement that generic support measures will be discontinued from October 1st is responsible and logical, particularly in view of the extremely tight labor market. We do not expect this discontinuation to bring a sharp rise in unemployment in the near future.

Dutch economy showing great resilience

In the second quarter of 2021 the growth rate of the Dutch economy was unexpectedly high at 3.1 percent. Average GDP in that quarter was only 0.9 percent below pre-pandemic levels. This probably means that GDP was already back at the pre-pandemic level by the end of the second quarter across the entire economy. There are major underlying differences between sectors and regions.

But that is not to say that the economy has already completely recovered. After all, if the pandemic had not occurred, the economy would have grown by over 2 percent by now. In other words, there’s still some catch-up growth to be had. We therefore expect relatively strong GPD growth for the second half of this year as well.

We forecast annual growth of 4.2. percent in 2021, and 3.7 percent in 2022. Although these are unprecedented high growth rates, they do come on the heels of a record contraction of 3.8 percent in 2020. Based on these forecasts, at year-end 2022 the Dutch economy will be almost 4 percent larger than it was three years earlier, just before the pandemic struck.

This growth is due to the underlying significant contribution of both domestic spending and international trade (see table 1). In general, we can say that the harder the blow in 2020, the higher the growth in 2021 and 2022. Household consumption has been slowest to recover, mainly because much of the retail and hospitality sectors were closed in the first half of 2021. The government is performing its stabilizing role with brio, not only through the major support packages but also in terms of government consumption and investments. International trade is making a positive contribution this year, thanks both to a strong rise in exports and a slight lag in import recovery due to faltering household consumption. Next year, imports growth will exceed exports growth.

These forecasts are subject to various uncertainties. We are assuming that the corona pandemic is largely under control, that the easing of restrictions announced by the government will be implemented, and that no further drastic measures will be needed in the future. Should things turn out differently, the economy will feel it. An added risk is that problems in international value chains could result in more or new shortages of raw materials and intermediates. The impact would be to limit production in various sectors (such as manufacturing and construction) which, in turn, would put a brake on economic recovery. At the time of writing, the impacts in the Netherlands appear less significant than for instance Germany, but the situation is fluid. It is also possible that inflation could rise, undermining household purchasing power and slowing down a recovery in consumption.

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

The Netherlands leads the field

Figure 1: Dutch economy bouncing back faster than other European economies
Figure 1: Dutch economy bouncing back faster than other European economiesSource: Macrobond, national offices of statistics, RaboResearch

This strong recovery puts the Netherlands ahead of the field. The economy was already in relatively good shape in the first quarter of this year, followed by above-average growth in the second quarter. Although the Dutch economy is still 0.9 percent below the pre-pandemic level, for the economy in the eurozone this is 2.8 percent. There are big differences between countries, see Figure 1. When the individual economies are expected to grow beyond pre-corona levels is indicated at the top of the figure. The U.S. economy already crossed this line in the second quarter. Again, there are large variations within Europe: full recovery in Spain and the U.K. is expected more than a year later than in the Netherlands.

The Netherland’s leading position can be explained by several factors: a strong economy before the pandemic, a favorable sector structure (for instance, a small tourism sector and substantial business and financial services sectors), high penetration of online retail and remote work pre-pandemic, alongside sound government finances that made those substantial support packages possible.

Strong recovery of Dutch exports

The strong recovery is clearly visible in exports. The level of Dutch exports has already surpassed the year-end 2019 figure. In contrast, the eurozone as a whole is not expected to achieve that level for another six months while Spain, France, and the U.K. will have an even longer wait.

Which raises the question: how is this possible? After all, exports are strongly influenced by business and consumer spending in other countries, while the performance of the Dutch domestic economy itself has little impact on exports. One explanation is the composition of Dutch exports. For instance, the tourism sector is much smaller in the Netherlands than in southern European countries. At the same time, other services unrelated to tourism make up a relatively large part of Dutch exports, for instance, other business and financial services. The current disruption to international value chains has little impact on the export of these services, which are seeing more rapid recovery as a result.

That said, it’s worth noting that in the past two years, the value of total goods exported from the Netherlands (not corrected for price changes) has risen steadily (Figure 2), almost as if the pandemic didn’t happen at all (see the comparison of 2019 growth with 2018 growth in the right-hand block). The main destination for Dutch exports was other E.U. countries. Within Europe, it’s striking that exports also rose to countries like Spain and Italy, whose domestic economies still have a (long) way to go before they reach pre-pandemic levels (Figure 3).

Figure 2: Dutch exports are rising across the globe
Figure 2: Dutch exports are rising across the globe Source: Statistics Netherlands (CBS), RaboResearch
Figure 3: Exports also growing to European countries with slower recovery
Figure 3: Exports also growing to European countries with slower recoverySource: Statistics Netherlands (CBS), RaboResearch

High inflation is likely temporary

We must admit that this year’s August inflation figure came as a shock: prices were 2.7 percent higher than in August 2020. Closer examination shows that this was mainly attributable to a relatively low inflation rate in August 2020. For the entire third quarter of 2021, we therefore expect inflation to come out at 2.0 percent, and at 1.9 percent for the entire year. Nonetheless, these levels are high compared to previous years.

Among the many causes is the low inflation level during the pandemic in 2020, due in part to reduced global demand for raw materials at that time, which caused a rapid fall in prices. Now that global demand is normalizing, we are seeing catch-up price rises with a temporary inflation uptick as a result.

Figure 4: Rapid rise in container transport prices combined with shortage of materials for Dutch manufacturing
Figure 4: Rapid rise in container transport prices combined with shortage of materials for Dutch manufacturingSource: Container Trades Statistics Ltd, Statistics Netherlands (CBS), Macrobond

More important are the current problems in the international value chain. Various sectors of the Dutch economy are facing shortages of raw materials and intermediates (see the orange line in Figure 4). In addition, container transport prices have rocketed across the world (see the blue line in Figure 4). Manufacturers are passing on the resulting rise in production costs to their customers.

Having said all that, we don’t expect inflation to remain at high levels for long. Problems in international trade will ease as the impact of the pandemic lessens and the major shocks in international value chains play themselves out. In addition, services are a large component of Dutch consumption and tend to be unaffected by the impact of higher global prices for raw materials. We therefore expect that any further changes in inflation will be limited in 2021 and that it will fall to 1.7 percent in 2022. The freeze on social housing rents in the Netherlands will also exert downward pressure on inflation through to mid-2022.

End of support packages is justified against labor shortage backdrop

The Dutch government’s main goal when introducing its extensive generic corona support packages (including the Emergency Measure for the Preservation of Jobs (NOW), and the Temporary Emergency Measure for Self-employed Persons (Tozo)) was to prevent a downward economic spiral. Without these packages many sectors would have gone under in a massive wave of bankruptcy and forced layoffs, which would have had significant impacts on the economy as a whole. The government recently announced the discontinuation of these measures with effect from October 1, 2021. From an economic perspective, that is a logical and responsible decision.

The support measures ensured that there was only a limited rise in unemployment, which stood at 4.6 percent in August 2020. In the meantime, this figure has fallen steadily, reaching 3.1 percent in July. At the same time, there has been a steep rise in the number of job vacancies. The labor market in the Netherlands has never been so tight (i.e., the correlation between the number of people unemployed and the number of vacancies), as shown in Figure 5.

Figure 5: Low level of bankruptcies and labor market shortages go hand-in-hand
Figure 5: Low level of bankruptcies and labor market shortages go hand-in-handSource: Macrobond, Statistics Netherlands (CBS)

The tight labor market is partly attributable to the extremely low level of bankruptcies (Figure 5), which, again, is a consequence of the support packages. It is nigh-on impossible to distinguish between loss of turnover due to the pandemic or due to other reasons. As a result, the pandemic and its associated support packages kept some companies alive which would otherwise have gone under. The Netherlands Chamber of Commerce has also recently noted a substantial weakening of business dynamics. For a long time, the damage caused by the reduced economic dynamic was considered an acceptable side effect that was outweighed by the positive impacts of the packages. 

This situation will change as the restrictive measures are phased out for good. The risk of continuing the generic support measures is that they would create “zombie” companies, that is, businesses kept alive by the support measures which would not be viable without them. While the direct costs of this support to the government are one problem, these businesses also lock in employees who would fare better and be more productive in companies that offer growth prospects for the future. We therefore expect that the end of the generic support packages will ease the labor market shortages to some extent. In turn, companies will find it easier to grow when it’s easier to recruit staff. More people will also become available for work as corona- testing and vaccination facilities are scaled down.

Taken together, these factors are expected to ease the labor market shortages soon. The expected recovery in labor migration (following a significant outflow during the pandemic) will also ease the shortages. We expect only a minimal rise in unemployment—to around 3.2 percent next year—due mainly to the fact that the number of unfilled vacancies will fall.

It is often argued that wage increases would help to fill the large number of unfilled vacancies. This approach would certainly help in some sectors and there are enough other justifications for wage increases. But, initially, higher wages mainly serve to attract employees in relatively badly paid jobs to relatively well paid sectors. For the economy as a whole, these higher wages would only be meaningful if they could tempt substantial numbers of inactive people into the labor market or if they could induce part-timers to work more hours. That cannot be guaranteed though, given that labor market participation in July was already at an historic high and that generic wage increases only have a limited effect on the number of hours worked per person in paid work.

For the short-term, it would be more effective to ensure that people currently in paid work are in the right place. The discontinuation of the generic support measures is a wise move, certainly in combination with the additional social measures announced at the same time that are aimed at economic adaptability and retraining. The latter is always a good idea, and never more so than when a pandemic is causing structural changes to the economy like reduced commuting, a fall in business travel, and increased demand for digital services. Naturally, it makes sense for the Dutch government to be working on targeted schemes to support sectors that are still completely closed under government orders, such as the events sector, bars, and nightclubs.

Frank van Es
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1082 0318

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