RaboResearch - Economic Research

Dutch economy: numbers still fine, but outlook less rosy

Economic Update

  • The Dutch economy has come strongly out of the pandemic, with economic activity 2.8% higher in 2022Q1 compared to the fourth quarter of 2019
  • Employment has gone up further, with labour participation at 72.3% in May
  • But consistently high inflation is expected to weigh more and more on the economy, which is why we’re anticipating GDP to contract in the last quarter of 2022 and the first quarter of 2023

Statistics Netherlands has upwardly revised the GDP figure for the first quarter of 2022 from 0.0% to 0.4% q/q, meaning that the Dutch economy performed quite a bit better in Q1 than previously thought. Unfortunately most of 2020 and 2021 has been adjusted as well, which has led to the overall performance of the Dutch economy actually having been downwardly revised somewhat. Compared to pre-corona-crisis levels, Dutch economic activity in Q1 is now 2.8% higher than in the last quarter of 2019, while this was 3.1% in earlier estimates.

Looking forward, we foresee a more gloomy picture. In our latest forecast for the Dutch economy we expect a mild, technical recession, with GDP contracting in the last quarter of 2022 and the first quarter of 2023. During the year we expect high inflation (9.9% in June) to weigh more and more on consumer spending. And although high employment and increased savings resulting from the lockdowns are expected to provide some support for private consumption, we don’t think this will be enough to prevent consumption from declining slightly in 2022Q4 and 2023Q1. Companies, meanwhile, are faced with higher input costs, eating away at their profits and thus limiting room for business investments. Moreover, firms also have to deal with higher interest rates and labour shortages. And finally, inflation globally has risen substantially, limiting spending in the Netherlands’ main trading partners and thus hampering Dutch exports.

Higher (un)employment

We expect labor demand to decline somewhat, as economic activity is expected to cool. And the unemployment rate in the Netherlands inched up from 3.2% in April to 3.3% in May (see figure 1). However, this can hardly be interpreted as a first sign of labour market weakness, as it wasn’t just unemployment that rose slightly, so did employment: the participation rate (age 15-75) reached another all-time high in May, increasing to 72.3%. The solid performance of the Dutch labor market is not surprising against the backdrop of the historically low number of bankruptcies (see figure 2). In the second quarter, labor shortage remained the obstacle businesses most often mention in Statistics Netherlands’ quarterly business survey. Going forward, we expect inflation to weigh on economic activity, moderately pushing up bankruptcies and unemployment (to 3.5% in 2023).

Figure 1: Employment rises further
Figure 1: Employment rises furtherSource: Statistics Netherlands
Figure 2: Bankruptcies far below historic average
Figure 2: Bankruptcies far below historic averageSource: Statistics Netherlands

Dutch housing market set to slow down

Fuelled by the fear of missing out (FOMO), a saving glut and all-time low mortgage interest rates, the Dutch owner-occupied housing market went bonkers in 2021 with prices rising more than 20% y/y, pushing the price-to-income ratio deep into uncharted territory. Official statistics still point toward relatively strong m/m growth this year, but those figures are trailing three to four months behind. And with the mortgage interest rates having more than doubled during that time, sentiment on the housing market is considerably different than last year. Prospective homebuyers are able to borrow much less, the number of homes for sale on the country’s most popular real estate website, Funda.nl, shot up more than 60% y/y (see figure x), and real estate brokers are signalling fewer viewings and fewer offers.

In our most recent Housing Market Quarterly, we have therefore lowered our outlook, and now expect prices to rise on average 16.1% y/y this year (down from 17.3%). It is important to stress that in the first five months of 2022 the Dutch house price index was already 12.8% higher on average than in 2021, mostly due to a carry-over effect. For 2023, we expect Dutch house prices to increase further by 4.5% y/y (was 5.5%), which is much less profound than what we have experienced the last couple of years. We assume interest rates will decline somewhat starting this fall/winter, with unemployment rising only mildly in 2023 as the Dutch economy takes a step back. This should keep demand for homes relatively buoyant. But given the geopolitical and macroeconomic uncertainties, we’ve also calculated two risk scenarios. The first adds higher interest rates to the baseline, the second also adds higher unemployment and a sharper economic contraction than what we have currently pencilled in. In both scenarios, house prices will decline in 2023. While this is not our current baseline, these calculations underline the potential risk of declining housing price going forward (Figure 4).

Figure 3: Homes for sale quickly increasing
Figure 3: Homes for sale quickly increasing  Source: Funda.nl, RaboResearch
Figure 4: House prices set to stagnate or drop
Figure 4: House prices set to stagnate or dropSource: Statistics Netherlands, RaboResearch
Carlijn Prins
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455
Nic Vrieselaar
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2216 2257

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