Dutch Economy in Focus – Boom eases off

by: Nico Klene

  • The Dutch economy can grow almost 3% in 2018 – less than we expected a few months ago, but comparable with 2017.
  • Our eurozone growth forecast for 2018 was recently revised down. This, plus weaker-than-expected first-quarter growth, prompted us to reduce the Dutch growth estimates too.
  • The lower GDP projection for 2018 is entirely due to the markedly lower export growth forecast. Domestic spending (consumption, investment, public spending) can on average grow slightly faster than initially foreseen.
  • Dutch economic growth will be lower in 2019, but still a solid 2½%.
  • The number of jobs will rise strongly. Unemployment can thus fall even further – to 3½% of the labour force. Even lower than during the previous boom, ten years ago.
  • The economic outlook remains favourable, but the uncertainties have increased. One reason is the ongoing trade conflict with the US.
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Dutch economy growing less vigorously

The economy remains a picture of health, but some cracks are beginning to show. The reasons lie abroad. World trade growth slowed markedly in the first quarter. Accordingly, Dutch exports shrank relative to the previous quarter. This depressed the expansion of gross domestic product (GDP). In addition, many sentiment indicators have declined, partly due to the trade conflict that the US has started with China and the EU. As a result, the short-term outlook has clouded a little. In this light, we have reduced our growth forecasts for the eurozone and the Netherlands for this year. The Netherlands is now expected to grow just under 3% (was 3¼%), which is slightly lower than the figure for 2017. The adjustment to our forecast for 2019 was only fractional.

GDP growth not 3.3%, but 3.0% in 2017

Statistics Netherlands (CBS) recently published the results of its revision of the national accounts. Compared with earlier revisions, the differences with the old figures are fairly small this time around. Nevertheless, there are some differences worth mentioning. Not only is the size of GDP somewhat bigger, but the rate of growth has also been adjusted for certain years. Last year, for instance, the economic growth rate was not 3.3%, but 3.0%. And the quarter-on-quarter growth pattern during 2017 was also different: lower than previously estimated by the CBS in the first two quarters and higher in the second two quarters. The upshot is that, on balance, growth in 2017 was somewhat lower than initially thought. This lower figure was mainly caused by a smaller contribution from exports to GDP growth.

  

Less growth in the first quarter

In the final quarter of last year, GDP rose 0.9% relative to the preceding quarter (the old figure was 0.7% qoq). GDP growth then decelerated to 0.6% at the start of this year, clearly undershooting our expectations. This slowing of momentum was the net outcome of diverse factors. Exports showed a remarkable downturn – from solid growth at the end of last year to quarter-on-quarter contraction in the first quarter of this year. Domestic spending, by contrast, actually grew substantially more in the first three months of this year: private consumption increased 1½% qoq and investment by over 2½%. Note, however, that investment had contracted late last year, while private consumption had only increased slightly.

This powerful expansion of consumption and investment in itself can lift average annual spending growth to a higher level than we assumed earlier. Export growth, however, will be significantly lower. Exports will thus account for a much smaller share of GDP growth than domestic spending this year.

The eurozone also saw GDP growth slacken in the first quarter. Here, too, exports have contracted (qoq).

Sentiment indicators down, but still high

The less buoyant international picture has been noticeable in all sorts of confidence indicators since the start of this year. After peaking late last year, these indicators have gradually declined in the eurozone. However, their still high levels point to sustained growth, while the composite PMI actually even bounced back in June. That said, ‘hard’ data, such as industrial output, also weakened.

The flagging growth in the first quarter is probably partly attributable to temporary factors. The winter weather, the flu epidemic and strikes can all have played a role. In addition, the trade conflict started by the US with China and the EU is weighing on economic sentiment. The political situation in Italy also deserves mention. The new government coalition is eyeing a massive increase in public spending, leading to a severe deterioration of the Italian public finances.

We now see the somewhat weaker GDP growth of the first quarter continuing in the second and, possibly, also the third quarter.

  

Confidence indicators have also dropped in the Netherlands. But here, the decline only started in March. But the levels are still high (see charts).

The less favourable international outlook is illustrated by the divergent movement of the purchasing manager indices (PMI) for (all) ‘new orders’ and for ‘new export orders’. The latter has clearly fallen more than the former (see chart on next page). However, a reading of 57 still points to further export growth (being well above the 50 mark that separates contraction from growth).

GDP forecast 2018 down despite stronger domestic spending growth

The combination of lower-than-expected growth in the first quarter plus the somewhat less positive outlook for the near future prompted us to also reduce our growth forecasts for the Dutch economy for 2018: from 3.3% to 2.9%. This lower growth is entirely attributable to exports. This forecast has been significantly revised down.

Domestic spending, however, is powering ahead. The increase in consumption is possibly being driven by the higher real disposable income. One reason for this rise is the vigorous jobs growth, which means that more and more people are in paid employment. Another is that consumer confidence remains high. Consumption growth in 2018 is expected to be higher than in 2017.

The favourable outlook sketched above points to a further strong increase in investment in fixed assets. Positive factors are the high manufacturing capacity utilisation rate and low financing costs. Residential investment is losing some momentum, but remains strong.

The government is also contributing to the economic expansion. The current coalition government has decided on an extra increase in spending, particularly for this year.

Forecast 2019 unchanged, but uncertainty has increased

We yet assume that the eurozone economy will rebound towards the end of this year. The adjustment to the growth forecast for 2019 is therefore fractional (-0.1% point).

But the uncertainties are mounting. The trade conflict continues, with both sides imposing tit-for-tat import tariff increases. This could escalate into a ‘trade war’, thereby significantly dampening world trade growth and, by extension, economic growth. Brexit remains another uncertain factor.

Unemployment is falling

Unemployment continues to fall. In May the jobless number was almost a quarter lower than a year earlier, but the downward trend did weaken in April and May compared to the previous month. The decrease in unemployment is attributable to strong jobs growth. But it is not just the ‘officially’ unemployed who were hired – many people who were previously outside the labour market also found work. The number of ‘real’ unemployed fell in the first five months of the year by 43,000, while the number of employed has increased much more, namely by 95,000.

Meanwhile, unemployment is only slightly above the level of the previous boom, ten years ago (see left-hand chart). Thanks to the sustained jobs growth, unemployment could presumably dip just below the 2008 level in 2019.

  

The ‘unused labour potential’ is therefore shrinking. This not only concerns those officially registered as unemployed, but also people without work who have either looked for work or are immediately available for work. In addition, part-time workers who are able and willing to work more hours are also counted. The unused labour potential or ‘broad unemployment’ is also falling rapidly. But in the first quarter, this figure was still clearly above the level of ten years ago – more than in the case of ‘ordinary’ unemployment.

Labour market continues to tighten

Other figures confirm that the labour market is still tightening, but without being as overheated as ten years ago. This can be measured according to the number of vacancies relative to the number of jobs or number of unemployed per vacancy. The chart (next page) shows that both are not yet at the level of 2008.

The growing tightness is also reflected in the rising number of permanent jobs. In the last quarter of 2017, more permanent jobs than flexible jobs were added for the first time in a long time. (We compare the number of jobs with the number four quarters earlier.) And this pattern was even more visible in the first quarter of this year. In addition, the number of permanent jobs also increased more in percentage terms (year-on-year).

  

The increased tightness will probably cause a further acceleration in wage growth.

Inflation slightly higher in 2018 – set to jump in 2019

Inflation in May was higher than at the end of last year (though somewhat lower in the intervening months). The increase is due to the rising energy prices (see right-hand chart). Core inflation has increased only marginally on balance. On average, inflation will be slightly higher this year than last year – due to the higher energy prices, stronger wage growth and slightly stronger rental increases.

  

For 2019, we foresee a strong jump in inflation, mainly due to the increased low VAT rate and higher energy tax. This, incidentally, is a temporary effect. Accelerating wage growth will also lead to extra inflation. On average, CPI inflation is estimated to rise from 1.6% in 2018 to 2.5% in 2019.