Dutch Economy in Focus – Growth further down

by: Nico Klene

  • Dutch economic growth will decelerate to 1.3% this year and to 1.1% in 2020. GDP growth will thus be lower than we previously thought – particularly in 2020
  • The recent worsening of the trade war prompted us to reduce our forecasts
  • Exports are weakening due to the meagre expansion of world trade
  • The increase in private consumption will fall sharply, mainly because of the moderation in disposable income growth, but also due to lower consumer confidence
  • Business investment will lose momentum due to the less favourable sales outlook. The escalating trade war will further undermine business confidence and depress investment, particularly next year
  • Accelerating government spending will act as a partial counterbalance
  • Unemployment is now lower than during the last economic boom. However, the slowing economy will dampen jobs growth and unemployment will rise again – notably next year
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Dutch economic growth will fall further both this and next year

Dutch economic growth will decelerate this year to 1.3%, down from over 2½% in 2018. This slowdown is due to flagging domestic spending and export growth. Exports are suffering from anaemic world trade, while household consumer spending is stalling due to the more modest improvement in disposable income.

Growth will continue to slacken (also globally) and remain low for the time being, partly due to the escalation of the trade war. A recovery will only take place in the course of 2020. Nevertheless, average growth will slow even slightly further next year – to 1.1%.

Stable GDP growth in first quarter of 2019 …

Gross domestic product (GDP) advanced 0.5% in the first three months relative to the previous quarter (qoq). That is the same growth figure as in the last quarter of 2018 and slightly above the eurozone average.

Both domestic spending and exports continued to rise. But investment and, notably, private consumption saw less growth after a strong final quarter of 2018. We should point out, however, that consumer spending was depressed by lower energy consumption due to the mild winter. Investment ran into a headwind from the strong dip in residential investment growth.

Government consumption grew 0.5%, the same as in the previous quarter. But this was a disappointing number in the light of the spending impulse promised in the Coalition Agreement.

Looking at the foreign trade balance, imports and exports both advanced in the first quarter (qoq). However, imports continued to outpace exports. As a result, net exports (exports minus imports) again dampened GDP growth.

With consumption, investment and foreign trade all taking a step back, it is perhaps surprising that GDP growth remained stable in the first quarter. This, however, was due to vigorous restocking. The strong expansion in stocks accounted (according to the provisional data) for about 0.4% point of the GDP increase. The first-quarter growth figure thus looks somewhat less solid than that of the previous quarter. We therefore see GDP growth falling back in the second quarter, also in the wider eurozone.

… but less growth expected in the second quarter

Various sentiment indicators also suggest that growth is likely to be lower in the second quarter than in the first. These have been trending down for a while now, despite temporary upticks from time to time. Meanwhile, the indicators have sunk to levels last seen in 2016. Note, however, that the EU Economic Sentiment Indicator and the manufacturing confidence indicator of Statistics Netherlands are still above their long-term average. The manufacturing purchasing managers index (PMI) is slightly below average, but above 50, the value that separates growth from contraction.