Dutch economy experiences atypical but robust recovery

by: Nora Neuteboom , Jan-Paul van de Kerke , Piet Rietman , Philip Bokeloh

The Dutch economy is finding its way back up this year. Although GDP contracted 0.5% in the first quarter compared to the previous quarter and 1.9% compared to the first quarter of last year, the contraction was much less than feared. Moreover, as the number of infections drops and ICU admissions decrease, the government can gradually reverse the restrictive measures. This will allow spending to recover further. This applies not only to the Netherlands, but also to its neighbouring countries. Although GDP, the classic indicator of the economy, is rising again, real household income is falling. All in all, the economic recovery will be different. This time, the recovery of the economy will not so much rely on foreign demand, but mainly on domestic demand.

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Consumer confidence returns

Consumers are more inclined to spend, since they can leave the house vaccinated and the risk of infection has been reduced. Families also saved a lot last year, because they had few opportunities to spend money. Corona put a stop to holidays and other fun things like the theatre, the pub and eating out. Those who kept their jobs and incomes were able to save considerable amounts of money as a result. On average, Dutch households will have saved an extra EUR 5,500 by 2020.

Yet we do not expect all the extra savings to be released at once. This is because it is mainly accumulated by wealthier households, who will probably put the extra money into assets. Furthermore, the sector that was hit hardest during the corona crisis, the service sector, hardly suits catch-up spending. All those missed appointments at the hairdresser’s in the past year will not be made up again. Nor the missed restaurant visits and holidays, if only because the number of holidays and free evenings is limited. All in all, we expect consumers to spend a fifth of their additional savings next year.

This does not detract from the fact that many households are in pretty good financial shape. According to CBS figures, net financial assets per individual increased by EUR 2,900 to EUR 16,000 last year, one of the highest in Europe. In addition, housing wealth is rising due to higher house prices. The combination of low interest rates, growing interest among investors, the adjusted transaction tax rate for first-time buyers, changing living preferences due to the shift to working from home, the lack of new-build homes and the relaxed lending conditions is propping up house prices further and further. Due to the increase in value, home owners will experience more room to spend money.

Increasing labour shortage

Despite the crisis, most people have managed to keep their jobs. After a short-lived rise in unemployment at the beginning of the crisis, especially among people on flexible contracts, it has steadily fallen. In April, there were only 316,000 unemployed, after a peak of 426,000 in August last year. Unemployment now stands at 3.5% of the labour force. This is not much higher than in February, just before the crisis, when the percentage was 2.9.

Companies are also more positive about the future. This can be seen in a series of confidence indicators. It is no longer only companies in the industrial sector that receive orders and are willing to invest, but also companies in the service sector. However, just as before the corona crisis, the shortage on the labour market is beginning to encumber entrepreneurs. They do post vacancies, but unfortunately the right candidates are often missing.

The renewed tightness in the labour market is partly structural and partly temporary. Structural, because the nature of work is changing: computer skills are becoming increasingly important and there is a growing need for employees with analytical skills. These are scarce and must be trained. Temporary, because with the reopening of the economy, there is again demand for personnel in the hard-hit sectors, many of whom have already moved on to other sectors. Some of these employees will return, but others will not, because some of the ‘corona jobs’ at the vaccination and test centres, the Municipal Health Service (GGD) and the sectors that did flourish, such as parcel delivery, supermarkets and e-commerce, will also be retained in the longer term. Temporarily too, because employees are currently changing jobs less frequently. Partly as a result of government support measures, job dynamics have diminished: when fewer jobs are lost, vacancies are filled less quickly.

Once the government fully withdraws the support measures, it is likely that more companies will go out of business and go bankrupt. But this may take some time. Recently, the government has indicated that it wants to continue providing support for longer. Therefore, we think that the number of insolvencies will remain low in the second and third quarter and will only increase thereafter. This means that the tightness in the labour market will continue for some time. All in all, we expect unemployment to rise at the end of this year and the beginning of next year. However, the increase will be much lower than we previously thought. We expect the number of unemployed to peak at 4.7% of the labour force around April next year. Earlier, we had assumed a rate of 5.2%.

We expect non-recurring wage developments to pick up in the course of this year and for collective wages to improve in 2022 and beyond. Nevertheless, we have adjusted the real income development downwards due to higher-than-expected inflation.

Government ready for even more support

There have recently been signals that the government wants to spare companies with deferred tax debts (totalling EUR 16 billion). The balance sheet problems are heavily concentrated in sectors that have been hit hard by the lockdown, such as the hospitality and culture sectors. For the time being, the plan is that companies will have to repay the deferred tax debt in five years from 1 October 2022 at an increasing interest rate. In the longer term, however, public debt relief seems to be a possibility on the condition that private lenders are also willing to write off debt. How and what will only become clear when a new government is formed.

The public support contributes to a further increase in public spending, especially when combined with investments from the Growth Fund and plans for additional spending to tackle educational and health care deficits. In line with this, the deficit and debt-to-GDP ratios will increase this year. Next year, when GDP is back at its 2019 level and state aid declines, public finances will improve again.

However, as long as the plans of the next cabinet are unknown, it is difficult to look ahead. On the negotiating table in The Hague are all kinds of themes that influence the government’s finances. These include the organisation of the tax service (which has come under extra attention due to the benefits affair) and the structure of the tax system, the weakened municipal finances, the housing shortage and the task of making the system more sustainable. Then there is the role of the Netherlands in Europe. The game surrounding the distribution of resources from the European Recovery Fund has long since begun.

The government can easily bear the higher costs thanks to the very low interest rate. In fact, when interest rates are negative, it pays to borrow money. Recently, however, interest rates have risen due to higher inflation. The 10-year government bond rate is now at 0.0% compared to -0.5% in December. However, we think that rates will return to lower levels once investors become convinced that inflation is only briefly higher.

Rise in inflation is only temporary

The recent rise in inflation is due to corona-induced price fluctuations. For example, the shortage of sea containers and ships is hampering international transport, the economic recovery is causing a rally in raw materials and the increased demand for electronics is leading to a shortage of computer chips. But in the longer term, the ample labour market in the eurozone will moderate European wage and price developments. For the Netherlands specifically, inflation is being cushioned by the agreements to limit rent increases.

The strong inflationary upswing expected by some investors following the roll-out of the US government’s generous stimulus programme seems unlikely. Maybe for a while in the US, but not sustainably. Certainly not in the eurozone, where the labour market is more plentiful. This extra spending in the US will, at best, contribute only to a limited extent to higher Dutch exports. The impulse from pent-up demand in neighbouring countries, where spending was under even more pressure during the lockdowns than here, will be stronger.

For this year, we expect a positive contribution of trade to GDP growth. However, this will not translate into an even higher current account surplus which, apart from imports and exports of goods and services, is largely determined by income transfers with foreign countries. These will again be lower this year as profits of Dutch companies abroad are under pressure due to corona. If corporate profits recover next year, the current account surplus is likely to rise again.