Rabobank: Uncertain economic outlook calls for robust policy

Now that uncertainty looks set to only increase with the arrival of President Trump, it would be sensible for the government to address the structural weaknesses in our economy in the areas of pensions, the labour market, health care and the housing market. What are now hairline cracks could turn into gaping holes or worse if the economic situation deteriorates. Repairing these hairline cracks now would be an efficient way of avoiding this. This is the message from the Rabobank economists in their Outlook 2017 published today.

Traditionally, the Rabo economists present their forecasts for the coming year in the annual Outlook. The Dutch economy is expected to post growth of 2.0 per cent in 2016 and 1.8 per cent in 2017. Hans Stegeman, Chief Economist for the Netherlands at Rabobank: “The Dutch economy’s performance this year and next will be slightly better than the European average. This is due to factors such as the improvement in the housing market and the recovery in the labour market. But the Netherlands is still a small and open economy. The international uncertainties have only increased with the election of Donald Trump as US president, and therefore the uncertainty with respect to our forecasts for 2017 has increased as well.”

Three economic scenarios for the Netherlands
The high degree of uncertainty regarding the economy has led to the economists developing three potential scenarios for the Netherlands in the 2018-2023 period, which they have called Muddling Through, The Fourth Industrial Revolution and Deglobalisation. Stegeman: “With the Muddling Through scenario, the name says it all: there will be no visionary policy and the structural problems will not be addressed. Economic growth will average 1.4 per cent in the 2018-2023 period.
In the Fourth Industrial Revolution scenario, we will have underestimated the productivity gains from today’s technological developments and the Dutch and German governments will take measures to encourage innovation and entrepreneurship, including a strong budgetary stimulus. Annual growth in the Netherlands will be 2.3 per cent and growth will pick up in the rest of the eurozone as well.

Finally we have the Deglobalisation scenario, in which the world becomes much more protectionist and there is little willingness to engage in international cooperation. World trade will slump, and annual economic growth in the Netherlands will be only 0.3%. The bandwidth of the scenarios appears to be wide, but the limited economic growth in the Deglobalisation scenario is still higher than the average seen in the Netherlands since the Great Financial Crisis.”

There are a number of bottlenecks in our economy to be deduced from these three scenarios. Stegeman: “The damage to the Dutch labour market in the scenarios is still acceptable. One important reason for this is of course the ageing of the population. But this does not mean that nothing needs to happen. Without policy action, the big difference between the self-employed and ‘permanent’ employees will indeed continue to be a problem. And in the Fourth Industrial Revolution scenario, this also means that people’s ability to adapt will be inadequate, so that some groups will likely face long-term unemployment.

Second, the development of disposable income is not favourable. Even in the Fourth Industrial Revolution  scenario there will be only a limited increase in purchasing power. This is entirely because we have structured our affairs in the Netherlands on a collective basis. Dutch households have relatively low freely disposable income, because firstly a significant amount of assets are locked up in property and pensions, and secondly because much of our spending, on health care for example, is funded collectively. In each scenario, making changes to the Dutch institutions associated with pensions, health care and home ownership would be a sensible move.”

Global economy to grow by 3 per cent in 2017
In the Outlook, the Rabo economists also look at the developments in the global economy and the financial markets. Elwin de Groot, Senior Market Economist at Rabobank: “The global economy is expected to grow at a rate of around three per cent in 2017. The election of Trump has increased uncertainty worldwide. Both his proposals for a protectionist trade policy and the geopolitical implications of his plans are raising the level of uncertainty. Europe is also entering a period of political uncertainty and faces serious challenges. The Chinese economy appears to be stabilising, but this country also has its bottlenecks.”

De Groot adds: “We think that the recent rise in capital markets interest rates is only temporary. The political uncertainty means that a strong rally by the euro against the dollar is unlikely. Lastly, we think that government bonds from countries such as Italy, Greece and Portugal will continue to be sensitive to political developments in Europe in 2017.”

 

The Outlook 2017 is available at www.rabobank.com/economics

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