The Netherlands: Economic growth to slow in the coming years

31 December 2018 11:32 RaboResearch

The Dutch economy is approaching its limits due to a tight labour market, while imported uncertainty is hindering business investment. This may be the last chance for policymakers to fix the roof while the sun is shining.

Restaurant Chairs Empty View In The Netherlands Europe

Economic growth will probably decline in the coming years. The growth in household consumption remains healthy, but is softening because low unemployment is only moderately reflected in higher wage growth. The tightness in the labour market is becoming more acute, leading among other things to a decline in housing investment. Economic activity is also slowing in neighbouring countries. Together with continuing growth in imports, this cuts the contribution of trade to GDP. We therefore forecast growth will decline from 2.6 per cent in 2018 to 1.9 per cent in 2019. In 2020, we expect the economy to move closer to its long-term growth trend and GDP growth to decline to 1.7 per cent. With these figures, the Netherlands will still be have above-trend economic growth and outperform most of the rest of the eurozone.

Table 1: Economic growth is declining

Source: Rabobank, Niesr

Declining investment in housing due to shortage of personnel

We are least optimistic with respect to investment in housing, partly due to the shortage of labour. Investment in new houses and renovation of existing properties is expected to stagnate in the coming year and will actually decline slightly in 2020 (table 1). We expect to see a decline in home sales to 225,000 in 2018 and 210,000 in 2019, which in addition to lower proceeds from transfer tax is also expected to lead to installation of fewer new kitchens and bathrooms, for instance. There is also a shortage of construction workers: the number of building permits issued for new homes this year remains stuck around 70,000 – well below the 87,000 homes that the government has set as its annual target (figure 1). We accordingly expect to see only a slight increase in the number of new homes. Together with falling home sales, this low growth in new homes is hindering an increase in the volume of housing investment. The continuing mismatch between high demand and limited supply in the Dutch housing market implies that house prices will continue to rise.

Figure 1: Number of building permits is stagnating, so production of new-build homes is lagging

Source: CBS, NVB Bouw

Consumption growth is moderating

Household consumption will continue to be an important driver for the Dutch economy in the coming years. Following higher taxes and unemployment after the crisis, the coming years should be when consumers are happy to spend: unemployment is close to an all-time low and the government has planned a reduction in taxation for most households. Consumer confidence is therefore relatively high (figure 2), but nevertheless seems to have peaked. Consumer confidence is a leading indicator for consumer spending. This waning optimism could thus be a sign that consumers will be less likely to spend their money in the future.

Figure 2: Waning consumer confidence after (cyclical) peak

Source: CBS

There are other reasons to expect a moderation of consumption growth besides the turn in confidence. Lower income tax will help households, but this will be offset to some extent by the increase in the of VAT. Low unemployment is another factor that bolsters confidence, but it also means that it is increasingly difficult to find new personnel. As a result, employment growth will ultimately no longer be a driver of aggregate income growth. The decline in unemployment has moreover not yet been reflected in significantly higher real wages: salaries have risen (figure 3), but the prices consumers pay are also higher. We accordingly expect consumption to provide less of a contribution to growth in the coming years.

Figure 3: Where is the wage growth?

Source: CBS, processed by Rabobank

Producer confidence and investment under pressure

Economic growth is also expected to slow in other countries in the coming years, and the Netherlands will feel the effects of this due to its open economy. This means the growth of exports will not be able to keep pace with the growth of imports. As a result, net trade will have a slight slowing effect on economic growth in the years to come.

Dutch business is very focused on foreign markets, so mediocre export growth will be more of a factor than healthy consumption growth for many companies. We note that producer confidence has waned in the past six months, which is a negative signal for businesses’ propensity to invest (figure 4). Low unemployment could be an incentive to invest in productivity-enhancing technology, but because this usually requires ICT professionals, who are also thin on the ground, the shortage of labour is also a limiting factor here.

Figure 4: Producer confidence has also peaked

Source: CBS

Besides the expectations of only mediocre exports, international uncertainty is also a major factor undermining confidence. With the trade tensions between China and the US, the political unrest in Italy and the Brexit saga there are plenty of international factors to throw the Dutch growth locomotive off course. We also expect to the see the beginning of a recession in the United States in 2020, towards the end of our forecast horizon.

What can the Netherlands do?

The uncertainty abroad and the expectations of slower growth mean that Dutch policymakers now have a last chance to fix the roof while the sun is still shining. It is therefore regrettable that the government has failed to address some important policy issues. The negotiations on employer-pensions have collapsed, and we are still waiting for a climate agreement. If the limited measures taken in de “preventie-akkoord” on tobacco, alcohol and unhealthy food consumption is any guide, there is little hope of a climate agreement that will make substantial progress.

The turbulence in France shows how politically sensitive environmental fiscal policy can be. But a CO2 tax could create room in the budget and at the same time contribute to a reduction of emissions by Dutch people without the government having to intervene directly in the structure of the Dutch economy. To take the sting out of the political debate, the government could directly and visibly repay most of the proceeds of such a tax via a “carbon dividend” to Dutch people on lower incomes.

It is also time to invest in the productivity of the Dutch economy. This increases our future growth potential, and would make the Netherlands more resilient to shocks. Innovation is important for this, but it is essential that Dutch businesses adopt new technology and improve their management practices to make the best use of this. Investment is needed for this, but there is still much potential for smarter ways of working. Most of all, managers and business owners need to challenge themselves to improve management practices.

Figure 5: Dutch government debt is declining rapidly, which forms a buffer for harder times

Source: CPB

Postponing difficult choices increases the risk that hard decisions will have to be taken in more difficult circumstances, as was the case in the aftermath of the financial crisis. But one notable benefit of those hard choices - mainly the austerity measures – is that they contributed to the Netherlands gaining a much healthier position than many other countries with respect to its government budget (figure 5).