The Dutch economy will feel the effects of the corona crisis for years to come

11 September 2020 13:50 RaboResearch

The Dutch economy is expected to contract by 5.2% in 2020. Measures to combat corona, uncertainty and rising unemployment are making the recovery patchy.

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For the Dutch economy, the coming period will feature a recovery after the historic slump in the first six months of the year. The question here is how quickly the recovery will progress, and how complete it will be. While we await a vaccine, the economy continues to suffer from the effects of the measures designed to prevent and combat local virus outbreaks. This means economic activity will remain subdued in some sectors, while other sectors are able to resume full activity. Apart from the direct effects of social distancing, consumer spending is restricted by fears of the virus itself and uncertainty regarding work and income. Domestic demand will moreover be limited by rising unemployment and bankruptcies. Finally, the above applies worldwide, meaning that the recovery in exports will be less than complete. As if the recovery from Covid-19 was not difficult enough, exports are also suffering from the poor trade relations between the US (and other Western countries) with China and the expected limited trade deal between the UK and the EU.

Figure 1: Limited recovery in 2021 after historic contraction in 2020

Source: Statistics Netherlands, RaboResearch

Table 1: Economic forecasts for the Netherlands

Source: Statistics Netherlands, RaboResearch

Patchy recovery after historic slump

During the second quarter, the Dutch economy suffered a historic blow as a result of the corona crisis. The economy contracted by 8.5 percent compared to the first quarter. Both consumption and investment declined sharply, and the contribution from trade was also negative. Private consumption was hard hit as it became much more difficult to spend money during the lockdown in April and May; government spending shrank because the healthcare sector (apart from corona care) could not operate at full capacity and businesses scaled back their investments. Although the downturn was historic, it was relatively modest in an international context (see figure 2): a relatively mild ‘intelligent lockdown’, the high level of digitalization and the low importance of tourism in the Dutch economy were important factors. In addition, the Dutch government’s relatively strong financial position meant that it was able to respond quickly and effectively with generous measures. The recovery in the Dutch economy is on the other hand expected to be not as strong as in the rest of the eurozone. Firstly because of the more limited downturn, but also because the recovery in international trade is cautious at best and the Netherlands is relatively exposed in this area.

Figure 2: Contraction in Dutch GDP is relatively limited

Source: National statistics institutions, RaboResearch

Nevertheless, the coming period will feature a recovery, that actually began in June when the corona measures were gradually eased. Knowledge about the virus and how to combat an outbreak has increased in the meantime. As has been seen recently, there are still local outbreaks of the virus, but the measures are not as strict as they were in April and May. The recovery will be far from complete. The 1.5 meter economy will continue to be the norm until a vaccine is found. Many businesses in hard-hit sectors such as hospitality, sport and recreation and art and culture will still not be able to operate at full capacity.

With the winter months that favor the virus almost upon us, we therefore expect a strong recovery in the third quarter to be followed by weak growth in the subsequent six months. Assuming that a vaccine will be widely available sometime in 2021, the economy will not really begin to return to normal until mid-year. At that point, we will still have to deal with higher unemployment and the weakened financial position of many businesses. All in all, it will definitely be several years before the Dutch economy is running at full capacity.

Consumers are worried

Consumer spending will therefore not return to normal levels in the near future. Consumption appears to be past its lowest level, but it is still significantly lower than it was a year ago. Spending can increasingly return to normal levels now that the corona measures are being eased. Spending on transport, and going out for eating and drinking also, has already recovered to some extent. There is no sign of a full recovery as yet. Measures are still in place, despite being eased. And fears of catching or spreading the virus are preventing some people from going out at all. Large purchases are also on hold, due to uncertainty as to how the virus will develop and uncertainty regarding the financial future for consumers. Half of all households expect the corona crisis to affect their own financial position and many are responding, for example by increasing their savings. Contrary to the development of producer confidence, there has been very little recovery in consumer confidence (see figure 3).

Figure 3: Consumers are more pessimistic than producers

Source: Statistics Netherlands, RaboResearch

Unemployment to rise further

We expect the labor market to weaken further. In our estimates, unemployment will rise from 3.4 percent in 2019 to an average of 4.3 and 6.6 percent of the working population in 2020 and 2021 respectively, peaking at just under 7 percent. This increase in unemployment has already started, with the self-employed and employees on flexible contracts among the worst affected. The condition of the labor market is however worse than the unemployment figures would suggest. Large-scale packages like NOW, TOGS and TOZO have meant that many people have kept their jobs, but they are mostly not or not fully back to work. The government will gradually scale back these packages. This means that there will be more reorganizations and bankruptcies in the coming quarters, as a result of which many employees on permanent contracts will lose their jobs. Government policy will therefore not only restrict the increase in unemployment, it will spread this increase over time. Unemployment is not expected to fall again until the end of 2021.

Government support packages will be scaled back

As already mentioned, the government has applied huge stimulative packages to prevent bankruptcies and unemployment. So far, more than 37 billion euros has been set aside for the emergency measures combating the corona crisis. The government recently extended its support programs through July 1, 2021, but it also scaled them back. The extension of this support from October 1 will most likely cost 11 billion euros. The Dutch government can easily fund this and the support is needed, but nonetheless it was sensible to adjust these programs. It is not really the intention to keep businesses and employment in place that would have been lost anyway without the corona crisis. This would damage the recovery in the long term.

Besides its support packages, government spending can also be a stabilizing factor in turbulent times for the economy. Government spending disappointed in the second quarter of this year, as the extra spending on corona care did not make up for the decline in regular healthcare. We expect spending on healthcare to fully recover in the third quarter. Whereas regular care was initially postponed, this can now resume with the reduced pressure on intensive care. Overall, government spending will contract by just 0.7 percent in 2020 and will increase by nearly 4 percent in 2021.

The slight decline in government spending and investment will not come close to offsetting the additional spending on combating the corona crisis. Tax revenues are also declining and social security spending is rising due to the increase in unemployment. The result is that government debt will rise this year towards 60 percent of GDP. We can take some reassurance from the fact that the Dutch government has enough room to service this additional debt due to the low level of interest rates.

Exports under pressure due to corona crisis and Brexit

Trade with other countries will make a negative contribution to economic growth in both 2020 and 2021. This is mainly because our most important export partners (such as the US, the UK and to a lesser extent Germany) are having a harder time than the Netherlands. The Dutch economy is relatively open, and therefore exposed to a fall in demand from other countries. This is slowing the economic recovery. Another factor is that the recovery will be seriously damaged by a limited trade deal with effect from 2021 with the UK.

Still many uncertainties

Our base estimate assumes that while the virus will continue to flare up locally, a national lockdown will not be necessary. If there is a second sizable outbreak, the outlook would deteriorate significantly. Although the economic impact in this case would be less than in the first half of this year, unemployment and bankruptcies would rise further and the likelihood of a financial crisis would increase. Other major downside risks lie in a marked deterioration in US-China relations or a no-deal Brexit.

However it is also possible that things will develop more favorably. We are assuming that a vaccine will not become available until sometime in 2021, but this could happen earlier. Social distancing measures can then be abandoned earlier, which would help the hospitality and art and culture sectors. We may also be underestimating the ability of consumers and businesses to adjust, in which case the economy will be less affected by the corona crisis. This applies to both the Netherlands and other countries.