Dutch economy may return to pre-crisis level by end of this year

The stringent lockdown is likely to cause continuing contraction in the Dutch economy in the first quarter of 2021 but we expect a relatively quick recovery for the rest of the year. The economy is expected to grow by 2.1% this year, compared to the 3.8% contraction in 2020.

That would bring economic activity in the Netherlands back to its pre-corona crisis level by the end of this year (Figure 1). It would put the timing of economic recovery in the Netherlands in sync with Germany, a quarter later than in the United States but earlier than in France, Italy, Spain and the United Kingdom. Although we expect the economy to move back to its structural growth path in 2022, we are setting a relatively high year-on- year growth level of 3.7%, given that the effect of catch-up activities in 2021 will spill over into 2022 growth figures.

Our expectations are of course colored by the uncertain times we live in. Much will depend on the speed of the vaccination rollout and when restrictions are lifted. Our forecasts assume that restrictions will be gradually lifted in the second quarter (for instance limited reopening of non-essential stores and the hospitality sector) with continuing relaxations in Q3. Based on the Dutch government’s vaccination strategy, we assume that pretty much everyone who wants to be vaccinated will have had their jabs by the start of Q4, and that all corona related restrictions in the Netherlands will be lifted.

Household consumption generally accounts for almost half of spending in the Dutch economy. It will therefore largely determine the pace of the expected economic recovery. Due to the strict lockdown, consumer spending was significantly lower in the first three months of 2021 than in the same period last year. This is a major contributing factor to our expectation that the economy will once again contract in the first quarter. But with the prospect of restrictions being lifted we expect household spending to rebound strongly in the rest of the year (as was clearly seen in the summer of 2020). The fact that household savings rose in the past year (see Figure 2) could also give an extra boost to spending.

At the same time, we do anticipate that rising unemployment will constrain consumption to some degree in the next two years. In January, the unemployment rate continued to decline (3.6%) but we expect it to rise to 4.7% by mid-2022. This is more optimistic than our previous forecast that unemployment would peak at 5.5%. Overall, we expect household consumption to grow by an average of 0.6% in in 2021 (year-on-year), followed by a further year-on-year rise of an average of 9.0% in 2022.

While consumers (involuntarily) reined in their spending, government consumption rose slightly in the past year. This growth is expected to accelerate in the course of 2021 to meet the costs of restarting regular care and spending on corona test locations, vaccines and the inoculation program. The European coronavirus recovery fund might give a bit of a boost: the CPB Netherlands Bureau for Economic Policy Analysis estimates that the Netherlands could be eligible for a few hundred million euros in support. We therefore predict a rise in government spending of 3.8 percent in 2021, and a further increase of 1.6 percent in 2022.

We expect government investment to grow by 5.0 percent in 2021, and by 5.3 percent in 2022. The key factor driving this forecast is the potential positive boost to spending from the Dutch National Growth Fund in the coming years. On the other hand, the nitrogen issue could throw a spanner in the works when it comes to national public sector infrastructure projects. Local government infrastructure budgets may also come under pressure following the evaporation of income flows from municipal parking fees and tourist taxes. Given that there is a general election mid-March in the Netherlands, we may have to revise our expectations for government consumption and investments later in the year since many political parties are calling for increased public spending in their election manifestoes.

Business investments, which fell by 3.8 percent in 2020, are expected to grow by 3.4 percent in 2021. The mood among Dutch manufacturers brightened somewhat in Q4 to just under the long-term average (see Figure 3). The gradual relaxation of corona restrictions will likely give them more confidence to up their investments, although the fact that certain sectors have seen their reserves pared to the bone could slow things down. As economic recovery in the Netherlands and in its key trading partners continues and businesses get back on their feet, we anticipate that business investments will continue to rise. For 2022 we foresee growth of 5.1 percent year-on-year.

The global economy is likely to return to growth this year, which will benefit Dutch exports. We forecast 5.8 percent export growth in 2021. Imports are expected to rise by 5.6 percent this year, driven partly by higher consumer spending and business investments. The bottom line is that trends in international trade this year will positively impact economic growth. By contrast, for 2022 economic growth will probably come under pressure from trade developments. In practice, Dutch consumers and businesses will continue to spend, thereby boosting Dutch imports. But key trading partners such as Germany and France will see only a limited rise in imports. Moreover, any future agreements between the EU and the United Kingdom are still a source of uncertainty for trade developments.