The Netherlands: GDP Back at Pre-Covid Level – Now What?

The third quarter of 2021 will enter the history books as the point when the Dutch economy returned to pre-Covid (i.e. Q4 2019) GDP levels. We expect the economic growth print in Q3 to come in at 1.2% QOQ, which is considerably more moderate than the Q2 2021 print of 3.8% QOQ. This suggests that the economy’s recovery from the Covid crisis is losing steam and activity is normalizing. Indeed, this can also be seen in Rabobank’s transaction data used to gauge consumer spending. In addition, economic sentiment remained upbeat throughout Q3 but did not improve relative to levels observed in Q2 (see Figure 1). The services sector should have benefited from the relaxation of containment measures and has likely been a significant contributor to Q3 growth. Manufacturing output rose 2.3% QOQ in July and August relative to Q2 levels, while retail sales grew 2.5% in Q3, but both expanded considerably less than in Q2. The labor market also continued to improve in Q3, as evidenced by a net increase of 67,000 persons employed (see Figure 2). Although the record-low unemployment figures are good news for consumers, firms are struggling to find personnel, which might inhibit economic growth going forward.

Looking ahead, we expect growth figures will move toward more ‘normal’ readings. The economy is facing headwinds, mainly from supply-side constraints, such as labor shortages, supply chain disruptions, and low availability of (raw) inputs. However, producers remain upbeat, with producer confidence reaching an all-time high in October. Demand seems to be outstripping supply though. Survey evidence has been pointing to upbeat assessments of order book levels and expected activity among producers for a while now. At the same, production prices (PPI) have risen sharply and were 14.5% higher in August than a year ago (see Figure 3).

Dutch consumer price inflation is also picking up and would have increased more if it weren’t for discounted tuition and rent freezes. The HICP index stood 3.8% higher in October (compared to a year ago), lifting the year-on-year figure to 1.9%. With gas prices expected to stay elevated (despite Putin’s promise to start filling Europe’s gas reserves) and forward gas prices considerably higher than the spot price in tranquil times, energy prices will likely continue to push the overall index up for months to come. Furthermore, it is conceivable that the aforementioned double-digit production price rises will feed into consumer prices – although, historically, the correlation between production prices and future consumer prices has been modest. That said, various large firms active in the fast-moving consumer goods sector have announced plans to raise (end product) prices as a consequence of increased raw input and transport prices. Survey evidence also points to upbeat assessments of expected selling prices in the manufacturing sector.

We still expect the pickup in inflation to be transitory, but the risk of a prolonged period of rapidly increasing consumer prices is tilted to the upside. Global supply chain disruptions have proved more persistent than previously expected and are unlikely to be alleviated soon. But ultimately, they should be relatively temporary. The most probable cause for lingering inflation would be a wage-price spiral. In the first three quarters of 2021, wage growth has been modest at 2.2% YOY, but higher growth may still come. Employment expectations are upbeat among employers, the unemployment rate stands at an ultra-low level, and the number of outstanding vacancies exceeds the number of unemployed persons (see Figure 4). Moreover, the participation rate, i.e. the percentage of the working-age population that is employed or unemployed, was just 0.1ppt shy of the maximum pre-Covid participation rate in Q2.

Meanwhile, Dutch Covid-19 cases have started to soar again – faster than authorities expected. Hospital occupancies are also rising fast, while the vaccination rate is flatlining, and seasonal effects are increasingly playing a role. ICU capacity is lower than a year ago, as regular care has resumed amid efforts to reduce the backlog. In order to prevent a scale-back of regular care, the coalition government has re-imposed social distancing measures. Indeed, seven months after the elections, the Netherlands is still governed by a caretaker cabinet at a time when action is needed regarding pressing matters such as climate and the housing market. The most likely scenario now is one in which the same four parties re-enter into a coalition government.