The Netherlands: Slow recovery of consumption

On September 15th the Dutch government presented its budget for the coming year. The Rutte III-government expects public debt to rise from 49% in 2019 to no less than 61% in 2021. We already saw debt to GDP rise to 55.2% in the second quarter of this year. Both the expected and the realised debt to GDP increase have of course everything to do with the corona crisis.

Measures taken to guide the economy through the pandemic amount to €62.5 bn. This includes direct support like the support compensation of labour costs in the job retention scheme NOW and fiscal measures like tax deferral and VAT-exemptions on masks and other medical aid products for companies. These extra corona-related expenses are one of the reasons why the government expects its balance to tip over to a deficit of 7.2% (of GDP) in 2020 and 5.5% in 2021. A part of these corona related expenses were already done in the first half of this year.

In addition to the third support package, the government plans to implement other measures to that might stimulate the recovery of domestic demand. Such as the reduction of the lowest bracket of the income tax, the increase in employment tax credit was brought forward from 2022 to 2021 and the low level of the corporate tax rate will be decreased.

We already see consumption recovery slowing down and consumer confidence remaining at a low level (figure 1). In July consumption rose slightly with 2% m/m compared to the 8% and 4% m/m increase in May and June. We also do not expect consumption to bounce back to 2019 levels any time soon. As the infection rate is moving up, the government announced, in addition to already some local and sectoral restrictions, new restrictions at country level. These will last for at least until the 20th of October. For instance restaurants and bars have to close at an earlier time, automatically leading to lower spending. If the infection rate continuous to increase, more restrictions might be in the cards. But besides the restrictions, consumers may also avoid certain places, such as restaurants and shopping centres, to prevent catching or spreading the virus. For the latter the coming winter season additionally means a lower capacity as we will not sit outside anymore.

Adding to that, the unemployment rate increased to 4.6% in August (figure 2). With the third support package being less generous as it predecessors and increasing infections, we expect the unemployment rate to rise further to 6.6% in 2021, having an extra downward pressure on consumption.

Even though the Dutch economy finds itself midst in a crisis, house prices continued to increase in August with 8.2% j/j. This reflects the low interest rate environment and the shortage of houses. On Budget Day, the government announced that it will step up its efforts to keep construction of new houses at a steady pace. They made, for example, an extra €295 million available to remove bottlenecks for housing construction. Additionally, the government reached out to first-time buyers on the housing market and removed the 2.0% stamp-duty for them. A kind gesture, but we think that it will only increase demand and therefore lead to more upward price pressure. On the other hand, the stamp-duty on buy-to-let-properties will be increased, which could lead to lower demand from investors. While house prices continued to increase in August, we do expect a correction in house prices in 2021 (figure 3), as an expected rise in unemployment will probably hurt demand for owner-occupied homes.

Besides plans to tackle the current economic issues, the government also thought about economic growth in the future. In order to ensure economic growth in the long-run, a National Growth Fund has been established. The aim is to allocate €20 bn in the next five years in knowledge, innovation and infrastructure. Projects are eligible as long as they contribute to future Dutch growth and fall within these domains. Investments in productivity growth are welcome, as it has been falling back in recent years (figure 4).