Dutch economy update: Downward revisions for the past, a below-trend future forecasted

After the Party for Freedom (PVV) won the Dutch elections in November 2023, an initial exploration phase started in December, in which the other right-wing parties that Geert Wilders’ PVV wants to include in his coalition emphasized that they only want to opt in if new policies adhere to the Dutch Constitution, which is not the case for some parts of his party program. Negotiations started again last week, but a final agreement on the new government is not expected in the coming months. It is therefore still difficult to predict the impact of the election outcome on the Dutch economy.

Statistics Netherlands made a downward correction to GDP growth for Q3 2023, which was revised from -0.2% to -0.3% QOQ. Looking at the components we see that investments decreased even further than initially estimated, while an upward revision to government spending was made. Perhaps the most remarkable revision is the change in private consumption numbers. The initially estimated stagnation gave room to suggest that the decline in inflation and increase in wages was starting to restore purchasing power. However, the decrease in household consumption of -0.5% calculated now shows that this was not (yet) the case.

Recently released numbers do provide a more positive outlook for household consumption in the fourth quarter of last year. Consumption volume was 0.3% higher in November YOY, after four months of YOY decline. Wages continued to grow, resulting in collectively bargained wages averaging 6.1% higher in 2023 than in 2022, the largest increase in over 40 years. Because inflation was also very limited in the last months (Dec 1.0%, Nov 1.4%, Oct -1.0% HICP), real wage growth will be positive in Q4 2023 YOY. We are expecting real wage growth to remain positive for the coming months, as HICP is forecasted at 2.9% YOY in January and 2.6% YOY in both February and March, while wages are expected to grow by 6.4% YOY during those months. As a result, we do stick with our forecast for Q4 2023 of 0.3% QOQ private consumption growth and 0.1% QOQ GDP growth. The further increase in real wages, in combination with an expected increase in the amount of hours worked, will contribute to an estimated growth in consumption of 1.1% YOY for the whole of 2024.

While consumer confidence has been recovering again thanks to the recent restoration in purchasing power, producer confidence has fallen over the past months. All three components of the indicator deteriorated in December (see Figure 1). There are more managers in the manufacturing industry expecting their output to decrease, their stocks to be too large and their order book to be too small, than those who think the opposite. This could be a sign that the higher interest rates are starting to bite. However, a majority of the managers stated that their company is still hardly being affected by rising interest rates.

Hard data has shown a similar picture: production in the manufacturing industry continued to fall in November last year (see Figure 2). Because we expect that national and international demand for Dutch products will only start to increase moderately in the first quarters of 2024, we foresee that it will take a considerable amount of time to reach the levels of production of early 2021. High interest rates mean that investing in new machinery or equipment has become increasingly more expensive, which decreases demand from producers themselves too. The fact that the machinery repair sector is one of the few manufacturing sectors that could produce a positive year-on-year figure in November (together with textiles and refined petroleum producers) suggests that producers already favor repair over investing in new machinery. By the end of 2024, total business investments are estimated to average 3.1% lower than last year.

The variables mentioned above can be good indicators of the direction the Dutch economy is heading in. Together with variables such as the number of bankruptcies and open vacancies, we can create a Business Cycle Indicator, using a weighted average based on historical correlation with GDP. The coincident BCI indicates that the economy was operating below trend in November and December of last year (see Figure 3). The leading BCI allows us to look up to three months into the future and is a bit less pessimistic. The predicted stagnation might indicate a turning point in GDP growth that would allow the economy to catch up with the levels of the trend (see Figure 3). As a result, the Dutch economy is expected to recover only slightly this year, with an increase of 0.5% in GDP.