The Netherlands: Coronavirus to halve economic growth

The Netherlands has posted good economic figures in recent years, but growth is expected to slow substantially this year. Our forecast for 2020 was already for a moderation of growth, due to international tensions and the impasse over nitrogen emissions in the Netherlands. The outlook has now deteriorated further due to the development of Covid-19, the new Coronavirus: Dutch economic growth is expected to decline from 1.7 percent in 2019 to 0.7 percent in 2020 (see table 1). In the scenario on which this forecast is based, we are assuming that the economic shock from the outbreak will not escalate further and will be short-lived. We see a further spread whereby other countries including the Netherlands see substantial outbreaks such as in Northern Italy as a risk scenario at this point.

We do not see much potential for recovering this lost growth in 2021, as we expect trade relations with the UK to worsen. This will weigh heavily on the open Dutch economy. Our provisional forecast is that the Dutch economy will grow by around 0.9 percent in 2021. The Netherlands is in a relatively strong position to withstand these shocks compared to other European countries: unemployment is low, wage growth is strong and taxes for Dutch citizens have recently been reduced. In addition, government debt has recently fallen below 50 percent of GDP.

Protectionist reflexes and a global slowing of growth have been pressuring world trade for some considerable time (see figure 2), and the new Coronavirus is expected to deal an additional blow to Dutch imports and exports. We expect growth of both imports and exports of only 0.4 percent year-on-year. This would be the lowest growth in Dutch trade since 2009.

The virus outbreak has delivered a shock to production chains around the world. Factories are closed in countries including China, South Korea and Italy, directly affecting Dutch businesses who trade with these countries. For instance, if a Dutch factory depends on parts from China, it can no longer produce and sell its products. Or the reverse: if a Dutch manufacturer produces a semi-finished product for a Chinese factory that has been shut down. The same applies to Dutch businesses that depend on a semi-finished product from Germany that contains components from China. Previously, we have seen that trade between the Netherlands and China is mostly in apparel, base metals and machinery.

This disruption to production and the effect of the virus on transport, business travel and tourism will severely affect the global economy, leading among other things to a recession in Italy and Germany. This will further reduce demand for Dutch goods and services. At the time of writing, we are assuming that the Coronavirus outbreak will be temporary and will remain limited, but looking further ahead the outlook for international trade is far from rosy. Indeed, we expect the United States, the world’s largest economy and the second most important trading partner for the Netherlands (see figure 3), to enter recession in the second half of the year. We also expect trade tensions between the United States and China to resurface in 2021.

Not only that, we expect trade relations with the United Kingdom to worsen in 2021. Once the Brexit transition period is over, additional administrative requirements and border checks will made trade with Britain more difficult. We therefore expect to see only modest export growth again in 2021 of 0.7 percent year-on-year. This is significantly lower than import growth, which we currently expect to increase by 1.3 percent year-on-year in 2021. If the Brexit transition period is extended or the global trade tensions subside, the outlook for trade will of course improve.

Government and business investment made a strong contribution to economic growth last year. Investment by Dutch businesses is estimated to have increased by 7.0 percent compared to 2018, while the government increased its investment by around 4.2 percent. This growth is expected to fall sharply in 2020 and 2021. We believe that business investment will actually decline slightly in this quarter and the next two quarters. In our previous forecasts, we stated that this could experience a setback in 2020 as a result of the global growth slowdown and the problems with Dutch policy on nitrogen emissions. Now we have the Covid-19 outbreak on top of this, weakening trade, making households more reluctant to spend and causing much uncertainty for businesses. Businesses are expected to further reduce their investment due to the impact of this on the Dutch economy. We see little potential for a recovery of growth in 2021, since declining trade with the United Kingdom will undermine the willingness of entrepreneurs to invest. Any increase in business investment will therefore be slight at best.

Government investment, much of which is in infrastructure, is expected to be less affected by the virus outbreak, but will be hampered by the impasse over nitrogen emissions. It is thus difficult to believe that the government will be able to fully realize its plans for new roads, for example. We therefore expect government investment to be stagnant at best in this quarter and subsequent quarters, meaning that its contribution to economic growth in 2020 will be virtually nil. In our view, the same applies to investment in housing. This already declined last year, and is suffering from a shortage of construction sites as well as the nitrogen issue. The effect of this on the number of issued construction permits is so big (see figure 4) that we currently expect housing investment to contract in 2021.

Consumers are also likely to experience direct and indirect consequences of the economic decline due to the Coronavirus. This could undermine their propensity to spend – people are already postponing their vacation plans - and some events have already been called off and some products are more difficult to obtain. Household spending will also be affected by the effect of the virus outbreak on employment. Employment is no longer expected to increase, while the labor supply will. Students will be graduating, and there are migrants entering the Dutch labor market. In our view, unemployment will accordingly rise from 3.0 percent in January to around 3.6 percent by the end of this year. We have thus adjusted our forecast for consumption growth in 2020 to the downside.

Nonetheless, we still expect private consumption in the Netherlands to make a substantial contribution to economic growth, because of the strong rise in purchasing power. Household spending is being boosted not only by lower taxation of income and energy, wages will increase in real terms by significantly more than they did in 2019. At that time, prices rose faster than collective labor agreement pay increases due to the increase in VAT, but this situation has now been reversed (see figure 5). We are therefore forecasting that consumer spending will increase by 1.5 percent compared to last year. This consumption will partly come from stocks, and will therefore not fully count in 2020’s growth figure (see figure 1). In 2021, we still expect consumption to rise further and increase by 1.7 percent, since wages will continue to rise and the impact of the Coronavirus will have passed its peak by then.

Economic growth in the Netherlands this year will also depend on the increase in government spending. On the last Budget Day, the Dutch government announced various additional spending plans. We have doubts as to whether the government will actually succeed in implementing these plans, since higher government spending quickly leads to more personnel. Finding these people proved to be a substantial challenge last year, and there are still a relatively large number of vacancies, for instance in healthcare (see figure 6). We are therefore forecasting an increase in government spending of 1.5 percent in 2020, followed by a further increase of 1.7 percent in 2021. If the government manages to implement its plans, this could be a significant boost for the Dutch economy.

As stated above, the Netherlands is already experiencing negative economic consequences as a result of the Coronavirus - without any outbreak on the scale of that in Italy, let alone China. But the risk of a further global spread of the virus with serious economic consequences cannot be ruled out. We have therefore calculated a risk scenario in which the entire world, including the Netherlands, experiences a substantial further spread of the virus. How would this affect the Dutch economy?

In the risk scenario, growth in the Netherlands in 2020 would turn into a contraction, but this will be less negative than in other countries because we are currently in a relatively sound position. Reduced taxation, strong wage growth, low unemployment and ambitious government plans mean that without Covid-19, growth in the Netherlands is expected to significantly outpace growth in Germany, for example. While the virus could cause significant damage, in our view we are also relatively resilient.

But the Netherlands will most likely fall into recession if we and several other major economies have to impose radical quarantine measures. Supply problems or local outbreaks will cause factories to close, further reducing production. Production will also decline in the services sector if schools and child care facilities close and parents can therefore no longer go to work. Some office staff will probably be able to work from home to some extent, but how productive they will be if teleworking systems are overburdened and children are at home all day is questionable. One can therefore expect all sectors to be affected. The health care sector will of course be working overtime, but hospital staff could also be absent due to the virus, or there will be difficulties with shortages of drugs, closed schools and closed child care services.

In addition to production problems, there will also be a fall in demand as people avoid shops and hospitality outlets. Sales of teleworking software, digital books, games and films could possibly increase, but a fall in demand is likely in most other sectors.

How the Netherlands responds to the shock and recovers will also depend on the government’s economic policy. The first priority will of course be health care. But if there is a real epidemic in the Netherlands, there will also be a desire to prevent otherwise healthy and competitive businesses failing due to lack of liquidity. The ECB may therefore provide support to businesses that are solvent but have limited liquidity with targeted financial measures to the banks so that they can weather the storm. In the recovery phase after the outbreak, when consumers venture out again and products are again available, there may be tax cuts to boost consumption and investment and possibly also additional government spending.