The Netherlands: Coronavirus pushes economy in a recession

Apart from being a heavy burden on healthcare, the corona crisis also leaves deep marks in the Dutch economy. In a previous update, we had already revised our forecast for economic growth in 2020 down from 1.4 to 0.7 percent. In that scenario, the virus outbreak was primarily an external problem leading to less world trade. In that update, we already noted that economic growth is expected to turn into a contraction if countries, including the Netherlands, take further measures to ward off the health crisis. Indeed, since then, schools, factories, shops and restaurants have closed their doors not only in the Netherlands, but in a growing number of countries.

As a result, household spending and producer output fall sharply temporarily. This not only affects the profitability of companies, but also puts pressure on employment and thus household income. The government has announced a major package of support measures to alleviate the economic pain, including more inclusive work hour reduction, income support for self-employed workers, deferral of tax payments, corporate loan guarantees and the promise to scale up the support if necessary. (Central) banks have also taken measures to prevent liquidity from drying up to companies. All these interventions are crucial to maintain household incomes and to prevent companies that are financially healthy and competitive in normal times from falling over. However, the measures taken by governments and (central) banks will not be able to completely prevent corporate profits to take a hit and unemployment to rise. For 2020, we therefore expect economic growth to turn into a contraction of 0.2 percent.

We assume that the virus outbreak will come under control in the second quarter, bringing the economy back to normal in the second half of 2020 and 2021. The aid measures by the government and (central) banks ensure that companies can survive the recession in 2020 and then increase production again to meet the demand of consumers who then spend money and other companies that resume their investment plans. As a result, the economy is expected to grow again in 2021. The economic outlook may deteriorate further if the virus outbreak takes longer to control and restrictions in for example restaurants are removed. The impact will also be greater if support measures from the government and (central) banks start slowly.

We estimate that household consumption will grow by just half a percent in the whole of 2020. Before the corona outbreak, we assumed that the Dutch would spend considerably more, thanks to low unemployment and a purchasing power boost due to rising wages and tax cuts. But the measures taken to contain the outbreak have a significant impact on households' ability to actually spend money. Restaurants and cafes, for example, have been closed for at least three weeks, and many other recreational facilities and shops have closed their doors. In addition, numerous events have been canceled.

Based on figures from Statistics Netherlands from 2015, we estimate that roughly a third of household spending is (temporarily) under pressure from the corona measures. Things like rent or mortgage, groceries and insurance simply continue. There is likely to be some shift from physical stores to online stores, and between spending categories. For example, households probably spend a little more on groceries, meal delivery and home entertainment. There may also be a shift over time: expenditure on, for example, clothing or home furnishings may be postponed, but not necessarily fully canceled.

Falling employment and incomes will put further pressure on consumers' ability to spend money. The announced government measures may alleviate much suffering, but they cannot completely eliminate it.
They cannot, in other words, prevent some people from experiencing a drop in their income. Not all temporary contracts may for example be extended and self-employed workers will see the number of assignments decrease.
The uncertainty of the impact of the corona crisis will also decrease consumers' willingness to buy.

We expect companies to invest 2.1 percent less in 2020 than in 2019. Some companies will make emergency investments in, for example, home working systems. But most companies will invest less because they see a sharp fall in demand from home and abroad, because they are closed or because their production is decreasing. The latter is due, for example, to problems in the supply of semi-finished products, higher sick leave or because employees stay at home to look after their children. Once again, government measures will provide relief, but cannot completely prevent the corona crisis from hitting corporate profitability. This will also decrease the willingness to invest. Once measures and uncertainty about the duration and impact of the corona crisis diminish, companies may catch up some of the deferred investments.

The picture for international trade has also darkened. After all, more and more countries are suspending activities, causing the demand for Dutch products to fall. Because demand for foreign products is also decreasing due to lower consumption and investments, we also anticipate a contraction in imports. We expect a 1.5 percent drop in 2020 for both exports and imports.

We expect government consumption to increase by about 2.6 percent this year. The government is expected to spend more on health care this year. Additionally, the cabinet had already announced several additional expenses last budget day (in September). But we doubt whether it will actually be possible to make these last expenditures in their entirety, because that often requires hiring more government staff. Finding new employees has proved to be a major challenge last year with unemployment hovering around a record low of 2.9 percent. While we expect this number to rise, higher unemployment as a result of the corona crisis does not offer immediate relief as it often concerns other professional groups.

Furthermore, as described in this text, the Dutch government has initially pledged EUR 15.6 billion to support measures for workers and businesses. This will not count in government consumption, but will eventually end up in the economy through, for example, household consumption and business investment. These expenditures will have a major impact on public finances though. Fortunately these are currently in good shape: Dutch government debt in the third quarter of 2019 was below 50 percent of gross domestic product for the first time in almost twelve years. That is well below the European budget standard of 60 percent. The Netherlands therefore has a favorable starting position to deal with this crisis.