Limited recovery for the Dutch economy from the corona crisis

The contraction expected in the Dutch economy this year (figure 1) can rightly be called historic: Statistics Netherlands has never previously measured such a deep downturn in GDP in the past 100 years. But our forecasts for the Dutch economy this year are still relatively mild compared to other countries in the eurozone. This is due to a less strict lockdown, and a good starting position. On the other hand, the Netherlands is expected to see a more modest recovery from the second half of this year than our neighboring countries. To some extent, this is a logical consequence of the less deep downturn at the start of the corona crisis. But it is also because the Netherlands is relatively exposed to falling foreign demand. And it is clear that demand from households and businesses around the world will be affected by the economic damage that the pandemic has already caused for some considerable time to come. The support packages from countries, central banks and the EU can prevent things getting even worse, but they cannot prevent a deep worldwide recession. Meanwhile, the geopolitical situation poses a problem for trade: relations between the US and China are worsening again, and hopes of a soft Brexit have faded under the Johnson administration.

A rather mild lockdown and a high level of digitalization in Dutch society has meant that the effects of the first wave of the corona virus on the economy in the Netherlands have been less severe than in many other eurozone countries. Quick and effective government measures are moreover cushioning the blow. The sound condition of the Dutch economy at the start of the pandemic has also helped: the labor market was extremely tight at that point, and government finances were in good shape. The GDP figures for the first quarter, in which the ‘normal’ months of January and February still weigh heavily, were thus relatively good in comparison to other eurozone countries. The ‘intelligent lockdown’ then announced by the government in response to the virus outbreak was rather mild in comparison to most other eurozone countries: although some sectors such as hospitality and culture were extremely hard hit, Dutch people managed to retain a relatively high degree of freedom of movement (figure 2), many shops and factories were able to stay open and most of the works in construction continued. The fact that Dutch people were already used to making making many purchases online before the outbreak and a high proportion of workers were already working at home also helped to limit the downturn in economic activity in this first phase. But the more severe damage in many other countries cannot hide the fact that the corona crisis has already had a very significant effect on the Dutch economy. Our forecast for the second quarter as a whole is that GDP will contract by 8 percent.

Consumer spending will inevitably be much lower this year than it was last year. The low point will be in the second quarter, in the months when it was simply not possible to spend as normal due to the lockdown. This affected spending in many company canteens, restaurants and fuel stations, on events and at travel agencies. The easing of the lockdown will lead to some, but not a full, recovery in the second half of the year. Social distancing and uncertainty among households regarding the economy and their own financial futures will continue to restrict consumer spending (figure 3). Overall, we expect Dutch households to spend around 7 percent less in 2020 than they did in 2019.

Developments in the labor market are also playing a major role (figure 4). Although the Dutch government is providing important support to the labor market with its NOW scheme, we still expect to see a sharp rise in unemployment in the course of the year, from 3 percent at the start of the year to almost 7 percent by year-end. The direction is already clear, as shown by the rapid increase in unemployment in April (3.4 percent), and the sharp decline in the number of open vacancies. The loss of work and jobs among the self-employed and workers on flexible contracts will get worse in the coming months as a result of the weak demand in many sectors. The hardest-hit sectors such as hospitality, culture and employment agencies indeed feature a high proportion of flexible workers. We also expect the consequences of reorganizations and bankruptcies to become visible in the labor market in the second half of the year, leading to more employees on permanent contracts losing their jobs.

Part of the loss of employment will not however directly lead to an increase in formal unemployment. People who work for a limited number of hours per week, those who become discouraged and withdraw from the labor market altogether and students who continue to study for longer to avoid the crisis by staying in school will not count as unemployed. In a sudden and serious crisis like this, there is a danger that the real damage to the labor market will be under-reported. For example, Statistics Netherlands reported a decline of 160,000 in the number of people in paid work in April, a sad monthly record. Unemployment increased by ‘only’ a quarter of this figure, by 41,000 people. But as people who want to work are without work for longer, one can expect that more of them will actively look for work and thus appear in the unemployment figures.

The outlook for business is also poor. The government has announced that we will have to maintain 1.5 meters social distancing for some considerable time until a vaccine or other drug for Covid-19 is found. This means that several sectors will not be able to use their full production capacity. Hospitality is the worst hit of all sectors in this respect. Network effects mean that the recovery in related sectors will be slower, for example the food industry that supplies the hospitality sector. The worst effects of the corona crisis are still to be felt in some sectors such as industry, because order books will deteriorate after a time lag. Dutch exports thus still performed quite well in the first quarter, despite the decline in world trade.

But the outlook has significantly worsened since that time due to the severe economic downturn at our most important trading partners. We are forecasting that the exports of goods and services from the Netherlands will be 7.2 percent lower than they were in 2019. The decline in household consumption will also depress businesses’ revenue and profitability, and thus reduce their capacity to invest. At the same time, readiness to invest will decrease substantially, given the poor prospects for producers (figure 5). The recovery in the second half of the year will not even come close to recouping the losses in the first two quarters. We therefore expect business investment this year to be 7 percent lower than it was last year.

The support packages introduced by the Dutch government are unprecedented in their size: the first package involves more than EUR 20 billion, with a further EUR 13 billion budgeted for the second. The main aim of the packages is to prevent bankruptcies and lay-offs. They should limit the decline in business investment and private consumption.

Government spending is forecast to increase by around 2 percent in 2020. At the same time, the government also has the problem with halted production chains and some investment projects will not go ahead. Despite the intention of bringing forward some investments, for example in housing, to boost employment and economic activity, we expect government investment to fall by 3.4 percent this year. The corona crisis will also reduce government revenues in the form of taxes and social contributions. The net effect of this will be a serious worsening of the budget balance. The exact extent of the damage is still difficult to estimate, due to uncertainty regarding the use of the new emergency measures, among other things. In its Spring Memorandum the Ministry of Finance estimated a budget deficit of EUR 92 billion. The extra spending of at least EUR 13 billion in the second support package will worsen the deficit further. Since GDP is also contracting significantly, the balance as a percentage of GDP is rising even more rapidly, and was estimated at 12 percent in the Spring Memorandum excluding the second support package. Government debt is also rising fast, to more than 65 percent of GDP. This is still well below the eurozone average and the ability to finance this debt is not at stake, also in view of the very low level of interest rates and the ECB’s purchase program.

The above forecasts assume that the virus remains under control and the process of easing lockdown continues. But if there is a new outbreak of the virus at the end of the year and we have a new period of lockdown, all our economic forecasts will be negatively affected. This would mean an even greater increase in bankruptcies and unemployment. There is also a real risk of a financial crisis in the event of such a downturn. Apart from the virus, there are still negative risks in the form of escalating geopolitical tensions and a hard Brexit.

If there is a second wave of the virus with a lockdown period and another sharp rise in unemployment, the housing market will be a specific risk in the Netherlands. Because although average loan-to-value ratios are lower than during the low point of the housing market crisis in 2013 as a result of the stricter repayment and income requirements, they are still relatively high in comparison to other countries. Especially those who have recently purchased a house and financed this fully with a mortgage will be faced with a risk of negative equity if house prices fall. This could lead to a decline in consumption, which would worsen the economic downturn.

There are also upside risks. Simply because the impact of the corona crisis is so great, the potential for misjudgment in our estimates is automatically also greater. And also, because entrepreneurs and consumers may be better able to adjust that we currently expect. Or, for example, if a higher utilization rate in Dutch production turns out to be possible or consumption patterns change more quickly. Lastly, governments are fully engaged: after the initial response to the crisis, they are now working on measures to boost the economic recovery. Providing an effective boost to the recovery is certainly no easy task for national and international politicians. But if this succeeds, the outlook after this year could certainly improve.