The Dutch economy is still growing, albeit more slowly

The Dutch economy appears to have passed its cyclical peak and is expected to grow by 2.8 per cent in 2018 and by 2.1 per cent in 2019. This is slower than in 2017, but is still well above our estimate of potential growth in the Dutch economy. A strong domestic economy supports growth, but is also sharply increases imports. Since exports are rising less rapidly in the same period, net trade will make a negative contribution to GDP growth in both 2018 and 2019.

We have lowered our forecast for economic growth in 2018 and 2019 relative to three months ago. This is partly due to weak imports by major trading partners in the first quarter of 2018, leading to a contraction in Dutch exports. We have recently reduced our forecast for transaction volume in the housing market, and have thus somewhat reduced our expectations for housing investment.

The Dutch economy has increasingly benefited from the recovery in the housing market since 2014. Significant spending related to owner-occupied property, such as renovations, frequently occurs when a property is purchased. We have recently adjusted our forecast for transaction volume in 2018 to the downside. Whereas a quarter ago we still expected the number of sales to flatten off or slightly increase, we now expect the number of sales in 2018 to decline slightly to 235,000 homes. This is still very high in historical terms, but housing investment will probably grow by less than we had previously expected. Three months ago, we still expected to see an increase of 8.5 per cent in 2018 and 3.5 per cent in 2019. Our current forecast is for 6.1 and 2.2 per cent respectively (figure 1).

The construction of new homes is a positive impulse for housing investment. The Cabinet announced its National Housing Agenda in May 2018, the major feature of which was the construction of 87,500 homes per year until the end of 2025. Given the limited role of housing corporations and the government, and capacity problems at builders and municipalities, we think it will take some time before so many homes can be built each year. We accordingly expect to see a slow increase towards the target of 87,500 homes. The number of building permits issued was also slightly lower in the first quarter of 2018 than a year earlier.

We expect private consumption to grow strongly over the next two years: by 3.2 per cent in 2018 and 2.9 per cent in 2019. The government is expected to support household consumption in 2019 with tax cuts already announced in October 2017. There are also strong fundamentals supporting household purchasing power. We expect employment to rise further, but probably at a slower pace than in 2017, since the labour market will continue to tighten as the non-working population declines. We thus expect unemployment to fall further, to 3.9 per cent in 2018 and 3.6 per cent in 2019. This would be lower than the lowest yearly average from before the crisis.

It is not only that total household income is rising because more people have a job, the tighter labour market is increasing pressure on nominal wages. An upward trend in contract wages was already discernible in the first four months of 2018, and we expect a further increase in 2018 and especially in 2019. Self-employed persons without personnel (‘zzp’ers’) are also benefiting from the tightness in the labour market and the strong economic growth.

At the same time, we expect the increasing tightness in the labour market and the markets for goods both nationally and internationally to push up consumer prices by 1.6 per cent in 2018 and 2.4 per cent in 2019, but we also expect inflation to lag nominal wage growth. Even in 2019, when the planned VAT increase will lead to upward price pressure, we expect slightly faster real wage growth. Wage growth is still low in historical terms. One reason for this is that the Netherlands features many self-employed persons and people on temporary contracts, some of whom may prefer to negotiate a permanent contract rather than a pay rise.

The further increase in house prices will also have a positive effect on household consumption over the coming two years. The owner-occupied property market will probably soon exceed its historical price peak. Homeowners are feeling more prosperous and private consumption is rising.

Lastly, the increasing tightness in the labour market and further house price increases will most likely continue to support consumer confidence over the next two years. However, a setback to the long term average is also a possibility, since in historical terms consumers have been positive on the economy for a very long time (figure 2).

The good performance of the Dutch economy is also affecting business investment in the Netherlands. We are forecasting an increase of 3.5 per cent this year and 4.2 per cent in 2019. High producer and consumer confidence, rising corporate earnings and increasing capacity utilisation are supporting the growth of business investment (figure 3).

The cyclical survey by Statistics Netherlands shows that business owners themselves also expect to increase their investment (figure 4). The optimism is broad based, but large companies are more optimistic than the SMEs.

The outlook for the global economy is still positive, but the Netherlands has an open economy and is therefore exposed to any potential negative developments abroad.

Slower growth at major trading partners

One of the main risks is that growth will slow at the Netherlands’ major trading partners. Weak imports by several major trading partners in the first three months of the year led to the first quarterly contraction in Dutch exports since 2013. For now, this would seem to be temporary in nature. We therefore expect exports to recover.

A hard Brexit is still a risk

A second risk for the Dutch economy is a Brexit in which the UK leaves the EU without new agreements. This ‘hard’ Brexit is still a possibility, and would lead to higher import tariffs and non-tariff barriers from March 2019. This could cause serious damage to the Dutch economy, due to the close trade relationships between the Netherlands and the UK. From our previous calculations, we think that a ‘hard’ Brexit could cost the Netherlands more than 4 per cent growth until 2030, equivalent to 4,000 euros per Dutch person in work. Our estimate currently is for an orderly exit, involving a transition period followed by a free trade treaty. But the negotiations between the EU and the UK are still difficult, and a ‘hard’ Brexit is still a risk.

Increase in import duties between the US and the EU

A sharp increase in import duties between the US and the EU could also harm the Dutch economy. The scale of the measures currently announced by both the US and the EU is so far negligible in macroeconomic terms. Only 6 per cent of the steel exported by the Netherlands goes to the US , while only a small number of the products target by EU sanctions have a relative high import share in the Dutch market, the top three being cranberry juice (59 per cent), playing cards (52 per cent) and face powders (47 per cent). But the damage could increase rapidly if we have an escalation into a full-blown trade war. If for instance the US and its trading partners impose import tariffs of 20 per cent, according to our calculations the Netherlands could lose 3 per cent growth until 2022, equivalent to 20 billion euros.

Sharp increase in oil prices

Finally, a recent RaboResearch study shows that a further sharp increase in oil prices would be negative for the Dutch economy. In a scenario in which the oil price rises to 115 dollars a barrel, the Dutch economy would lose 1.2 percentage points of growth until 2022. This reflects a negative impact on the domestic economy offset to some extent by a depreciation of the euro, which would improve the competitive position of the Netherlands. Household purchasing power in particular would be weakened, since inflation would rise. The Netherlands is after all a net importer of energy. If oil prices rise by less, to 90 dollars a barrel, the impact on the Netherlands will be more or less negligible. We expect oil prices to subside again after their recent rally, but rising global geopolitical tensions could disrupt the oil market again and drive oil prices higher.