The Netherlands: Cooler temperatures are coming

The Dutch economy performed well in 2019 compared to other large European economies. Investments grew quickly, and despite relatively small real wage growth as inflation outpaced collectively-negotiated wage growth, Dutch consumers continued to spend more. However, we do expect growth to slow in 2020. Export growth will most likely be lower, due to weaker global growth and expectations of a downturn in the United States. Domestically, investments are hurt by issues related to nitrogen. We therefore expect the Dutch economy to grow by 1.2 percent in 2020, somewhat less than the 1.7 percent we have penciled in for 2019 (table 1).

After a strong rebound in the third quarter of 2019, average daily manufacturing production showed zero growth in October and shrunk by 1.1 percent m/m in November. Adding to a gloomy outlook for the sector, the Dutch manufacturing PMI pointed towards a decline in output for the second month in a row, falling to 48.3 in December (figure 1). Additionally, a small uptick in producer confidence in December cannot mask that the index appears to be trending downward (figure 1). Given the forecasted global growth slowdown, we expect the export-oriented manufacturing sector to shrink by 0.2 percent in 2020.

We are less optimistic about both private and public investments in the coming year. We still expect private investment to grow, albeit at a much lower pace than last year (+1 percent in 2020, compared to +6.3 percent in 2019). For public investment on the other hand, we expect a decline. Investments are hurt not just by the slower global growth, but domestically also by ongoing issues around nitrogen. The Netherlands struggles with reducing nitrogen emissions. This problem especially hurts the construction sector, but may also prevent other sectors from expanding their businesses. Additionally, this hampers the willingness to invest, and may hinder the government from executing their infrastructural investment plans, postponing part of the scheduled public investment. Another indication that the Netherlands has passed the top of the cycle can be found in the number of bankruptcies: although still at a very low level, the number of bankruptcies rose by 2 percent in 2019 after five years of decline (figure 2).

While investments will contribute less to Dutch economic growth in 2020, we expect consumers to continue to become an even more important driver of growth than in 2019. Past year, households saw inflation (2.6 percent ) rising quicker than collectively negotiated wages (2.5 percent ), in part due to a VAT hike, but this doesn't appear to have stopped them from spending more than in 2018: in October consumption grew 1.7 percent y/y. For 2020 we expect inflation to drop to 1.7 percent on average, as the VAT rates will not increase another time and because energy taxes are expected to decline. On the other hand, wages are expected to continue to rise and the income tax has been lowered this year. Together with lower inflation these developments should support household's purchasing power, and should further drive up consumption.

December was the first month ever in which more than nine million people were working, and unemployment fell to a record-low of 3.2 percent. This positively contributes to consumption growth. However, in light of the expected weakening of the world economy and the ongoing domestic issues, we expect unemployment to rise somewhat in 2020. Employment growth is likely to be surpassed by the increase in labor supply in 2020. This could have a dampening effect on consumption growth. All in all, we expect consumption to increase by 1.7 percent in 2020, contributing 0.8 percent -points to our forecasted 1.2 percent GDP growth.