Dutch economy to contract this year more than in 2009 – Q&A

How the corona virus outbreak will develop is highly uncertain. The measures taken by governments to control the spread of the virus have brought part of economic activity to a standstill. This is an exceptional situation, and its consequences are thus highly uncertain. We can make reasonable estimates of the extent to which the measures are halting production in various sectors. It is much more difficult to estimate the effects of this uncertainty on the behavior of businesses and consumers. We also do not know when and in what sequence economic activity can be safely restored. On top of that, it is not certain how quickly the situation will normalize. This depends not only on the control of the virus outbreak, but also on the damage done to the economy at that time, the amount of reserves that households and businesses will still have, and how confident they will feel about the future at the time.

Due to these uncertainties, we have calculated two scenarios, a base scenario and an alternative scenario. To do this, we have made certain assumptions regarding the course of the virus outbreak, the effects on economic activity and the subsequent economic recovery in the Netherlands and in other countries. The method used for this analysis is explained in our publication. At the same time, we formed an opinion regarding the extent to which the measures preventing the spread of the virus are reducing production in the various sectors of the Dutch economy, based on collaboration with the sector specialists at Rabobank. We have also tested our overall estimate against the current data held by Rabobank, with the data grouped so as to remove references to individual clients for the researchers. Finally, we have considered other scenarios, in particular one in which (intelligent) lockdowns in the Netherlands and many other countries continue for at least six months.

The first assumption is that the measures to restrict the corona virus outbreak will continue until June 1 and then be gradually eased. We also assume that even after the lifting of the restrictive measures in the Netherlands and the rest of the world, production will continue to suffer from disrupted global supply chains for some time. Domestic and external demand will start to grow again from the third quarter, but will remain below pre-corona levels for some considerable time. We also assume that the government support measures and support from the central banks and other parties will mean that most businesses will be able to survive the recession in 2020, but that they will not be able to prevent businesses suffering substantial falls in revenue, that there will be more bankruptcies and that a large number of Dutch people will experience a decline in work and income this year. For the longer term, we assume that there will be a loss of productivity, partly because there will be less investment in research and development, apart from in the medical sector. International trade will also be disrupted, leading to less transfer of knowledge and innovation. For an explanation of our productivity model for the Netherlands, see our previous publication.

The corona virus is spreading further around the world, forcing many countries – including the Netherlands – to extend measures designed to control its spread. We have accordingly adjusted our forecast for the Dutch economy in 2020 to the downside, using the above-mentioned base scenario. We now expect gross domestic product (GDP) to contract by 5 percent this year (table 1).

The (intelligent) lockdowns in the Netherlands and the rest of the world in the first half of this year will cause sharp declines in consumption by households and businesses, in exports and in production. The support measures from the government, the central and commercial banks and other parties will ease the pain but will not remove it altogether. Many businesses will see their revenues decline and an increase in bankruptcies looks likely. This will put pressure on employment and household incomes.

As a result, the recovery in the third quarter will probably materialize gradually: consumers and businesses will remain cautious with respect to spending. Either due to uncertainty, or because incomes and savings have been sharply reduced due to the crisis. In addition, factories will not be able to get back up to speed immediately due to the disruption of global supply chains. We thus expect that it will take some considerable time before the Dutch economy returns to its pre-corona crisis level.

The Netherlands has entered the fourth week of its intelligent lockdown, and figures on the negative effect of this on the economy are beginning to emerge. According to Statistics Netherlands and Translink, the number of people using public transport has fallen by nearly 90 percent in de second half of March. In March, the Dutch car dealer association BOVAG registered 23 percent fewer car sales than a year earlier and the number of PIN payments has fallen sharply. Also, at the time of writing 50,000 businesses had already applied for the Temporary Emergency Bridging Measure to Preserve Employment (known as ‘NOW’), a contribution to wage costs. Figures on economic activity in other countries also show a very concerning picture, which will affect the Netherlands through declining trade. There are also positive economic figures for specific business sectors: supermarkets and home building stores have actually increased their sales in the initial weeks of the intelligent lockdown.

In the first instance directly, as the virus outbreak and the measures to control it are leading to compulsory closures and disrupted supply chains. On top of that, many sectors are facing a temporary fall in demand because the economic recovery in the Netherlands and abroad will be slow, while the downturn is happening extremely quickly.

We expect to see a sharp fall in nearly all sectors in the second quarter due to the direct impact of the virus outbreak, especially in hospitality, agriculture, industry and parts of business services (see table 2). In many sectors, the recovery with effect from the third quarter will be slow because of weak demand due to the worsened economic situation (see figures 2 and 3). But for industry for example, we expect the low point of activity to occur in the third quarter. This is because industry is less directly affected by the virus and will suffer more from lower domestic and international demand and disrupted supply chains.

And while a sluggish recovery will begin in many sectors in the third quarter, we do not expect this to happen in the construction sector. Construction sites will be open and work will be going on, but the process of granting permits for new projects will be delayed. The economic cycle of construction moreover lags behind many other sectors, due to the lengthy duration of projects. Businesses and private citizens will also be cautious when it comes to large investments in renovation or new accommodation. Ultimately, this will lead to lower production in the rest of the year.

Strangely enough, we also expect activity in healthcare to decline in the second quarter. Although hospital departments dealing with corona are working overtime, most healthcare providers are seeing fewer and fewer patients. This is partly because patients are not consulting a specialist or general practitioner for issues other than the virus, and also because practices for dental care or physiotherapy have been closed or limited to emergency cases only due to the social distancing rules. As a result, we expect lower activity in the healthcare sector in the second quarter. But because we expect the corona crisis to subside in the third quarter, there will be a catch-up due to postponed hip and knee operations for example, and also consultations for dental and physical activity care. This will lead to increased production in the third quarter.

We expect a sharp increase in unemployment in the coming period. In February, there were 274,000 Dutch people without paid work who were looking for work. This number is expected to rise to 400,000-500,000 this year. The actual loss of employment will probably be worse than this, for instance because not all self-employed persons losing contracts will register as unemployed.

In the first instance, this will concern mainly those in the flexible workforce in those sectors worst affected by the corona crisis. These sectors include hospitality, culture and recreation, construction, trade, logistics, horticulture and industry. It is estimated that nearly half a million self-employed people and over half a million employees with a highly flexible employment relationship work in these sectors. We cannot rule out the possibility that some of the flexible workforce in other sectors will also be sent home later this year.

The support measures by the government, central and commercial banks and other parties are helping businesses and private persons to soften the financial impact of the corona crisis. But they cannot fully prevent a decline in revenues, or that some businesses will go bankrupt. This could mean that also people in permanent jobs will become unemployed later this year. Since we expect the economic recovery to be gradual, unemployment will fall more slowly than it has risen.

First of all, the measures to control the spread of the virus make it more difficult to view properties. This alone will reduce the number of sales while the lockdown lasts. But the corona crisis is also expected to lead to lower demand for owner-occupied homes due to loss of employment and declining household income. First and second-time buyers may thus have to put their rehousing plans on the back burner. And we think that investors, who were already concerned about new regulation, will become more cautious.

We thus expect the number of home sales this year to fall to around 175,000, 20 percent less than in 2019 (see figure 4). House prices are expected to fall for several consecutive quarters from the second half of this year. Since prices are continuing to rise in the first half of the year, houses will on average still be 3.9 percent more expensive over the whole of 2020 than they were in 2019 (see figure 5).

We are assuming a cautious recovery in home sales in 2021 to around 180,000. Employment will then be increasing again, while renting in the free sector will still be expensive. Given relatively low mortgage interest rates, this will prompt potential buyers to take the plunge. Since there is still a considerable shortage of housing, this will push prices higher. We therefore expect house prices to slowly increase again in the second half of 2021, although on average they will still be 3.3 percent lower than in 2020.

We have also calculated a scenario in which the (intelligent) lockdowns in the Netherlands and other countries continue for another three months after June 1. In this case, the restrictions will not be eased until September. The economic effects will be much more serious. Not only because production and consumption will be limited for longer, also because more bankruptcies will surely be inevitable and unemployment will rise faster. A recovery after the lockdowns will also be more difficult because existing structures such as value chains will have broken up.

According to our calculations, the economic contraction for the Netherlands in this scenario will be around 14 percent in 2020. This would be followed by very rapid growth of 11 percent in 2021, but the damage to the economy will not be entirely repaired. Although a contraction of 14 percent would be unprecedented in the Netherlands, it is in line with a recent OECD study, which estimated that economic production could decline by around 2 percentage points of annual GDP for each month of lockdown.

Obviously, the uncertainties in this scenario are even greater than in our base scenario. An important question in a scenario of this magnitude is whether the financial system could withstand such a deep economic slump. A financial crisis would not only cause even more economic disruption, it would also severely restrict any subsequent recovery. Every effort needs to be made to prevent such an escalation.

The development of the economy is now heavily dependent on the development of the virus outbreak and the consequences for economic activity of the measures taken by governments to curb the virus. There are feasible scenarios in which it may be possible to safely resume economic activity more quickly, for instance if an effective vaccine is discovered. Or if widespread and rapid testing becomes possible, so that infection with the virus and immunity to the virus can be established with a high degree of certainty. A safe and effective drug could be found, or the capacity of healthcare systems could be more rapidly expanded than now appears to be possible. In such scenarios, economic activity could recover more quickly and the negative economic effects would be lower.