The Netherlands: Slight Downturn Ahead

Second quarter GDP data will be not out for a while, but when it is released we expect to learn that the Dutch economy grew modestly and that the manufacturing and services sectors were important contributors. Manufacturing output was 3.9% higher in May than the Q1 average. Having been freed from Covid-19-related restrictions that were still effective in part of Q1, the services sectors profited from reopening effects in Q2. The 7.3% YOY consumption increase in May was entirely driven by higher services consumption, which was up 19.4% YOY. In contrast, goods consumption was down 6% YOY. Energy and water consumption also fell by approximately 20% YOY in May, driven by slightly higher temperatures and sky-high energy prices, encouraging energy-saving behavior.

In July, the Economic Sentiment Indicator came in below 100, which is below the long-term average, for the second month in a row. This relatively low score is mainly driven by consumer pessimism (see Figure 1). Businesses, on the other hand, are more upbeat (see Figure 1). Sentiment among businesses has been more positive, but the difference with the current mood is not large. Confidence levels among Dutch producers are also more or less unchanged and remain higher than the long-term average, although this is due to optimism about order books and not expected activity (see Figure 2). The drop in the Composite PMI in Germany to 48.0, which is usually consistent with an economic contraction, could signal deterioration ahead for the Dutch economy.

The mood among Dutch consumers has been sour for a while (see Figure 3). Consumer confidence recorded an all-time low in July for the third time this year. Consumers are worried about the sharp and sustained increase in inflation and indicate that it’s not a good moment to make large purchases. HICP inflation rose again, from 9.9% in June to 11.6% in July, marking a break with the downward trend that we have seen since March. Although rising energy prices were again the most important contributor, the increase in prices for services also played a role. Average wage growth in collective labor agreements, which was 3.8% in June, pales in comparison to the HICP increase.

Consumers are more optimistic about the future employment situation in the Netherlands (see Figure 3). Indeed, despite a small drop in the number of employed persons in June (0.1% MOM), the participation rate managed to stay at a record high, and opportunities for the unemployed are plentiful. Firms reported labor shortages as their number one constraint in Q2, underlining the current labor market tightness. All in all, we feel the high pessimism among consumers and sky-high inflation are consistent with our expectation of lower consumption growth going forward.

In our Economic Quarterly, we communicated our expectation of slower growth and even predicted negative growth in Q4 2022 and Q1 2023. This is technically called a recession, but it looks more like stagnation (see Figure 4). Economic theory and historical evidence teach us that strong and sustained inflation is almost always followed by a slowdown in activity. In our baseline, we assumed that the government will not re-impose stringent anti-Covid measures and that gas will continue to flow to Europe, although in lower volumes than before the war. We could be forced to downgrade our forecast of a slight downturn if these assumptions turn out to be too optimistic.

Consumption, investments, and net trade are the primary drivers of the economic slowdown. Purchasing power losses are only partly offset by government measures and wage growth. Corona savings can act as a buffer for some, but it’s likely that households will cut back consumption due to real income declines. We only expect a mild uptick in the unemployment rate, as companies will be reluctant to let workers go, and this will prevent a larger drop in consumption. Businesses are faced with sky-high input prices and shrinking margins, higher interest rates, tax arrears (which need to paid off starting October 1), and uncertainty about the future state of the economy. This puts a strain on investments. Exports are also expected to slow given that trade partners are facing the same headwinds.