10 June 2013

Netherlands: Economic developments and outlook, June 2013 - DNB predicts gradual recovery

The Dutch economy will shrink by 0.8 per cent this year. If present policy remains unchanged, this will be followed by modest growth of 0.5 per cent in 2014. A more favourable international economic outlook will help Dutch economic growth accelerate to 1.1 per cent in 2015.

The Dutch economy is going through heavy weather. Economic growth will once again be negative this year. Although the present recession is considerably less severe than in 2008-2009, household disposable income – adjusted for inflation – is now falling much more steeply than it did then. In order to help them through this challenging period, Dutch households are addressing their savings to an exceptional extent. As a result, spending levels remain more or less stable. While the Dutch economy is going through a difficult time, there are most definitely bright spots from a structural perspective, such as its strong competitiveness and the high labour participation rate by international standards.

Households, banks, pension funds and the public sector are all attempting to repair their damaged balance sheets. As a consequence, it is proving very difficult to drag the economy out of the doldrums. Throughout the 2013-2015 forecast period, Dutch economic output will be far below its normal level. This is evident among other things from the trend of employment, which will worsen substantially in 2013. Partly because of this, the unemployment rate will rise sharply, reaching a peak point at 7.2 per cent of the labour force midway through 2014.

This year, in particular, the Dutch economy is being affected by disappointing international developments. At only 1 per cent per annum in 2012 and 2013, growth in relevant world trade is substantially below the long-term average of 4.5 per cent. That figure will be feasible again in 2014, and should increase slightly in 2015. The anticipated slow but steady international recovery is driven by multiple factors, including the more stable financial markets, the economic convergence in the euro area and the favourable growth outlook in Germany and the United States.

Without new policy, the EMU deficit will rise further, from 3.5 per cent of GDP in 2013 to 3.9 per cent in 2014. The structural budget deficit, which corrects the actual budget deficit for non-recurring and cyclical distortions, will deteriorate in 2014. In order to reduce the deficit to 3.0 per cent of GDP in 2014, spending cuts of around €6-8 billion will be required. An austerity package of that magnitude would also be enough to reverse the deterioration of the structural balance, and would also prevent the public debt from rising further after 2014. Without additional measures being taken, public debt is likely to rise from 75.3 per cent of GDP in 2014 to 76.1 per cent in 2015. The said austerity package would help stabilise the debt ratio at 75 per cent of GDP over the coming two years.

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