Group Economics

Dutch Economy in Focus Netherlands Research

16 March 2018

Economic boom continues

• Dutch economy set to grow a further 3¼% in 2018, more than we expected
Nico Klene
several months ago
Tel. +31 (0) 20 628 4204
nico.klene@nl.abnamro.com
• Record-high economic barometers signal accelerating growth early this
year

• We recently revised up our eurozone and US growth forecasts for 2018 and
2019. This, plus the improving economic barometers, also led us to raise
the Dutch growth forecasts

• Exports, consumption, investment and the strong government spending

impulse (as set out in the Coalition Agreement) will keep the economy on
the same strong growth track this year

• Amidst slowing world trade expansion, Dutch economic growth will

probably dip somewhat in 2019, but still remain robust at just over 2½%

• Vigorous jobs growth will push unemployment to 3½% of the labour force,
the same low level as achieved during the previous boom

• Inflation will edge higher in 2018 as wage growth and rents pick up pace,
before jumping in 2019 when the low VAT rate is raised

Dutch economy firing on all cylinders

1
The Dutch economy is on a roll. Gross domestic product (GDP) gained 3¼% last year
and a similarly strong figure is expected this year. Last year, the Dutch economy
benefited from a stronger rise in exports thanks to an acceleration in global trade.
Moreover, domestic spending in general, and investment in particular, also gathered
pace.

This favourable picture will continue to hold sway. Strong global trade growth and
higher government spending indicate that Dutch GDP is firmly on track to rise by
another 3¼% or so this year. The positive mood indicators also confirm that the

1 This figure refers to the GDP series adjusted for seasonal and calendar effects. According to the unadjusted series, GDP rose by 3.1%.

Insights.abnamro.nl/en
2 Dutch Economy in Focus – Economic boom continues – 16 March 2018

economy retained its strong growth momentum in the first months of the year.
Accordingly, we have raised our growth forecasts.

Sustained strong quarterly growth … … leads to annual GDP growth above 3%

GDP - % qoq GDP - % yoy

2 4

1 2

0 0

-1

-1 -2
12 13 14 15 16 17 12 13 14 15 16 17

Source: Thomson Reuters Datastream

Last year showed the strongest growth since 2007

In 2017 GDP increased by 0.8% on average in each of the four quarters compared to
the previous quarter (qoq). That is even more than in 2016, when quarterly growth was
already robust. Virtually all spending components contributed to the stronger growth
than in 2016. As in 2015 and 2016, both domestic spending and exports accounted for
about half of the GDP increase.

Economic growth is broadly based

Contribution of spending components to GDP growth in % points

4
3
2
1
0
-1
-2
11 12 13 14 15 16 17 18

Domestic spending Exports

Source: CPB and ABN AMRO (forecast 2018)

In the last quarter of 2017, GDP again advanced 0.8% qoq, mainly driven by residential
investment (+5-6% qoq !), exports and government consumption. Household
consumption showed a surprising decline. Presumably, this was partly due to the lower
energy usage in the autumn when temperatures were higher than normal (and also
higher than in the same period of 2016). In view of the current consumer optimism and
rising disposable incomes, this fall in consumption was probably temporary.

Business investment also flagged in the closing quarter of 2017. The primary cause
was the substantial decline in investments in means of transport, a sector which often
3 Dutch Economy in Focus – Economic boom continues – 16 March 2018

fluctuates strongly between positive and negative numbers. As total exports clearly
outperformed imports, the contribution from net exports (exports minus imports) to
GDP growth was higher than in the previous quarter.

Sentiment indicators improve further

2
Multiple sentiment indicators confirm the bright economic picture. In the first months of
this year these economic barometers rose further from the already high levels reached
last year, thus outshining comparable indicators for the eurozone as a whole. In
February, the Economic Sentiment Indicator (ESI) was at its highest level since the
summer of 2007. Producer confidence and the Purchasing Managers’ Index (PMI),
both among manufactures, are even at record levels. Consumer confidence is similarly
ebullient. The steadily improving barometers suggest that economic growth was even
higher in the first months of the year than at the end of last year.

This, combined with the increased growth forecasts for the eurozone and the US (see
below), prompted us to also raise the growth forecasts for the Dutch economy.

Dutch economic barometers … … have risen to even higher levels

Indices Indices
64 118 15 30
10 20
57 109
5 10
50 100 0 0
43 91 -5 -10
36 82 -10 -20
-15 -30
29 73 -20 -40
22 64 -25 -50
05 06 07 08 09 10 11 12 13 14 15 16 17 18 07 08 09 10 11 12 13 14 15 16 17 18

Purchasing Managers' Index manufacturing (lhs) Producer confidence manufacturing (lhs)

Economic Sentiment Indicator (rhs) Consumer confidence (rhs)

Long-term consumer confidence average is about -2

Source: Thomson Reuters Datastream Source: Thomson Reuters Datastream

Powerful world trade growth boosts exports

World trade displayed a surprisingly robust recovery last year. And according to
various indicators, trade growth is set to remain strong this year. All sorts of sentiment
indicators for the eurozone are at historically high levels (despite some recent cooling).
In view of this upbeat development, we raised our growth forecasts for the eurozone,
both for 2018 and (to a lesser extent) 2019.

Our forecasts for the US were also revised up, as the US administration now looks
likely to raise its spending more than previously thought.

International circumstances thus remain benign for Dutch exports, which can continue
to go from strength to strength. Clearly there are risks, such as protectionism in the
3
US and the fractious Brexit negotiations. These could put a drag on growth.

2 Last-known data are from February.

3 See https://insights.abnamro.nl/ en/2018/03/global-trade-watch-global-trade-has-firmed-but-risks-are-rising/
4 Dutch Economy in Focus – Economic boom continues – 16 March 2018

Indicator points to powerful export growth

% yoy Index >50 points to growth, <50 - contraction

10 64

5 57

0 50

-5 43

-10 36

-15 29
00 02 04 06 08 10 12 14 16 18

Export domestically produced goods (% yoy; lhs)

PMI export orders (rhs)
Source: Thomson Reuters Datastream, Statistics Netherlands

Domestic spending will also continue to grow strongly - aided by government

Buoyant business activity is spawning jobs at a quickening rate. With more people in
paid work, consumer spending can move up a gear. Moreover, wages are also
gradually picking up and are rising in real terms (i.e. above inflation). We therefore
expect household consumer spending to increase more this year than last and to
continue gathering pace in 2019, partly thanks to the promised tax cuts. According to
the CPB Netherlands Bureau for Economic Policy Analysis, this favourable effect will
outweigh the negative impact on purchasing power from the VAT hike.

The government will also contribute to extra economic growth, particularly this year,
4
through the additional spending commitments set out in the Coalition Agreement.

Investment is also rising rapidly, largely propelled by bright sales prospects at home
and abroad. Other favourable factors are the high manufacturing utilisation rate (which
5
returned to its peak of 2007 at the start of this year) , low interest rates and high
corporate profits.

Residential investment will clearly decelerate compared to the high growth rate of
6
+13% in 2017, but will remain robust.

In summary, GDP growth can work out at 3.3% in 2018, somewhat above our former
estimate of just under 3%. 2019 will see growth slacken, partly due to the slower
expansion of world trade, but there are no concrete reasons for anticipating a strong
decline. In this light, we have raised our forecast for 2019 to about 2½% (was 2%).

Unemployment to fall further to low level of 2007

Unemployment is shrinking. In 2017 the average number of unemployed people was
almost 19% lower than in 2016. And last February the unemployed number was even
22% lower than a year earlier. Thanks to the strong jobs growth, more and more
people are finding work, so that the unemployment rate can continue to fall. People
7
who were formerly outside the labour market are also benefiting from the current

4 The envisaged tax cuts will follow in 2019.

5 Note, however, that the capacity utilisation rate was even higher at the start of the century.
6 For our latest analysis of the housing market, see: https://insights.abnamro.nl/en/2018/01/housing-market-monitor-prices-to-rise-further-in-2018-and-2019/
7 The ‘unemployed’ are people looking for work and immediately available for work. Those who do not meet these criteria do not count as unemployed in the statistics.
5 Dutch Economy in Focus – Economic boom continues – 16 March 2018

expansion of jobs. On balance, 165,000 people joined the working population in the
course of 2017, including almost 80,000 who were formerly outside the labour market.

Unused labour potential shrinks further

x1000

1800
1500
1200
900
600
300
0
13 14 15 16 17
Want to work longer hours and available
Looked for work or available
Looked for work and available (unemployed)
Source: Statistics Netherlands

The ‘unused labour potential’ is thus decreasing. Statistics Netherlands distinguishes

three groups: the officially unemployed, people who have looked for or are immediately
available for work and, finally, part-time workers who can and want to work longer
hours. A decline can be seen for all three groups (see chart).

The unused labour potential decreased in the course of 2017 from almost 11% of the
8
potential labour force to 9.5% in the final quarter. We think that there is still a
substantial group of people who can join the workforce or work longer hours.
Unemployment can then fall to the low point reached during the previous boom (ten
years ago), namely 3½% of the labour force - in 2019.

Tightening labour market

Indices Absolute movements versus four quarters earlier

36 8 180
120
27 6 60
0
18 4
-60
-120
9 2
-180
0 0 -240
05 06 07 08 09 10 11 12 13 14 15 16 17 12 13 14 15 16 17

Number of vacancies per 1000 jobs (lhs)

Permanent jobs Flex jobs (incl. self employed)
Number of unemployed per vacancy (rhs)
Source: Statistics Netherlands (CBS) Source: Statistics Netherlands (CBS)

Tightening labour market

The labour market is clearly tightening. In the fourth quarter the number of vacancies
rose yet again and the vacancy indicator of Statistics Netherlands shows that in
February businesses still anticipated a further rise. The tightening trend is mainly

8 Potential labour force: people between 15 and 75 living in the Netherlands (excl. people in an institution).
6 Dutch Economy in Focus – Economic boom continues – 16 March 2018

visible in the rising number of vacancies relative to the number of jobs and also in the
falling number of unemployed per vacancy (see left-hand chart on previous page).
Note, however, that the labour market is not yet as tight as in 2007-2008.

Another indication of the tighter labour market is the growing number of permanent
jobs. Until the third quarter last year, there were more new flexible jobs than permanent
jobs. (We compare the number of jobs with the number four quarters earlier.) However,
the number of new permanent jobs has been rising for some time and, in the last
quarter of 2017, actually outstripped the number of new flexible jobs.

Contract wage growth is slowly rising

Hourly wages in private sector - % yoy

0
11 12 13 14 15 16 17 18

Source: Thomson Reuters Datastream

The ever tighter labour market will give wage growth a further impulse, even though
there is still a lot of 'unused potential'.

Inflation rising gradually, but set to jump in 2019

CPI inflation averaged 1.4% in 2017, significantly more than the 0.3% of 2016. The
9
difference was predominantly caused by the higher energy prices. Core inflation only
rose by fractionally more than 0.2% point.

Higher inflation in 2017

CPI, % yoy

-1
08 09 10 11 12 13 14 15 16 17
Headline HICP

Source: Thomson Reuters Datastream

9 Core inflation: the inflation figure without the (volatile) prices of energy, food, alcohol and tobacco.
7 Dutch Economy in Focus – Economic boom continues – 16 March 2018

For 2018, we foresee slightly higher inflation. One reason is the stronger wage rises
because of the tightening labour market. Another is the fractionally higher rent
increases. The oil price is expected to continue rising, but not much more than in 2017.

In 2019, however, inflation will jump. This is mainly due to the hike in the low VAT rate
which, in itself, will produce an estimated 0.6% point extra inflation. Added to this,
accelerating wage growth will also fuel inflation.

Key figures Dutch economy

2016 2017 2018 2019
% changes
GDP 2.1 3.2 3.3 2.6
Private consumption 1.5 1.9 2.2 2.3
Government consumption 1.1 0.9 3.0 2.7
Investment in fixed assets 5.2 6.1 5.7 4.0
Exports 4.1 5.8 5.2 4.6
Imports 3.9 5.2 5.7 5.0
Consumer prices (CPI) 0.3 1.4 1.6 2.5
Harmonised consumer prices (HICP) 0.1 1.3 1.5 2.4
Wages private sector 1.6 1.6 2.2 2.9
Levels
Unemployment (% labour force) 6.0 4.9 3.8 3.5
Current account (% GDP) 8.5 9.4 9.1 8.9
Budget balance (% GDP) 0.4 0.9 0.6 0.8
Revised figures (since previous ‘Dutch Economy in Focus’) in italics.

Forecasts: ABN AMRO Group Economics

8 Dutch Economy in Focus – Economic boom continues – 16 March 2018

APPENDIX MACRO INDICATORS

Key figures for the Dutch economy

2015 2016 2017 2017 2018 2018f 2019f
Q2 Q3 Q4
% changes qoq qoq qoq
GDP 2.3 2.1 3.2 1.5 0.4 0.8 3.3 2.6
Private consumption 2.0 1.5 1.9 0.7 0.4 -0.3 2.2 2.3
Government consumption -0.2 1.1 1.0 0.7 0.0 0.5 2.9 2.3
Investment in fixed assets 11.0 5.2 6.1 0.8 2.1 -0.0 5.7 4.0
Exports goods and services 6.5 4.1 5.8 1.9 1.8 0.8 5.2 4.6
Imports goods and services 8.4 3.9 5.2 1.2 1.8 0.1 5.7 5.0
Consumer prices (CPI - % yoy) 0.6 0.3 1.4 1.2 1.4 1.4 1.3 (Jan-Feb) 1.6 2.5
Harmonised consumer prices (HICP - % yoy) 0.2 0.1 1.3 1.0 1.5 1.4 1.4 (Jan-Feb) 1.5 2.4
Wages private sector (% yoy) 1.2 1.6 1.6 1.6 1.6 1.7 1.9 (Jan-Feb) 2.2 2.9
Levels
Unemployment (% labour force) 6.9 6.0 4.9 5.0 4.7 4.4 4.1 (Jan-Feb) 3.8 3.5
Producer confidence manufacturing (eop) 104.4 106.9 112.0 109.4 110.4 112.0 113.3 (Feb)
Consumer confidence (eop) 13 21 25 23 23 25 23 (Feb)
Revised figures in italics
Forecasts: ABN AMRO Group Economics

Key figures international economy

2015 2016 2017 2017 2018 2018f 2019f
Q2 Q3 Q4
% changes
qoq qoq qoq
GDP eurozone 2.0 1.8 2.5 0.7 0.7 0.6 2.8 2.3
GDP Germany 1.5 1.9 2.5 0.6 0.7 0.6 2.9 2.6
GDP United States 2.9 1.5 2.3 0.8 0.8 0.6 3.0 2.7
Levels
USD per EUR (eop) 1.09 1.05 1.20 1.14 1.18 1.20 1.22 (Feb) 1.20 1.30
3m Euribor (%, eop) -0.1 -0.3 -0.33 -0.33 -0.33 -0.33 -0.33 (Feb) -0.3 -0.1
10y Bund Germany (%, eop) 0.6 0.21 0.42 0.47 0.46 0.42 0.66 (Feb) 0.9 1.2
10y State, Netherlands (%, eop) 0.8 0.35 0.53 0.66 0.58 0.53 0.70 (Feb) 1.0 1.3
Oil price Brent (USD/barrel, average) 52.4 43.8 54.3 49.8 52.1 61.5 65.3 (Feb) 70 78
Revised figures in italics
Forecasts: ABN AMRO Group Economics
9 Dutch Economy in Focus – Economic boom continues – 16 March 2018

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