Dutch economy in focus july'15

Dutch Economy in Focus

Group Economics

Estimates up after GDP revision 8 July 2015 GDP growth above eurozone average

8 6 4 2 0 -2 -4 -6 00

05 Netherlands

10

15

Eurozone

Latest economic data inspire optimism The Dutch economy is going from strength to strength. Revised data show GDP growing faster than thought in the first quarter. The figures for the third and fourth quarters of 2014 have also been adjusted upwards. This upward momentum has prompted us to raise our GDP estimates.

The optimism-inspiring economic figures provide further support for this step. Entrepreneurs are looking to the future with confidence. High capacity utilisation rates are encouraging them to invest again. The recovery of business investments is most visible in residential construction.

The more vigorous investment dynamics are giving the labour market a boost. Falling unemployment and the better prospects of finding a job are making consumers more confident.

Their optimism is further reinforced by the ongoing revival of the housing market. Higher domestic demand paves the way for rising inflation. Moreover, the upturn in economic activity will also generate extra tax revenues. Against this, there will be lower income from natural gas, so that the deficit reduction will remain limited. But it is still heartening to see public debt falling as a percentage of GDP for the first time since 2007.

2

Dutch Economy in Focus - Estimates up after GDP revision - 8 July 2015

Economy bigger than thought Philip Bokeloh – 020 383 2657

GDP growth revised up

GDP growth back above eurozone average

The Dutch economy is going from strength to strength.

According to revised figures, GDP grew in the first quarter by

% y-o-y

0.6% q.o.q., and not by 0.4% as initially estimated. Compared

8

with the same quarter a year ago, GDP growth worked out at

6

2.5% in the first quarter instead of 2.4%. That is above the

4

eurozone average. The figures for the third and fourth quarters

2

of 2014 have also been revised up. This contributes via the carry-over effect to higher growth in 2015.

0 -2 -4

The revisions have prompted us to raise the GDP estimates for

-6 00

this year, and all the more so now that the latest economic

05

data give cause for optimism. Growth is now estimated at 2.3%

10

Netherlands

15

Eurozone

instead of 2.1%. Encouragingly, the economic activity is also more broadly-based. The economic revival initially rested

Source: Datastream

purely on foreign trade. Starting from this year, consumption and investments are also making positive contributions. Some caution is in order, however. The uncertainty surrounding Greece could have adverse effects on the Dutch economy.

Broad-based growth in activity Percentage point

Entrepreneurs are positive

3

Entrepreneurs are looking to the future with mounting confidence. The PMI index reached a level of 56.2 in June.

That is well above the 50 points which marks the difference

Exports

2

Imports

1

between economic expansion and contraction. Entrepreneurs are particularly satisfied with the acceleration in orders. More orders are coming from abroad thanks to the low euro and the

Inventories

0

Investment

-1 Gov .consumption

reviving economy in the rest of the eurozone. The United States went through a weak first quarter due to incidental factors, but seems to have got over this temporary dip.

-2

Priv. consumption

-3 12

The improvement in business sentiment is confirmed by the producer confidence index of Statistics Netherlands (CBS) and

GDP (% qoq)

13

Source: CPB Netherlands Bureau for Economic Policy Analysis, 2015 and 2016 estimates ABN AMRO Bank

the European economic indicator. Both indicators hit their highest level in four years' time in June. Entrepreneurs are more positive about the production outlook and consider

Strong uplift in producer confidence

stocks too low. With capacity utilisation rates moving back

index

towards the peaks of 2008, they see renewed reason to invest.

15

Investments are rising Business investments increased in the first quarter by 8% y-o-y. Many entrepreneurs currently prefer to finance their

0

investments from their own resources. The high profitability of the past years and the relatively healthy balance sheets

-15

provide ample scope for this. Businesses remain reluctant to borrow. In the first five months of the year, the amount of outstanding business credit was 4½% lower than last year, and this despite banks relaxing their lending conditions. Banks

-30 00

05

Producer confidence

assess the financial risks as lower, partly due to the falling number of bankruptcies.

10

Source: CBS - Statistics Netherlands

15

3

Dutch Economy in Focus - Estimates up after GDP revision - 8 July 2015

The recovery of the business investments is most visible in

Fewer businesses are going bankrupt

residential construction, where investments shot up by 21% y-o-y in the first quarter. Now that the housing market is rebounding, architects are receiving new commissions and municipalities are processing more applications for building permission. In addition, builders have more months of work remaining on projects in progress and are more upbeat about the direction of new-build housing prices. Construction investments received a one-off impulse in the first half of 2015 from the temporary reduction in VAT on the labour costs of

Total number in past 12 months

12500 10000 7500 5000 2500

home renovations and repairs. This lower rate was cancelled

0 00

effective from 1 July.

05

10

15

Bankruptcies

Business services are also continuing to do well. The turnover in this sector advanced 5.9% in the first quarter compared to

Source: CBS - Statistics Netherlands

the same period last year. That is the strongest growth rate since 2008. The biggest jump in turnover occurred in the recruitment agency sector. Businesses are currently expanding their ‘flexible layer’ in response to accelerating demand.

Industry is also perking up, with average daily production in

Real estate investments rising strongly after contraction % y-o-y

April up 0.9% compared to a year ago. The outcome would have been even higher if the capacity in the tobacco industry had not fallen away. Industry is benefiting from the improving conditions in Germany, the most important sales market for industrial products.

30 20 10 0

Employment is growing

-10

The stronger investment dynamics are giving the labour

-20

market a boost. There are more vacancies, employment is

-30 00

rising and the number of worked hours is edging upwards. At

05

10

Private investment

the same time, both the number of dismissals and

15

Real estate investments

unemployment are decreasing. The pace of improvement is still slow, as more and more people are entering the labour

Source: Datastream

market in response to the better job prospects. Though the larger supply of labour is keeping wages in check, hourly wages are creeping up again. Combined with low inflation, this

Employers are making more use of 'flexible layer'

is resulting in higher disposable incomes. The increase remains moderate, however, due to rising taxes and social insurance premiums.

One important trend in the labour market is the spread of

%

40 30

flexible working. More than one in five employees are working on a temporary or secondment contract. Including selfemployed persons, one in three employees do not have a permanent contract. This 'flexible layer' is larger than in surrounding countries. The Work and Security Act (Wet Werk en Zekerheid) was introduced on 1 July in order to harmonise the rights of flexible and permanent employees. This Act gives

20 10 0 03

05 Temporary job

07

09

Self-employed without staff

employees on flexible contracts more rights, while employees on permanent contracts enjoy less rights. Ahead of the adjustment, many employees on flexible contracts have reportedly lost their job. Despite this initial effect, we do not expect the law to lead to structurally higher unemployment.

11

Source: CBS - Statistics Netherlands

13

4

Dutch Economy in Focus - Estimates up after GDP revision - 8 July 2015

Consumer spending up

Continued rise in house prices

The fall in unemployment and the improved job prospects are making consumers more confident. Their optimism is further reinforced by the sustained revival in the housing market.

Though the temporary expansion of the gift exemption has

% y-o-y

20

been reversed and banks are required to apply tighter loan-to-income criteria, home sales are continuing to rise this

10

year. Low mortgage rates are making homes more affordable, which is buoying up confidence in the housing market. Fewer

0

houses are up for sale and sellers are daring to raise their asking price for the first time in a long time. Due to the rising

-10 00

valuation levels in the housing market, fewer homes are 'under

05

water'.

Meanwhile, consumer confidence has reached its highest level

10

15

House price index Source: CBS - Statistics Netherlands/Land Registry and huizenzoeker.nl

in eight years' time. Households are positive about the economy, less sombre about their finances and more willing to spend. They are dining out more often, for instance. Turnover in the hospitality sector rose for the seventh time in a row in

Strong improvement in consumer confidence

the first quarter, this time by 3.9% y-o-y. Households are also

Index

more relaxed about spending money on consumer discretionary goods, such as household appliances and home interior items. Though retail sales are on the upward path,

50 25

turnover growth remains weak. The reason is that selling prices are under pressure, partly due to fierce online

0

competition.

-25

Inflation less weak

-50

According to harmonised figures, inflation rose from zero in

00

05

April to 0.7% y-o-y in May. That is above the 0.3% eurozone

15

Consumer confidende

average. The sharp increase in May is almost entirely attributable to holiday trips, flights and accommodation. The

10

Source: CBS - Statistics Netherlands

price of these rose faster than usual in May due to the early Whitsun this year and the larger number of holidaymakers in May. The sudden increase in inflation was therefore due to incidental factors.

Nevertheless, we expect a gradual rise in inflation. The weaker

Inflation bottoms out Inflation % y-o-y, output gap % difference between actual and potential GDP growth

euro heralds increased prices for goods and services imported

6

from abroad. In addition, oil prices are moving slightly higher

4

and the output gap is narrowing because actual GDP growth is higher than potential economic growth. As a result, the pressure on inflation is no longer downward but upward.

2 0 -2

Windfalls dominate the budget picture The powerful expansion of GDP is creating windfalls for the government: tax revenues are higher than estimated, whereas benefit expenditures are lower than thought. The financing expenses are another favourable factor for public finances. In April the ten-year interest rate fell to a low of 0.3% before rising again. Early in July, the interest rate was 1.1%, which is still historically low. The spread with Germany has also widened, but remains modest at just under 30 basis points.

-4 00

05 Harmonised inflation

10 Output gap

Source: Datastream, OECD (2015 and 2016 based on estimates)

15

5

Dutch Economy in Focus - Estimates up after GDP revision - 8 July 2015

At the same time, the government also suffered a substantial setback. Natural gas revenues are lower than anticipated. The

Key figures of Dutch economy

risk of earthquakes has forced the government to scale down

2013

the gas extraction activities. The limit this year is 30 billion cubic metres instead of the previously estimated 39.4 billion.

And a further reduction may be necessary next year. Eleven billion cubic metres of gas entails a revenue loss of EUR 200 million. The brake on gas production comes at a moment that the court has ordered the Netherlands to meet its stated climate objectives. The CO2 emissions must be reduced by

2014

2015

2016

% mutaties

GDP

-0.4

1.0

Private consumption

2.3

2.2

-1.4

Government consumption

0.2

0.0

1.8

1.5

0.3

-0.3

Investment

0.5

Exports

-4.5

3.5

5.0

4.1

2.4

4.0

4.4

Imports

5.4

1.1

4.0

4.2

5.9

Consumer prices (CPI)

2.5

1.0

0.6

1.8

Consumer prices (HICP)

2.6

0.3

0.1

1.6

Wages

1.3

1.1

1.3

1.7

2% of GDP and 1% next year. However, the percentage will

Unemployment (% labour force)

7.3

7.4

7.0

6.6

work out higher if the government sticks to its plan to reduce

Current account balance (% GDP)

11.0

10.8

10.4

10.0

tax on work by EUR 5bn. This plan will probably meet with

Budget balance (% GDP)

-2.4

-2.4

-2.0

-1.0

25% in 2020 compared to 1990 instead of the 17% that the government was previously targeting.

Improvement in public finances

Levels

According to our estimate, the budget deficit will fall this year to

resistance from Brussels. The European Commission only permits tax reductions if these are accompanied by structural reforms. But these are unlikely, since the proposal to standardise VAT rates and grant municipalities greater tax collection powers in exchange for tax reductions has been scuppered by key opposition parties.

Given the shrinking budget deficit and higher economic growth, the public debt as a percentage of GDP can slowly start to fall again. Our estimate for this year is a debt of 67.5% of GDP. After the sale of ABN AMRO, this percentage will be even lower.

Revised figures are in italics.

Forecasts: ABN AMRO Group Economics

6

Dutch Economy in Focus - Estimates up after GDP revision - 8 July 2015

APPENDIX 1. MACRO INDICATORS

Key figures for the Dutch economy 2012

2013

2014

% changes

GDP

2014

2015

Q3

Q4

Q1

Q2

qoq

qoq

qoq

qoq

0.4

0.9

0.6

2015f

2016f

2.3

2.2

-1.1

-0.4

1.0

Private consumption

-1.6

-1.4

0.0

0.1

0.8

0.6

1.8

1.5

Government consumption

-0.7

-0.2

0.3

0.1

-0.6

0.4

-0.3

0.5

Investment

-6.3

-4.5

3.5

2.2

3.3

2.1

5.0

4.1

Exports

3.8

2.4

4.0

1.3

0.9

1.1

4.4

5.4

Imports

2.7

1.1

4.0

1.5

0.6

0.1

4.2

5.9

2.5

2.5

1.0

0.9

0.9

0.2

1.1 (mei)

0.6

1.8

Consumer prices (CPI - % yoy) Harmonised consumer prices (HICP - % yoy)

2.8

2.6

0.3

0.3

0.2

-0.5

0.7 (mei)

0.1

1.6

Wages private sector (% yoy)

1.6

1.3

1.1

1.1

1.2

1.3

1.2

1.3

1.7

Unemployment (% labour force)

5.8

7.3

7.4

7.2

7.1

7.1

6.9 (mei)

7.0

6.6

Levels

Producer confidence manufacturing (eop)

-5.6

0.1

3.4

-0.2

3.4

1.4

4.6

Consumer confidence (eop)

-39

-17

-7

-7

-7

2

6

2013

2014

Forecasts: ABN AMRO Group Economics

Key figures international economy 2012

% changes

2014

2015

Q3

Q4

Q1

Q2 qoq

2015f

2016f

qoq

qoq

qoq

GDP eurozone

-0.7

-0.4

0.9

0.2

0.3

0.4

1.8

2.3

GDP Germany

0.6

0.2

1.6

0.1

0.7

0.3

2.0

2.5

GDP United States

2.3

2.2

2.4

1.2

0.5

0.0

2.7

3.1

USD per EUR (eop)

1.32

1.38

1.21

1.26

1.21

1.07

1.11

1.00

1.15

3m Euribor (%. eop)

0.2

0.3

0.1

0.1

0.1

0.0

0.0

0.0

0.1

10y Bund Germany (%. eop)

1.3

1.9

0.5

0.9

0.5

0.2

0.8

1.0

1.9

Levels

10y State. Netherlands (%. eop) Oil price Brent (USD/barrel. average) Forecasts: ABN AMRO Group Economics

1.5

2.2

0.7

1.1

0.7

0.3

1.0

1.1

2.0

111.7

108.7

98.9

102.1

76.1

53.9

61.9

60

75

7

Dutch Economy in Focus - Estimates up after GDP revision - 8 July 2015

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