Roads to recovery, chapter 6: Consumers in distress: Consumption, income and wealth

• Since the beginning of the Great Recession, household consumption in the Netherlands has decreased by an exceptional amount.
• Key factors for recovery of consumption are productivity growth, lower unemployment, higher housing prices and improved funding rates of pension funds.
• Deleveraging and precautionary savings yield downward risks.

Since the beginning of the Great Recession private consumption in the Netherlands has fallen dramatically, both in historical and international perspective. Recovery of consumption growth depends on, in addition to growth of disposable income, the development of wealth and debt. Many households will be forced to save more if the housing market does not recover and house prices fall further.

Compared to neighbouring countries, private consumption in the Netherlands has dropped significantly. Government consumption from which households benefit, such has health spending, has, however, increased. The first important factor behind the decline in private consumption is the decline in disposable income due to lower real wages, higher taxes and increased unemployment. One particular factor for the Netherlands is the wealth effect. Households in the Netherlands have relatively large asset holdings and debts. Falling house prices have left 1.4 million with a mortgage worth more than the value of the home it is secured against. As a consequence, households can borrow less or they have voluntarily saved more, both of which depress consumption. A second special factor is the pension system, where pension fund assets have declined, leading to higher premiums and, for many, sharply lower benefits.

Depending on the speed of recovery, higher wages and employment growth will provide more disposable income and growth in private consumption. A major risk factor is the saving behaviour of households, as some need to correct their negative equity position or that they are simply more cautious than before the crisis. However, if house prices grow by 3 to 4% per year, the value of household asset holdings will increase and the need to save will be much reduced.