Macro Economic Outlook (MEV) 2011

Hesitant economic recovery

The Dutch economy is expected to grow by 1¾% during 2010 and by 1½% during 2011. The increase in the GDP (Gross Domestic Product) is contributed almost entirely by exports. The estimated growth in consumption by households is rather modest, whereas business investments still show a downward tendency this year. The unemployment rate has stabilised at its current level, with an average of 5½% of the Dutch labour force during both 2010 and 2011. Expected inflation rates for 2010 and 2011 are 1¼% and 1½% respectively. The estimated 2010 budget deficit amounts to 5.8% of GDP, whereas the 2011 deficit is expected to contract to 3.9% of GDP. This estimate does not take any new governmental agreement options into account.

These are the key headlines in CPB's Macro Economic Outlook 2011 (MEV 2011, only in Dutch), as published today. With this publication, CPB Netherlands Bureau for Economic Policy Analysis presents its analyses and forecasts of both the Dutch and worldwide economy in the years 2010 and 2011. Today, the September issue of the CPB Newsletter 2010/3 also publishes an explanation of these estimates.

Other features in this edition of the CPB Newsletter relate to inventiveness and perseverance in market organisation; Four Futures for Finance, a scenario study regarding the possible future of the financial sector; the impact of the 2001 tax revisions on women’s labour participation; and CPB's adoption of the internationally accepted definition of unemployment.

Worldwide decline in growth rate
World trade showed a sharp incline during the second half of last year after the break-down of late 2008, but has now reached a more stable phase. Leading indicators predict further slowing of world trade volumes during the second half of 2010. For the year 2010 as a whole, the relevant world trade is expected to expand by 9%, slowing down to a growth rate of 5¼% during 2011. GDP growth within the euro area is expected to remain limited to 1¾% and 1½% during 2010 and 2011 respectively. This is significantly less than growth rates normally achieved after a recession has bottomed out.

Unchanged major international uncertainties
The main downside risk remains the renewed restlessness of the financial markets, aggravated by significant policy uncertainties. The European governments hardly have any space left for implementing fiscal stimuli. The strong recovery of consumers' expenditure in highly developed economies, in particular within the euro area, constitutes an upside 'risk'.

Main Economic Indicators for the Netherlands, 2009-2011

The Dutch economy
The timing and depth of the recession in the Dutch economy during 2008 and 2009 were determined mainly by international economic developments, and similarly, the timing and power of recovery in 2010 and 2011 are dependant on the same forces.

The expected economic growth rates of 1¾% this year and 1½% next year, earning the recovery the qualifications ‘moderate’ and ‘hesitant’, are in accordance with the forecast growth pattern in, among others, the United States, Germany, France and Italy, where GDP growth rates are likely to dip slightly below this year's rates. By the end of the forecast period, the Dutch GDP level is still below the level achieved during the first half of 2008, just before the credit crisis broke out.

Remarkably low unemployment rate
According to the forecast, the unemployment percentages of both 2010 and 2011 should amount to an average of 5½%, which constitutes a limited increase compared to 2009. From an historical perspective, such an increase would be considered minor. Various factors contribute to the favourable current labour market developments. For example, corporate profitability was relatively high before the credit crisis asserted itself and payroll costs were swiftly adjusted to the new economic conditions (lower bonus payments, less profit sharing and less overtime); and possibly, CEO’s anticipate another spell of scarcity in the labour market, as was the case before the credit crisis broke out. Additionally, the number of self-employed persons (without staff) has grown during the past few years. This group incurred a significant decline in their income last year, absorbing part of the 2009 production collapse. The part-time unemployment scheme has, to some extent, alleviated the 2009 and 2010 unemployment rates; however, its effect on the 2011 statistics will be negligible.
Employment is expected to further decrease this year in response to the sharp fall in production during 2009. Next year, employment will stabilise: a decline in both the private and public sectors is offset by a substantial increase in employment within the healthcare sector.

Two successive years of decreasing purchasing power
The average inflation rate is expected to amount to 1¼% and 1½% in 2010 and 2011 respectively.
The increase in contract wages within the private sector is forecast to decrease from 2.7% during 2009 to 1% in 2010 and to 1½% in 2011. Contract wages develop with a lagged response to developments in inflation and unemployment.

During 2010, the purchasing power of households has declined for the first time since the crisis set in. The average decrease in purchasing power amounts to ½%. The so-called median purchasing power is projected to decrease by ¼% next year. However, these purchasing power statistics do not include the impact of lost assets, job losses and eliminated bonus payments. All households affected by such events will incur a significantly more unfavourable development.

Deficit swiftly contracts, but remains high
During 2010, the public deficit is projected to increase to 5.8% of GDP. This rise is in part due to the lagged effect in tax income after decreases in production and incomes; last year's recession therefore reduces this year's tax received. Moreover, the deficit will increase, because the fiscal stimulus package will expand to its maximum potential and the healthcare costs continue their steep incline.
With further economic recovery, the expiration of the fiscal stimuli and further spending cuts, the public deficit will decrease next year to a projected 3.9% of GDP. The improvement of the balance will not be sufficient to prevent a further rise in public debt. Instead, public debt is expected to increase by almost 2 percentage points to a total of 66.2% of GDP, after having increased by almost 4 percentage points during the year 2010.

Recovery is fully export-driven
Exports once more serve as the driving force of economic recovery. The combined contribution to growth during 2010 and 2011 is equivalent to the cumulative growth rate of GDP during these two years. This year, Dutch companies, supported by recovering world trade and the cheaper euro, have exported 12¾% more goods than during the previous year. In particular re-exports have shown a significant increase with a growth rate of 16¾%. Next year, when the increase in the relevant world trade will contract to approximately half its current rate due to a decrease in the GDP growth rate in the surrounding countries, the Dutch export growth rate is projected to fall back to 7½%.

Households are saving money again
This year, households have consumed a projected ½% more than during 2009; growth is predominantly incurred in fixed costs. The estimated consumption growth for next year amounts to ¾%. Real labour income is expected to decline during both 2010 and 2011. However, in view of the fact that other income (consisting of items such as interest and dividend income) is likely to show a significant increase during the 2-year forecast period, many consumers will be able to reserve some of their disposable income as savings. On balance, changes in wealth hardly affect the estimated growth in consumption. The benefit income will increase this year and decrease next year. For the first time since 2003, households will spend substantially less than they receive during 2010.

Modest increase in investments during 2011
The current production capacity utilisation continues to be lower than pre-crisis ratios. Combined with the current underutilisation of industrial buildings, this will decelerate expansion investments. Business investments are therefore projected to decrease by 5½% during 2010, even in the face of profit recovery during this year, increased producer confidence during the past 18 months and an improved order position. Due to the continued increase in profitability and further acceleration of economic recovery, a 2¾% increase in business investments is forecast.