The turmoil that followed has grown into a full-blown credit crisis, which will undoubtedly affect the real economy. Nonetheless, Dutch GDP is expected to grow by 2¼% this year and 1¾% next, not much below Dutch potential.

This year's growth deceleration is due mainly to weakening world trade growth (in its turn caused mainly by the ongoing credit crisis),which will reduce Dutch export growth. Next year, both world trade growth and Dutch export growth are expected to strengthen to some extent. By then, however, domestic expenditure is set to weaken, which will somewhat diminish economic growth.
The upheaval that continues to affect financial markets is adding to the uncertainty to which all economic forecasts are prone.

These are the headlines in CPB's Central Economic Plan2008 (only in Dutch), published today.

World economy slows down
In 2007, the US economy grew by 2.2%. In spite of continued export growth and expansionary policy measures (both fiscal and monetary), GDP growth in the US is expected to reach a meagre 1% this year. This can be attributed mainly to the sharp decline in residential investment. In addition, consumption expenditure will suffer from falling house prices, a weakening labour market, and tighter credit conditions. This year, economic growth in the US will be almost entirely due to carry-over, as in the course of the year GDP will hardly rise above the level reached in the last quarter of 2007. During the first two quarters of 2008, GDP may even decrease relative to the previous quarter.
Rising oil and food prices will keep inflation high. The US economy is expected to recover somewhat in 2009.

The economy in the euro area is expected to grow by 1½% this year, a result that can be attributed, to a great extent, to the weakness of the US economy adversely affecting European exports. Also contributing to the diminished economic growth relative to last year: the current strength of the euro, the record high oil price, the tightening credit supply of European banks, and the negative impact of the credit crisis on the confidence of both producers and consumers. Finally, in some European countries the recent boom on the housing market has come to an end. As is the case in the US, economic growth in the euro area is expected to be a little higher next year than it is this year.
In the projections, the average exchange rate in 2008 and 2009 is 1.45 US dollars per euro, while the price of a barrel of Brent oil is projected at 87 US dollars.

Dutch economy set to grow less fast
During the second half of 2007, the Dutch economy grew by over 4%. This positive result alone will strengthen this year's measured growth figure. The economy is expected to grow by 2¼%, in spite of the decrease in world trade growth. Growth in 2009 is projected to be lower. World trade and Dutch exports will have recovered slightly by then, but these favourable developments will be more than offset by a decline in growth of private consumption and capital formation.

Natural gas production fluctuates sharply
Fluctuations in the production of natural gas explain a great deal of last year's quarterly growth pattern of the Dutch economy. While in the first half of 2007 the production volume in mining and quarrying was 20% lower than it was in the first half of 2006, in the second half of 2007 it was 30% higher. Thus, the performance of this industry in 2007 has a considerable effect on measured GDP growth in 2008. The quarterly growth path is much smoother when mining, quarrying and utilities are excluded.

Tensions remain
Although the performance of the Dutch economy this year and next will not match that of previous years, existing tensions will not suddenly dissipate. In 2008, actual production will exceed potential production by 2%, considerably above the low of -1¼% recorded in 2003. Only next year, when GDP growth slows further, will the output gap diminish slightly.

The labour market remains tight. This year, unemployment will decrease to just over 300,000 persons. This means that about 4% of the working population is jobless, a full percentage point below the estimated equilibrium level. Unemployment will rise somewhat next year.

Wage growth and inflation on the rise
Contractual wages are expected to increase this year by 3¼%, and next year by 3¾%. Low unemployment and rising inflation exert upward pressure on wages. Inflation will reach 2½% this year and 2¾% next year, picking up steam during the second half of 2008, in particular. By then, housing rentals, energy prices, the air flight tax, and excise duties will push up the general price level. But the main factor that drives up inflation this year is an increase in production costs. Both unit labour costs and the cost of capital are rising. Early next year, the planned increase of the VAT (from 19% to 20%) and the rise of excise duties on alcoholic beverages will push up inflation even further. Only in the second half of 2009 is inflation set to diminish.

Consumption keeps rising
Private consumption is projected to grow by 2% this year. When institutional change in health insurance is excluded (instead of policyholders enjoying a no-claim discount, as they did the last couple of years, they are going to bear a certain amount of own risk), then consumption growth amounts to 1½%. Real disposable household income grows less this year than it did last year, but the negative effect that this has on consumption expenditure will appear only later. Nonetheless, decelerating house prices and the recent weakening of the stock market affect consumption negatively. The projections additionally take into account a small, positive anticipation effect on consumption that arises in 2008 from the VAT hike that will occur 2009. This anticipation effect also lowers consumption in 2009. Next year, private consumption expenditure growth is projected to be a mere 1%. The increase in real disposable household income will then probably be half a percentage point higher than this year, but again, this will not immediately be reflected in higher consumption growth.

Capital formation weakens
The investment of firms in capital equipment is expected to grow by 7% this year, up from 6% last year. Next year, however, capital formation is projected to decrease. Corrected for non-cyclical investment (such as in aircraft and energy projects), capital formation will slow down already this year, and even a 3½% decline is projected for next year. The main cause is a decrease in production in the private sector. In addition, rising labour costs and rising interest charges lower profits, reducing firms' own financial resources. Finally, tighter credit conditions also play a part.

Export growth declines sharply
This year, export growth (re-exports excluded) slows down almost by half, compared to last year. Whereas domestically produced exports grew by 4% last year, they will increase by only 2½% this year. Exports are expected to recover slightly in 2009. This growth path mirrors the projected dynamics of relevant world trade. Additionally, the Dutch export performance obviously depends on the Netherlands' competitive strength. As a result of the appreciation of the euro and the increase in unit labour costs, the Dutch economy loses some ground to its competitors, both this year and next. That being said, re-exports will continue to grow more quickly than domestically produced exports.

Government runs increasing surpluses
The general government balance in 2007 is estimated to have been the equivalent of 0.6% of GDP. The surplus is expected to rise to 1.1% of GDP this year, before reaching 1.4% next year. The principal drivers behind the government surplus include the rising tax revenues, which can be attributed to prevailing favourable economic conditions, and the continued rise of the oil price, which increases the revenues from the sale of natural gas. If cyclical factors, gas sales, and interest payments are excluded from the budget, however, the balance is seen to deteriorate both this year and next.

The free interplay of market forces enhances productivity
Special attention in Central Economic Plan 2008 is given to competition, regulation, and productivity growth. Since 1975, many markets worldwide have been functioning more smoothly. The Netherlands is no exception in this regard. In several OECD countries, changes in competition policy have led to increased competition among producers of goods and services. Although the US and Great Britain have taken the lead in this field, France and Germany also began to make some changes about a decade ago. From a purely theoretical point of view, it cannot be stated with certainty that increased competition will always lead to higher productivity growth, and with it greater social welfare. While competition compels firms to invest in innovation in order to maintain their competitive edge, fierce competition may reduce profits to the extent that investment no longer pays. Empirical research into the UK economy has shown that the former effect is actually more often stronger than the latter. In certain industries, moreover, the positive effect of competition on productivity turns out to be surprisingly large. In various industries in the Netherlands enhanced competition has contributed positively to productivity growth as well. From the nineties onward, competition policy has promoted productivity.