Macro Economic Outlook 2007

Nevertheless, inflation and wage developments are expected to be moderate in 2006 and 2007. The budget will be practically balanced this year and next.

These are some of the headlines in CPB's Macro Economic Outlook 2007, published today. This Outlook (in short: MEV) contains analyses and forecasts for the world economy and the Dutch economy in the years 2006 and 2007. This issue also highlights two special topics: 'The importance of China for the Dutch economy' and 'The effectiveness of Dutch police: From more to better blue'.

US growth will decrease slightly in 2007; Chinese growth restrained, but still high
US economic growth was higher in the first half of 2006 than in the two preceding periods, in part because of the powerful recovery after the hurricanes Katrina and Rita. At the same time, the American housing market started to cool down. This development is expected to persist this year and next, with a lower growth rate of the American economy in 2007 as a consequence.

Recently, the Chinese authorities have taken strong measures to moderate the exorbitant growth rates of the Chinese economy. Although these actions will have some restraining effects, economic growth in China will probably still be very high in 2007: 9.5%.

Economy in the euro area is picking up
The business cycle in the euro area has continued its way up in the first half of 2006, not only because of exports but also thanks to an upturn in investments and consumption. Despite this recovery, contractual wages are expected to rise only moderately. The prospects for the euro area are favourable. Consumer confidence has improved considerably; producer confidence is higher than in the last six years. Economic growth in the euro area will slow down a bit, however, mainly because of the stringent budgetary policy in some of the larger euro countries, including Germany and Italy.

Substantial growth in the Netherlands
CPB expects firm Dutch economic growth of 3.25% this year, decreasing slightly to 3% next year. This marks the second phase of recovery, after an already substantially higher growth rate in the previous two years, compared to the meagre years 2002-2003. Adjusted for seasonal influences and workday effects, GDP volume was 1% higher in the second quarter of this year than in the first quarter. A similar high quarter-to-quarter growth rate occurred only once before during the last decade: in the first quarter of 2004.

Tightening markets
The output gap (i.e. the difference between the actual and the (estimated) potential level of production) was still negative last year, but will probably turn out to be positive in 2006 and 2007. This indicates that the economy is tightening more and more, which can be observed in both the labour market and the commodity markets. Since employment increases substantially faster than labour supply, unemployment will decline rapidly, with growing tensions in the labour market as a result. In 2006, unemployment is expected to be 4.5% on average: lower than the equilibrium rate of unemployment. The capacity utilisation rate, which indicates how tight commodity markets are, is expected to rise this year and next. The forecasted investments are not enough to make capacity development keep pace with production growth.

Consumers and producers spend more money
Mainly due to the favourable developments of employment and purchasing power, private consumption is expected to increase by 2% this year and next. The increased private consumption manifests itself especially in more consumption of durable goods.

Thanks to the higher production and the favourable level of profitability, producer confidence has risen sharply and entrepreneurs are more inclined to expand their capital stock. Gross fixed investment will probably increase for the first time since 1999. Compared to the nineties, however, the level of investment is still relatively low.

Inflation and wage rises remain moderate
Contractual wage rises in the market sector are expected to pick up to 1.75% in 2006 and 2% in 2007. The acceleration of the contractual wage rise is moderate in light of the rapid recovery of the labour-market situation, This is partly caused by the fact that collective labour agreements have already been effected for about one-third of the employees; the business cycle was less favourable at the time of the negotiations. The rise of contractual wages is somewhat higher than the expected inflation of 1.25% in 2006 and 1.5% in 2007. In both years, several government measures will have a mitigating effect on inflation.

Purchasing power in the lift
After three years of falling purchasing power, most households will probably be better off financially in 2006 and 2007 - on average, by 1.75 percent per year. The range of purchasing power effects is very wide this year, however, due to the transition to a new healthcare system. Consequently, the financial situation of part of the households is declining. In view of current policies, purchasing power will probably increase by 1.25 percent on average, thanks to a reduction of the tax burden and because the average wage rise is somewhat higher than inflation.

Budget in balance
This year and next, the government budget will roughly be in balance. The strong recovery of the EMU-budget balance since 2003 has mainly been caused by substantial adjustments and financial burden increases in 2004 and 2005, and by the cyclical recovery and the strongly rising gas revenues in 2006 and 2007. Next year, the gross debt of the general government will probably amount to less than half the value of the gross domestic product for the first time in 25 years.

Special issue: The importance of China for the Dutch economy
Since the end of the 1980s, China has experienced a spectacular economic growth of almost ten percent per year, due to economic reforms. This 'awakening' has strongly enlarged trade with the Netherlands. At present, almost 8 percent of Dutch imports originate from China, two-thirds of which is to be re-exported immediately. Dutch investments in China are, however, still limited. China's booming economic development has not influenced distinctively the Dutch labour market and income distribution, whereas inflation has been tempered somewhat, thanks to cheap imports from China.

Special issue: Effectiveness of the police: From more to better blue
Several mayors of major Dutch cities, including Rotterdam and Maastricht, have made safety their first priority. The great emphasis on safety has also led to more focus on the effectiveness of the police force. Inciting the police force to 'better blue' is a more cost-effective way of increasing safety than using the resources for 'more blue'. The challenge is then to stimulate a culture of experimenting, monitoring and evaluating within the police force, which is a necessary condition for a more effective use of current resources.