CPB: Dutch economy does not yet gather momentum

Economic forecasts - June 2004:

• The Dutch economy is expected to grow by 1.25% both this year and next.
• Unemployment rises to 7.25% on average in 2005.
• Next year real disposable income of households declines, due to lower real wages and higher taxes.
• This year the general government deficit will probably come out at 3% of Dutch GDP, falling to 2.75% in 2005.

These are some of the headlines of the most recent short-term economic projections of CPB Netherlands Bureau for Economic Policy Analysis, as published today. CPB Newsletter 2004/1 contains a table, summarizing the forecasts in figures. From now on CPB will issue CPB Newsletter on a quarterly basis. CPB press release, 'CPB launches quarterly Newsletter', offers more information on the new publications series.

The world economy

High oil price dims the pace of economic recovery
In the last months, the price of oil has increased again; early June the price reached the level of 39 dollar per barrel Brent oil. This is the highest price level since the early 1990's. Corrected for inflation the current oil price is not that high. In real terms, the oil price of the early 1980's was some 70% higher. Due to the strong demand for oil in the United States and in Asia, the risks of terrorist attacks in Saudi Arabia, and the low international oil reserves, the price of oil will probably remain high in the next year and a half. The oil price is expected to decrease slightly, from 34 dollar per barrel in 2004 to 32 dollar next year. The high oil price will dim the economic upswing a bit, but will not lead to a new recession in the world economy.

Robust growth in the US; hesitant recovery in the euro zone
The growth spurt in the United States continued in the first months of this year. The prospects for the American economy remain favourable, although the macroeconomic policy is getting less expansive. The American economic growth is expected to come out at 4.75% this year, slackening to 3.75% in 2005.
The volume of gross domestic product (GDP) in the euro zone has increased by 0.6% in the first quarter of 2004 compared to the preceding quarter. This implies a slight acceleration compared to the 0.4% growth in the fourth quarter of 2003; nevertheless the recovery is still hesitant. The slow growth pace is expected to continue in the next year and a half. The high oil price and the strong euro dim the economic growth. Estimated growth in the euro zone is 1.75% in 2004, expanding to 2.25% in 2005.

The Dutch economy

Economy does not yet gather momentum
The Dutch economy seems to have said goodbye to the recession. Still the economic recovery cannot be called firm, nor does the growth rate accelerate. Both this year and next economic growth is likely to amount to 1.25%. In both years the performance of the Dutch economy will be worse than average in the euro zone, and below the potential growth of the Dutch economy. Cutbacks in government expenditure, increases in the tax burden, higher pension contributions and wage moderation all have a negative impact on domestic spending.

Exports are the driving force for Dutch economic growth
Although the economic growth depends largely on exports, both this year and next, Dutch exporters cannot profit fully from the powerful growth of the world economy. The strongly increased labour costs and the appreciation of the euro in the last couple of years have weakened the competitiveness of Dutch firms. As a consequence, growth in exports of 'Made in Holland' products remains modest and the market share of exporters decreases. With growth figures of more than 10% the expected increase in re-exports can be described as exuberant. Many European distribution centres for ICT products are located in the Netherlands; the international demand for exactly these products is booming. Nevertheless, re-exports only have a relatively small impact on Dutch economic growth because not much value is added to these products.

Purchasing power decreases; scarcely any consumption growth
Last year households have restrained their consumption in favour of more savings. Private consumption fell by 1.2%. Consumption is not expected to decrease any further in 2004 and 2005, as the negative wealth effects due to the lower share prices at the stock market drain away. The main cause for the estimated small increase in consumption of 0.75% this year is the reduction in the services covered by the public health insurance. From this year on households have to pay physiotherapy, dental care etc. themselves.
For next year, zero growth of consumption is expected, because of an adverse development in real disposable income. The purchasing power of households diminishes due to the negative real wage growth (the average wage increase is below inflation), the rising pension contributions and higher taxes.

Decline in investments comes to an end
After three years of declining private non-residential investments, the negative trend is expected to come to an end this year. Next year investments will probably grow slightly, by 1%. Together with an increase in orders on hand, producers' confidence has expanded recently. Nevertheless, the recovery in investments will be modest as yet. Production growth will be moderate this year and next, and as a consequence the degree of capacity utilisation will not increase very fast. Moreover, the profitability of the market sector will remain low. Although the recovery of labour productivity and the moderate wage movements have a positive effect on profits, this is partly undone by the increase in pension contributions and the high oil price.

Worrisome developments in the labour market
The labour market situation can be called worrisome. Unemployment rises with 10 to 15 thousand persons every month, leading to an estimated average unemployment rate of 6.75% in 2004. The combination of low production and low profitability forces companies to reductions in the work force. At the same time employment in the public sector hardly grows any longer as a consequence of the cutbacks in government expenditures.
Next year, total employment is expected to rise slightly. However, as the working force grows faster, unemployment will increase again, up to 7.25% in 2005.

Low inflation...
In the first months of this year inflation has come down to just above 1%, with the 'price war' in Dutch super markets as an important factor to push inflation down. In April en May inflation has risen again, to 1.5% last month, mainly because of the continued effect of an increase in tobacco duties and higher petrol prices. For this year, inflation is estimated to come out at 1.5% on average, declining to 1.25% in 2005. Whereas inflation is pushed up by the higher petrol prices, the strong euro and the lower increases in wage costs have a moderating effect on inflation.

...still lower wage increases
Because of the low inflation rate and expanding unemployment, wage claims are moderate. This year the contractual wages in the market sector are expected to expand by 1.25% on average: slightly below the inflation rate. Next year, these contractual wage increases will probably go down somewhat further, to 0.75%. This corresponds with wage increases in new collective labour agreements equivalent to inflation.

Government deficit reduced to the EMU deficit limit of 3%
Last year the general government deficit has exceeded the 3% deficit limit of the Stability and Growth Pact. This was caused by the low economic growth, financial setbacks in (among other things) the health care sector, and high deficits of local governments. Thanks to the extra cutbacks in government expenditures and increases in the tax burden, this year the deficit is estimated to be at the borderline of 3%. In 2005 the general government deficit is expected to decrease to 2.75% GDP.

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