Economic growth is picking up firmly
Household expenditure will increase as a consequence of the recovery of purchasing power and employment. Furthermore, investments and exports also rise, while unemployment swiftly decreases. Next year, the government budget will almost be in balance.
These are some of the headlines from CPB's short-term forecasts, as published today in the CPB Newsletter 2006/2.
Favourable international outlook
The international economic prospects, highly relevant for the Dutch economy, are favourable for 2006 and 2007. US growth picked up in the first quarter of this year, after being depressed by the hurricanes Katrina and Rita at the end of 2005. Because monetary policy is no longer expansive, and interest rates on the capital market have clearly risen, economic growth is likely to smoothen out somewhat.
The average increase of the Gross Domestic Product (GDP) in the euro area will probably improve from 1.3% in 2005 to 2.25% in 2006 - the highest growth rate since 2000.
Exports and investments are the most important contributors to the favourable development. Next year, GDP growth in the euro area is expected to lose momentum, mainly due to the restrictive budgetary policy in Germany, the recent appreciation of the euro, and the assumed increase of interest rates.
Oil price to an all-time high
This year, the oil price has further increased, to around 70 dollars per barrel in April and May. This high price is a result of political developments increasing the uncertainty about future supply, as well as of the substantial growth of demand in recent years, combined with a relatively limited rise in supply. For 2007, CPB expects a structurally high oil price of 70 dollars per barrel.
Dutch economy flourishes, thanks to increasing domestic expenditure...
… CPB expects economic growth to come out at 3% this year, falling back slightly to 2.75% in 2007. Contrary to previous years, total domestic expenditure (private consumption, investments, and government expenditure) will make a substantial contribution. Total disposable household income will increase, thanks to recovering employment and purchasing power. This positively affects the growth of private consumption in this year and next.
Private non-residential investment will probably rise strongly. In April, producer confidence reached its highest level since the year 2000. The expected revival of production growth will cause an increase in the capacity utilisation rate and profitability. This year, especially investments in machinery and computers are on the rise, resulting in a growth of total private investment of 8.5%. Next year, this growth is expected to slow down to 4%, mainly due to less investment in the aviation industry and public transport.
... and more exports
Exports continue to contribute substantially to Dutch economic growth. Especially the improving economic situation in the EU plays a central role in this development. Another factor is the modest turn for the better that the Dutch price competitiveness position will probably take in 2007, after deteriorations in all previous years of this decade. This year, 'made in Holland' exports will reach their highest growth rate since 2000.
The boom in re-exports will continue without abatement in 2006 and 2007. Driven by the ascent of China as manufacturing nation of consumer electronics, Dutch re-exports are expected to increase by double digits in both years.
Unemployment decreases rapidly
There has been a considerable reduction in unemployment since the end of 2005. For the first time since 2002, employment will show a substantial increase in 2006. This positive development is expected to intensify firmly next year. As a result, unemployment could diminish by 135,000 persons in two years; i.e. by almost 30%. Next year's decrease will be stronger, as employment always reacts somewhat tardily to production.
Rise in wages and prices continues to be moderate
Inflation is estimated to be 1.25% this year, after 1.7% in 2005. The abolition of the users' part of property taxes pushes down inflation this year, but it will no longer be influential next year. Rising unit labour costs constitute another upward effect on prices in 2007. On the other hand, energy prices will then probably contribute less to inflation. On balance, inflation is expected to be 1.5% next year.
Contractual wages are projected to increase somewhat faster. Mainly as a consequence of decreasing unemployment, the rise in contractual wages can accelerate from 1.75% in 2006 to 2% in 2007.
General government financial balance almost in balance
The Dutch EMU budget deficit, more than 3% in 2003, is now disappearing like snow in the summer. Despite an increase in expenditure because of new policy measures, only a small deficit is projected for this year and next. This positive development can be attributed to several things, among them the extra gas revenues (thanks to the high oil price), the picking-up of the business cycle, and the effect of previous policy measures to drive back the number of social benefit allowances.
Further in CPB Newsletter 2006/2
Apart from the table Main Economic Indicators with the economic prospects for 2006 and 2007, this issue of the CPB Newsletter contains a column by CPB director Coen Teulings about improving competition in healthcare, an article about childcare and paid parental leave, and a review of recent CPB publications.