CPB Report 2001/3

• Slow-down in world economy drags on; projected recovery will be slow
• Dutch GDP growth 2% in both this year and next year
• Too early for a judgement on the macroeconomic impact of terrorist attack

Today, CPB Netherlands Bureau for Economic Policy Analysis published its latest forecasts for both the Dutch economy and the world economy. These forecasts do not take into consideration the latest developments in the United States, since the cut-off date for the projections was early September. At this moment it is too early to give a well-balanced judgement on the macroeconomic impact of the dramatic events in the US. The impact will mainly depend on the possible effects on the crude-oil price, the euro/dollar exchange rate, consumer confidence and investor confidence, both in the US and in the rest of the world.

World economy will recover slowly from slow-down
This year, the world economy shows a sharp slow-down. When the recovery sets in, it will be slow and erratic. The US economy has shown some first weak signs of a recovery. A forceful upswing is not projected, as the technology sector remains weak and consumer savings are on the rise. Growth in Asia and Western Europe should pick up, with a one- or two quarter lag relative to the US. GDP growth in the euro area as well as in the EU as a whole is estimated at 1.75% in this year and 2.25% in 2002. Economic prospects for Japan remain subdued; necessary structural adjustments could gravely harm employment.
World trade growth is expected to slow from almost 13% in 2000 to 2.5% in the current year. It could rebound to about 6.5% in 2002.
Inflation in the US and Europe started to decelerate during the summer and is projected to slow further over the forecast horizon. Deflationary tendencies in Japan will probably continue.

Dutch GDP growth decreases to 2%
CPB expects the Dutch economy to grow by 2% this year and next year. This means that GDP growth will dip below 3% for the first time since 1995. With the exception of public expenditure, all expenditure categories (export, consumption and investment) are showing lower growth rates than last year. The slow-down of export growth, in line with lower world trade growth, is the main reason for the lower GDP growth. In response to the cyclical downswing, investment growth will decline to around 1% this year and next.

Consumption grows less than purchasing power
This year, real disposable household income increases considerably, by 5.5%. This is mainly caused by the burden relief associated with the 2001 tax reform. Despite this sharp increase in purchasing power, private consumption will only rise moderately this year: 2.25%. In part this is due to the less favourable developments in household wealth. This contrasts with the recent past, when surging wealth gains through home ownership and share ownership in particular led to a situation where consumption growth exceeded the increase in disposable household income.

Labour market
The lower output growth has a lagged effect on employment, which will still show considerable growth of 1.75% in 2001. As a result, labour productivity will actually fall. But next year employment growth is expected to decelerate to 0.75%. This will cause an increase in the unemployment rate to 3.75% in 2002.

Inflation and wages
Not least owing to a number of temporary factors like the foot and mouth disease outbreak and the VAT increase in the 2001 tax reform, inflation rises sharply this year to 4.5%. It is expected to fall back to 2.5% next year.

Government budget
Thanks to the strict budget policy and to the favourable economic development during the last years, public expenditure as a proportion of GDP will fall from 47.6% in 1998 to 45.1% in 2002. This is due above all to lower interest payments and lower social security outlays. At the same time, more resources are being allocated to health, education, police, justice and infrastructure.
After a period of chronic deficits, the EMU balance is expected to come out at 0.9% of GDP in 2002, marking the fourth successive surplus year. The tax and premium burden for households and businesses will be reduced by a total of 5 billion euro over the whole cabinet term.

Risks attached to projections
The projections for this year and next are, as usual, surrounded by considerable uncertainties, of which the most important ones have an international character. The strength and timing of the international recovery as well as the course of the euro exchange rate have a great impact on the Dutch economy's prospects. If the recovery of the US economy in the second half of this year is slower or weaker than assumed in the central projection, next years's GDP growth of the Dutch economy could easily be 0.5% lower.


Also in CPB Report 2001/3
The forecasts as presented above, are published in the September 2001 issue of CPB Report. CPB Report is a quarterly, English language magazine, that reviews the most recent forecasts on the national and international economy and highlights research activities. This issue contains articles on various subjects, including: enlargement of the European Union; housing subsidisation in the Netherlands; ageing, actuarial neutrality and flexible retirement; and the social costs and benefits of the Dutch R&D tax credit scheme.

Economic consequences of enlarging the European Union
In the long run, the enlargement of the European Union (EU) with countries from countries from Central and Eastern Europe (CEEC) will have a small positive effect of on average 0.07% GDP on the economies of the present fifteen EU countries. At the same time, it will have a much larger effect on the CEEC, on average 5.3%. Accession to the internal market and thus removing trade barriers is by far the most important effect of EU enlargement.
The shock of accession to the EU internal market differs substantially between industries. CPB researchers found that significant industrial restructuring will occur in Central and Eastern Europe after accession to the EU.

Housing subsidisation in the Netherlands
The current system of housing subsidisation and regulation in the Netherlands has several distortionary and distributional effects. First, at the present high level of house prices, renting a house turns out to be more attractive than owning it, especially for low-income households. Second, the tax system favours mortgage-financed home ownership relative to equity-financed ownership. Third, above a certain income level, the subsidy on the costs of owner-occupied housing rises with income.