CPB Report: Economic boom although growth decelerates

CPB Netherlands Bureau for Economic Policy Analysis has lowered the growth expectations for 2001 from 4% in September 2000 to 3.5% now because of a lower growth of both exports, investment and consumption. Exports will probably expand by 8% in stead of 9%, as a consequence of a slow-down in world trade growth. Investment growth is tempered to 4.25% for private non-residential investment and 2% for private residential investment.

Consumption growth 4% in both 2000 and 2001
In 2001 consumption growth will probably be as high as in 2000 (4%), although the growth in net household incomes will accelerate to 5%, owing to the net burden relief within the framework of the tax reform. The expected lagging of consumption growth behind net household income growth can be explained in three ways. Firstly, next year the wealth effects on consumption, caused by the booming housing and stock markets, will probably wane appreciably. Secondly, consumers will probably bring forward some purchases in anticipation of the VAT increase on 1 January 2001; consumer spending will thus come out higher in 2000 and correspondingly lower in 2001. Thirdly, it should be borne in mind that part of the additional consumption due to the burden-relief-induced rise in net household income will not be applied until 2002.

Inflation will temporarily rise further
Inflation, measured in terms of the consumer price index (CPI), will, on current estimates, reach 4.25% next year, compared to 2.5% in 2000. The higher inflation can be explained in part by the increase in indirect taxes within the framework of the tax reform. As far as purchasing power is concerned, this effect will be easily compensated by the cut in direct taxes.

Tight labour market will push up earnings growth
In 2000 contractual pay rates will probably increase by 3.25%. For next year contractual pay is projected to accelerate to 4%, although the introduction of the new tax system will be accompanied by a substantial burden relief and a fall in the 'replacement rate' (i.e. the ratio between a net benefit and a net earned pay). The upward pressures on earnings growth are the higher inflation rate and the tight labour market. These seem likely to more than offset the moderating impact of the tax reform. Recently concluded collective labour agreements point to some acceleration in contractual pay rates.

World economy
CPB expects the volume of world trade to expand by 13% in 2000 and 9.25% in 2001. Economic growth in industrial countries is slowing down because of the tight monetary policy in many countries and the higher oil prices. The soft landing of the US economy is developing as expected. Unforeseen was the persistence of high oil prices, while the euro weakened further instead of picking up, as projected. Given these circumstances, inflation forecasts for Europe have had to be revised upward for this year and next. Recent indicators point to an earlier and stronger cooling off of activity in the European Union than in our previous projection, with an estimated GDP growth of 3.25% this year and 2.75 percent next year. This slowdown is more pronounced than in the recent forecasts of some international organisations.

The forecasts, as presented above, are published in the December 2000 issue of CPB Report.

Also in CPB Report 2000/4
CPB Report is a quarterly, English language magazine, that reviews the most recent forecasts on the national and the international economy and highlights research activities. This issue contains articles on various subjects, including shortages of scientists, the mobility of capital within the European Union, economic consequences of EU enlargement; privatisation of Amsterdam Airport Schiphol and the public interest; and the relation between home-ownership and labour market mobility.

Relation between home-ownership and labour market mobility
CPB has examined whether home-ownership impedes the flexibility of the labour market. The idea was that home-owners might be less likely to switch jobs because they are less willing to move to another region. As a result, home-owners could be more vulnerable for unemployment. CPB research results indicate the opposite. Compared to renters, unemployed home-owners are more likely to move. Nevertheless, home-owners in general change jobs less often than renters do. Home-owners, moreover, are less likely to become unemployed. All this suggests that home-owners possess hidden characteristics that protect them from (the ill effects of) unemployment. Home-owners are not easily willing to move, unless prompted by unemployment. This suggests that a large owner-occupied housing sector impedes job mobility on the labour market, thereby diminishing its flexibility. This may be caused by the large transaction costs on the housing market, of which the real estate sales taxes are a substantial part.

Privatisation of Amsterdam Airport Schiphol and the public interest
At this moment the government is stakeholder, owner, policymaker and regulator of Amsterdam Airport Schiphol. The regulation on for example noise levels, safety and spatial planning is likely to become more transparent after privatisation. This may be the most important reason to privatise.
However, a number of specific issues require special attention. There might be a difference between the commercial interest of the privatised airport and the public interest.
Being a private company, an airport will make investment decisions on the basis of profitability. This can lead to situations in which the airport does not have an incentive to reduce noise levels nor to pursue cluster and agglomeration effects.
Privatisation can also lead to myopia, i.e. pursue short-term interests at the expense of long-term interests. In other sectors, this could lead to takeovers or even bankruptcy. Both these market corrections seem either unfeasible or undesirable in the case of this airport. This calls for government regulation