More help for Dutch consumers after longer-lasting technical recession

Looking at the hard data, July was a bad month for GDP. Domestic consumption of households, goods exports and investment, in particular, fell in constant prices, while imports expanded. Manufacturing production contracted in July, while mining & quarrying (i.e. gas production) and construction expanded. Retail sales and car registrations fell in July-August. Furthermore, surveyed non-financial businesses became more pessimistic about sales/production in August and even more so in September. One of the few positives for service exports is the rise in the number of overnight stays of foreign visitors. All in all, we are projecting another mild GDP contraction for the third quarter.

There are signs, however, that the Dutch economy will perform a bit better in the fourth quarter than in the preceding three months, even though the fourth quarter looks worse than the third for the rest of the eurozone. The Economic Sentiment Indicator for the Netherlands moved up slightly for two months in a row in August and September. This was mostly thanks to the large service sector. Underlying indicators for expected demand and production improved for industry, retail and commercial services in September.

Consumers have generally remained quite downbeat in recent months. However, one positive sign for consumption going forward is that house prices have stopped declining, with a significant increase recorded in August following two months of stagnation. Furthermore, wage increases will more clearly outpace inflation in the fourth quarter and beyond. This, combined with an expanding public sector and a little export growth, will need to offset a forecast decline in investment.

Meanwhile, more growth can be expected from consumption in 2024 than assumed previously, as parliament has proposed amendments to the government budget worth 0.4% of GDP. These measures, such as the freezing of fuel excise taxes, higher minimum wage and higher statutory pensions, should support low (middle) incomes. The policy changes come on top of the 0.2% of GDP package of purchasing power measures which has already been proposed by the government.

The government advised against many of the proposals from parliament because these are often untargeted and in many cases, against the government’s own fiscal rules (e.g. additional expenditures have to be financed by cuts in other expenditures). The government has also indicated that the accompanying proposed revenue measures are not as easy to implement (as of 1 January 2024) or as big as portrayed, which means that some changes will have to be made. This week, the debate continues.

Assuming that at least some measures will be adopted, we have raised the profile of the consumption of households a bit. This is because we expect some redistribution from firms, the wealthy and higher incomes (with a low marginal propensity to spend) to low (middle) incomes (with a high propensity). The expected effect on the budget balance is negligible, as we expect only funded measures to be adopted. Still, this should allow for positive GDP growth in 2024 (0.7%).