The Netherlands: Preparing for lift-off

Despite the fact that Dutch GDP hardly changed in 4Q20, shrinking only 0.1% quarter-on-quarter, 2020 will go down in history as the year with the largest post-WWII decline (-3.8%). While the Netherlands went into an arguably stricter lockdown in mid-December than in March 2020, with retail stores forced to close, the economic consequences so far have been much less profound. This can be explained by a number of factors:

1. Businesses adjusted their models (such as more restaurants switching to home deliveries) and got their distribution channels for online shopping in order. This has, for instance, boosted investment in transport equipment.
2. Consumers are more used to buying online, substituting service consumption for the purchase of goods.
3. There is less uncertainty. Vaccines have provided light at the end of the tunnel and fiscal support instruments are already in place, automatically fluctuating with a firm’s turnover. This means higher investment than during the first lockdown.
4. Manufacturing is holding up well, facing fewer input supply restrictions from e.g. China and stronger foreign demand. The Netherlands is benefiting from the recovery of world trade. While service exports are still weak, goods exports are higher than the pre-Covid peak.

Despite the relatively benign experience in 4Q20, we nevertheless expect the first-quarter figure to be worse. In particular, household consumption is expected to come in with more negative growth, as is indicated by a fall in the value of ING's debit card, IDEAL and cash withdrawal transactions (the total amount spent by consumers, based on their debit card, ATM withdrawals and online payments was 12% and 8% below normal in January and February, respectively) and in retail sales (-4% month-on-month in January).

Don't be surprised if lockdowns are extended

The lockdown will continue at least until the end of March and one should not be surprised if it is extended. In recent weeks, the extensions have often been accompanied by a piecemeal loosening of the social distancing measures. While the 9pm curfew and a maximum of one guest per day still hold, schools have reopened partially, most contact occupations (hairdressers, masseurs, driving instructors, etc.) have been allowed to operate again, shopping can be done via click-and-collect or by appointment, and sport is allowed for young people.

As of 31 March, bars and restaurants can serve guests on terraces and retail stores may get some more options to welcome back customers. Such a relaxation should translate into the beginning of a recovery in the second quarter, even though it will probably take more time for a full reopening of the economy. The government expects adults to have received their first Covid-19 vaccine injection only by 1 July, which suggests that much of the GDP rebound should happen in the second half of the year.

The government maintains sizeable support for the economy in 2021. Even though projected public Covid expenditures are lower for the full year 2021 than in 2020, the average per month with support is higher. The intended phasing out of support (mainly wage subsidies and fix cost compensation) has been scratched for the first two quarters; support continues to fluctuate automatically with the turnover of firms. Furthermore, the government announced in mid-February a National Education Programme aimed at making up for the lost years of schooling during school closures, which implies a cumulative €8.5 billion (1% GDP) additional spending for the next 2.5 years.

There will be general elections for the House of Representatives on 17 March. The outcome will determine the direction of fiscal policies of the Dutch government. Our earlier analysis of the policy proposals and their effects shows that most political parties, both parties currently in the government and also parties in the opposition, are opting for further increases in public spending for the next term up to 2025.

The direction of taxation depends more on the political composition of the next coalition – a centre-left government would increase the tax burden while a centre-right government is likely to go for lower taxation – but generally, the direction of almost all parties is a loosening of the fiscal stance. So for the medium term, economic developments are expected to be supported. Although this would imply a shift of the fiscal burden to future generations, and hence a possible need for an upward revision to our public debt ratio projections, it is likely that public debt in the Netherlands will remain low by international standards.

Despite ample support for the economy and the possibility of even more spending after elections, we currently still expect some negative repercussions of the earlier hit to the economy to play out. Most support measures will end in mid-2021, and this is when it will become more apparent which businesses are structurally viable. This should coincide with an increase of insolvencies and layoffs, but not to a level seen during the aftermath of the Global Financial, as the cause of the losses is more temporary in nature this time around. Still, policies are accommodative: a total of about €13 billion in tax deferrals need to be paid back by businesses, but they are allowed to spread the payment over no less than 36 months.