The Dutch Economy Chart Book: What goes up must come down

Dutch GDP growth is still close to potential, but business cycle momentum is fading in the market sector. This is most visible in the deceleration of private investment. Domestic demand is the main growth driver, in part due to tax relief in 2020. We project only a minor slowdown in GDP growth from 1.7% in 2019 to 1.5% in 2020. Without expansionary fiscal policy, the slowdown would have been more pronounced than currently projected.

Employment growth has maintained a surprisingly strong pace recently. The level of employment is at record highs, due to higher participation rates and ongoing demand growth. To the benefit of workers, recent employment developments involve fewer flexible contracts and fewer temping jobs and an acceleration of contractual wages in collective wage agreements to 3.2% year-on-year in January 2020.

Despite the record number of vacancies and a near record low unemployment rate of 3.0%, the labour market looks to be a little less tight in the near future. Leading indicators point in that direction. The share of Dutch companies with sales limitations due to labour shortages has slowly started to decrease, yet still from a high level.

The unemployment rate can really only go up. This may happen if the labour supply maintains its strong upward pace while employment starts to lose traction. If the participation rate of men returns to the pre-crisis peak and younger women continue to replace older workers with low participation rates, the labour supply could increase by 207,000 people in five years’ time.

For many years since the global financial crisis, private consumption was the main weakness of the Dutch economy, but strong labour market developments should benefit consumption growth in 2020. Still, households on average buy 4% (in 2018) fewer consumption goods and services on balance than in 2008. It may take somewhere up to 2025 before the average consumption level has fully recovered to the pre-crisis level. The share of household expenditures that was spent on basic needs (housing, health care, energy and food & beverages) is much higher than before the crisis.

Confidence among consumers has fallen considerably since mid-2018 to a long-term average level, in part due to looming pension cuts and the VAT-hike of 1 January 2019. Yet, we forecast accelerating consumption for 2020. The main reasons for the expected rise in 2020 are falling inflation, accelerating collective wages and labour income tax relief.