Dutch economic growth returns amid solid export growth

The second quarter GDP growth rate that Statistics Netherlands (CBS) reported today was even better than expected in our recent monthly forecasts (0.6%). This strong 1.0% rate follows a quarter-on-quarter contraction of 0.3% in the first quarter amid a weak trade environment. It also brings an end to a period of seven quarters of stagnation with mild contraction.

GDP growth translated into an expansion of employment in the second quarter, albeit at a slower pace than in previous quarters, as weak GDP did not prevent more people from obtaining a job. Although the strain on the labour market is decreasing somewhat now that labour costs are increasing, the number of vacancies is still higher than the number of unemployed people. A lack of personnel remains the most often reported main factor limiting non-financial businesses.

The Dutch economy particularly benefited from an improvement in foreign demand in the second quarter. Total exports expanded by 1.3% QoQ, much in line with our forecasts. This improvement was thanks to the considerable growth of goods exports, which expanded by 1.7% QoQ. The industrial production figure suggests that this solid goods export performance was to some extent driven by the pharmaceutical industry, chemical industry, basic metals, and mining & quarrying. Service exports continued to grow, up 0.5% QoQ in 2Q24. The trade balance also increased, as imports rose at a much more subdued (0.5%) pace than exports. This was in part due to the fact that Dutch consumers bought less abroad.

Government consumption expanded by a very solid 1.0% quarter-on-quarter, in line with expectations on the intended expansionary fiscal policy. The number of hours worked, in particular, increased in public administration and the health sector.

Investment expanded moderately (0.4% QoQ), helped by purchases of transportation equipment and ICT equipment. Still, the lagged effects of subdued demand, elevated interest rates and the low number of construction permits seemed to have further hit capital expenditures in non-residential real estate.

Inventories were reduced further in 2Q24. Retail was particularly downbeat on purchasing orders. But because the pace of the reduction of inventories was lower than at the start of the year, this development provided a positive contribution to GDP growth in the second quarter (0.3 percentage points).

The only big substantial drag on GDP in the second quarter came from household consumption, which contracted by 1.0% quarter-on-quarter. While this was in line with the weakness that we observed among consumers (becoming more pessimistic and purchasing less) and in the retail sector in recent months (falling sales and sentiment), this is somewhat at odds with our view for the rest of the year. Purchasing power is rising considerably as high contractual wage growth (around 6.5% year-on-year) is outpacing inflation (around 3% year-on-year) considerably. Also, the overall consumer confidence indicator was still higher in 2Q24 than in 1Q24. Concerns about unemployment and inflation, however, rose in the second quarter. It is quite likely that this is related to very visible elements of (expected) inflation, such as hikes in the tax on tobacco (in April) and housing rents (in July). Furthermore, compared to last year, the improvement in purchasing power is now less concentrated among low-income households (which usually have a high propensity to consume), which has led to a higher savings rate at the macro level.

Among Dutch industries, manufacturing was among the best performers in value added growth in the second quarter, expanding by a strong 3.3% QoQ. Culture, recreation & sports, business services, and construction were also growing well while trade, hospitality, transport & storage, the semi-public sector (government, education & health), and ICT also showed an expansion at a slower pace. Financial services, the energy supply sector, agriculture & fishery and real estate contracted.