The Netherlands falls into a technical recession

Dutch GDP contracted in the second quarter of 2023 by -0.3% quarter-on-quarter, following a contraction of -0.4% between January and March.

GDP in the second quarter was also -0.3% smaller compared to the same quarter in 2022. The main reasons for the quarter-on-quarter contraction were falling goods exports, falling consumption of households and an increase in imports.

The performance of Dutch exports was as weak as during the first months of the year, with a contraction of -0.7% in the second quarter. This was solely due to a decline in goods exports of -1.4%, as service exports expanded by 2.5%. The net trade contribution to GDP growth (-1.0% point) was even worse than these numbers suggest, as imports rose (0.5%) both in goods (0.7%) and in services (0.1%).

After net trade, it was the falling consumption of households that provided the largest drag on GDP growth (-0.7% point), as the contraction was a very considerable -1.6% quarter on quarter. This was much worse than anticipated based on preliminary monthly figures. Dutch consumers bought less abroad and, against expectations, also reduced their consumption of domestic services. At the same time, the consumption of domestic food, beverages and tobacco also fell, in line with forecasts. Consumers living abroad purchased more in the Netherlands, however.

Investment excluding changes in inventories expanded as expected, by 1.3%. The quarter-on-quarter growth of gross capital formation was especially strong in transport equipment (9.9%), machinery and other equipment (2.6%) and non-residential buildings (1.2%). Investment in intangible assets (0.2%), such as software and databases and R&D, stagnated, while there was less investment in ICT equipment (-0.5%), infrastructure (-1.0%), and housing (-2.2%).

The change in inventories was positive, providing a large contribution (0.9% point) to the GDP development. This increase came as a surprise, as a large share of firms in retail and manufacturing have considered inventories as “too large” for quite some time now (according to recent surveys by the European Commission) and therefore was expected to reduce further.

Government consumption expanded by 0.7%. This direction was anticipated, in line with the ambitious coalition agreement of the government (that fell recently). Growth was particularly strong in collective government consumption (1.3%) but also visible in individual final government consumption (0.4%). Employment figures suggest that the latter could be driven by both healthcare and education consumption.

Among Dutch industries, agriculture and fishery (-4.1% quarter-on-quarter) contracted the most. The trade, transport and hospitality sector (which includes retail, of which sales volumes dropped by -0.4% QoQ) declined by -2.0%, and given its large size provided the largest negative contribution to the GDP development (-0.4% point). Water utilities (-1.5%), construction (-0.5%) and manufacturing (-0.3% QoQ) also contributed to the recession. The contraction of industrial production was most pronounced in tobacco, beverages, machinery, basic metal, clothing and construction materials.

There was growth in value added of mining and quarrying (i.e. oil and gas, at 10.9%), the energy supply sector (8.5%), recreation and culture (6.1%), semi-public services (1.2%), business services (0.8%), ICT (0.4%), the financial sector (0.2%), and real estate (0.1%).

Looking ahead, we see a very flat GDP, with quarterly growth figures remaining close to zero. The second quarter figures at first glance do not seem to call for a substantial change to the view that there will be growth of a few tenths of a percentage point for all of 2023.

One positive is that wage growth surpassed inflation, but the repercussions of higher interest rates and weak international developments continue to weigh on the Dutch outlook. We see that sentiment figures are worsening and the fall of the government may also slow government expenditure growth a little bit. With a still-tight labour market and firms expected to hoard labour, we're not anticipating a deep recession with high levels of unemployment.