Eurozone rebalancing toward broad- based recovery · in our March report, with GDP growth of 1.8%...

Netherlands

EY Eurozone Forecast June 2015

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Eurozone rebalancing toward broad-based recovery

Outlook for Netherlands

Economy to continue its slow but steady recovery

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SpainPortugal

France

Ireland

Finland

Estonia

LatviaLithuania

Belgium

Slovakia

Austria

Slovenia

Italy

Greece

Malta

Cyprus

Netherlands

Luxembourg

Germany

• Although our forecast that the Dutch economy will grow by 1.8% this year is hardly spectacular by the standards of

in other advanced economies, such as the US and the UK, it will represent a marked improvement on growth of 0.9% in 2014.

• The main spur to activity should come from the boost provided to consumer spending

in the latter part of 2014 and early 2015, along with that of some other commodities,

around 0.6% in 2015. So even with growth in household incomes muted, real pay should see the biggest rise since 2009. Household spending will also gain from record-low borrowing costs.

• Meanwhile, Dutch exports, a relatively

from the weaker euro. At the end of May, the euro had dropped by 7% against the both the dollar and sterling since the beginning of 2015, providing a helpful counter to fairly soft demand in some of the Netherlands’ major export markets.

• That said, developments supporting activity will have to battle against continued headwinds facing the economy. Households remain heavily indebted, with many in a position of negative equity, and an environment of weak growth in nominal incomes will do little to aid deleveraging. At the same time, further restrictions on mortgage lending will constrain a recovery in the housing market. And a political

despite a relatively healthy budget position, will deny the economy the prospect of much support from the government sector.

• However, overall we now forecast a slightly stronger recovery than we were predicting in our March report, with GDP growth of 1.8% this year expected to be followed by 1.6% expansion in 2016 and then a similar pace in 2017–19.

Unemployment

2015

6.6%

Consumer prices

2015

0.6%

GDP growth

2015

1.8%

GDP growth

2016

1.6%

Highlights

1EY Eurozone Forecast June 2015 | Netherlands


Economy showing some signs of life …

The Dutch economy has put in a mediocre performance in recent years. Despite upwardly revised growth of 0.9% in 2014, GDP at the end of last year was still around 2% below the pre-financial crisis peak reached in 2008. However, a number of tailwinds to the economy point to 2015 delivering a better, albeit still fairly subdued, performance, with GDP growth seen at about 1.8%.

Quarterly GDP growth of 0.8% in the last three months of 2014 was the strongest rate since Q1 2011 and represented the third successive quarter of expansion, the longest sustained run since the beginning of 2011. This resulted in growth of 0.9%

in 2014 as a whole, up from –0.7% in 2013, and the best performance for three years. Meanwhile, the Q4 numbers continued to point to a broad-based expansion, with exports, investment and consumer spending all making positive contributions.

However, activity in Q4 was supported by some one-off factors, notably a temporary exemption from gift tax for parental gifts of up to €100,000 and less stringent caps on mortgage loan-to-value ratios. This contributed to housing transactions in Q4 rising to 20% above their level a year earlier.

With the effect of these measures washing out, some slowdown in growth in Q1 was predictable. Indeed, the quarterly growth rate halved to 0.4%, with consumer spending and investment slowing on the

rates seen in the last three months of 2014. That said, Q1 growth provided further signs of the recovery becoming more broad-based and less reliant on exports. And 2015 should still be a relatively positive year for the Dutch economy. In particular, lower oil prices continue to bode well for household spending.

… as prospects for households brighten

Dutch households have faced a tough time in recent years, reflecting in large part a squeeze on real incomes. Indeed, over the past five years, average real earnings have fallen by about 1% a year. However, consumers’ spending power is now being

Table 1

Netherlands (annual percentage changes unless specified)

2014 2015 2016 2017 2018 2019

GDP 0.9 1.8 1.6 1.6 1.7 1.6

Private consumption 0.1 1.0 0.9 1.1 1.4 1.6

Fixed investment 3.5 2.7 2.1 2.0 2.1 2.2

Stockbuilding (% of GDP) 0.0 –0.1 –0.1 0.0 0.0 0.0

Government consumption –0.3 –0.1 0.0 0.3 0.8 1.3

Exports of goods and services 4.0 2.9 3.6 3.2 2.6 2.2

Imports of goods and services 4.0 2.1 3.1 2.9 2.5 2.3

Consumer prices 0.3 0.6 1.3 1.4 1.5 1.6

Unemployment rate (level) 7.4 6.6 6.3 6.3 6.2 6.0

Current account balance (% of GDP) 10.3 10.8 10.9 11.0 11.1 11.0

Government budget (% of GDP) –2.4 –1.9 –1.6 –1.5 –1.3 –1.0

Government debt (% of GDP) 69.7 69.9 69.6 69.2 68.6 67.7

0.1 0.1 0.1 0.1 0.2 0.5

Euro effective exchange rate (1995 = 100) 123.9 114.4 113.1 113.3 114.7 116.2

Exchange rate (US$ per €) 1.33 1.11 1.07 1.06 1.09 1.11

Source: Oxford Economics.

2 EY Eurozone Forecast June 2015 | Netherlands

the collapse in the price of oil in the second half of 2014 and more recent falls in other commodity prices. On the European Union (EU)-harmonized measure, inflation averaged –0.5% in Q1 2015, down from 0.2% in Q4 2014, but then rose to zero in April and 0.7% in May.

A recent modest pickup in nominal earnings growth combined with falling prices pushed annual real wage growth up to around 1% in Q1. This was hardly a spectacular increase, but still the strongest performance since the end of 2009. We expect very low inflation to persist for much of this year, averaging only 0.6%

consumer spending.

Low interest rates, a corollary of a very low inflation environment, will also aid Dutch households, among the most heavily indebted in the world. In this respect, the program of quantitative easing adopted by the European Central Bank (ECB) is helping by depressing long-term bond yields, which have in turn reduced bank lending rates. Evidence of a gradual pickup in house prices will also help to improve the underlying balance sheet position of households, reducing pressure for consumers to deleverage.

A more buoyant outlook for households has been reflected in the European Commission’s economic sentiment indicator, which remained close to a four-year high in April. Rising sentiment is also being supported by a better performance in the jobs market. The number in work in Q1 2015 was 0.8% higher than a year earlier, the biggest rise in six years and the first quarter since the middle of 2012 to see year-on-year growth. So with a cocktail of favorable factors at work, we now expect household spending to grow by 1% in 2015, up from only 0.1% last year.

Investment should continue to see steady growth

A brighter outlook for consumer spending should create a more conducive climate for investment, particularly business investment. This would continue a theme. The second half of 2014 saw Dutch investment put in a very strong performance, with capital spending in Q4 up by 5.1% on a quarterly basis.

Figure 1Prices and earnings


% year

0

1

2

3

4

5

6

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Consumerprice index

Averageearnings

Forecast

Figure 2Contributions to GDP growth

Source: Oxford Economics; Haver Analytics.

% year

–4

–3

–2

–1

0

1

2

3

4

5

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Net exports

GDP

ForecastDomestic demand

Table 2

Forecast for Netherlands by sector (annual percentage changes in gross added value) 2014 2015 2016 2017 2018 2019

GDP 0.9 1.8 1.6 1.6 1.7 1.6

Manufacturing –2.1 2.5 1.5 1.0 1.3 1.3

Agriculture 6.0 1.8 1.6 1.6 1.4 1.1

Construction 0.6 1.5 3.0 2.5 1.8 1.7

Utilities 0.3 2.0 1.6 1.5 1.7 1.7

Trade 2.5 2.6 2.3 2.2 2.1 1.9

Financial and business services 2.4 2.4 2.2 2.1 2.1 2.0

Communications 3.5 2.8 2.3 2.3 2.4 2.2

Non–market services 0.4 0.2 0.1 0.6 0.9 1.2


3EY Eurozone Forecast June 2015 | Netherlands

Figure 3Consumption and investment


% year

–15

–10

–5

0

5

10

15

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Investment

Consumption

Forecast

Figure 4Misery Index*


%

5

6

7

8

9

10

11

12

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

However, the investment numbers around the turn of the year were flattered by a spike in residential investment, as homebuyers sought to take advantage of temporary tax breaks and looser controls on mortgage lending. So growth in investment is unlikely to run at such a strong pace this year — indeed, Q1 saw investment spending rise by a relatively modest 1.9%. What happens to bank lending will have some bearing on investment growth. Despite evidence of a strengthening economy, the stock of bank lending to corporations continued to decline at an accelerating pace during 2014. In Q4, the stock of loans to firms fell for the sixth successive quarter, leaving loans 5.2% down on a year earlier. The loosening of financial conditions implied by the ECB’s quantitative easing program suggests that both the demand and supply of lending should put

of a long period of economic weakness suggests that firms will continue to be wary about borrowing to invest.

Another development that will influence investment growth is the lower oil price. On the one hand, cheaper oil should boost the margins of many Dutch firms. But it will have an adverse effect on the small oil sector and potentially the more important gas sector. The Netherlands is the second-largest natural gas producer in Europe and the ninth-largest in the world, accounting for more than 30% of EU total annual gas production. In the past, sharp falls in the oil price have often coincided with large drops in the gas price. Indeed, with a large proportion of gas purchases indexed to the oil price, European gas prices have been on a downward trend since early 2014, with a pickup in the latter part of last year having since partly reversed. So while cheaper energy should deliver a net benefit to the Netherlands, it will not be an unalloyed blessing for investment or exports.

Dutch exporters to gain from a weaker euro

As the Dutch economy is relatively open (with exports representing over 80% of GDP), the euro exchange rate has an important bearing on the Netherlands. On that note, the sizeable drop in the value of the euro (down by around 7% against both the dollar and sterling since the beginning of the year — a weakening driven in part by the ECB’s unconventional policy actions) is good news for Dutch exporters, if less so for domestic consumers. And we expect the euro to continue to fall gradually, to about 1.05 to the dollar by the end of 2016.

But the boost to the Dutch economy should not be exaggerated. More than 60% of Dutch exports go to other Eurozone economies, and the important role played by multinational firms in the Netherlands in generating export earnings makes a fall in the exchange rate a double-edged sword — reducing the foreign currency price of finished products, but raising the cost of imported inputs. Overall, we expect to see exports growing by almost 3% this year, followed by 3.6% in 2016, outpacing import growth and thereby keeping the current account surplus high (at over 10% of GDP) in the coming years, despite the impact of lower gas export prices.

Slow recovery on track

The Dutch economy is faced with a significant level of household debt, tight fiscal policy and weak expansions in many neighboring countries. So tailwinds to growth from cheap oil and a cheap euro are unlikely to be enough to propel the Netherlands to very strong growth. That said, we have raised our forecast for GDP growth in 2015 slightly, to 1.8%, with a modest slowdown to 1.6% expected in 2016 and then a similar pace forecast for 2017–19. “Slow but

economy over the coming years.


4 EY Eurozone Forecast June 2015 | Netherlands

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