The Netherlands - External weakness increasingly visible in activity data
The external weakness is being increasingly felt in the Netherlands.
We expect growth to slow from 4.5% in 2022 to 0.7% in 2023 and 1.0% in 2024
Inflation is declining but underlying pressures remain firm. Inflation to average 4.3% in 2023 and 3.4% in 2024
On the back of slowing global growth, the weakening in external demand is becoming increasingly visible in Dutch activity data. As we map out in our May several international indicators are in recessionary territory, and with the eurozone and Germany officially in a recession, if anything, more weakness on the external demand front is to be expected. This primarily affects the sectors that are most exposed to international trade and global value chains. Looking at Dutch industry, we see PMIs clearly in contractionary territory and industrial production is recording the largest year-over-year decline in more than 10 years (see for a closer look at Dutch Industrial PMIs). Despite the recent declines in wholesale energy prices since the peaks from last year, energy prices are still elevated compared to pre-Ukraine war levels. This explains why energy intensive subsectors such as chemicals and plastics are leading the production declines. Weak external demand does not only affect Dutch industry but has other knock on effects, for instance to other sectors such as transport, and we also see firms clearing out excess inventories in the face of slowing demand. From a macro perspective, we expect net exports to contribute negatively to growth over the year as a whole.
On the domestic front, pockets of resilience are keeping demand afloat, for now. Strong firm as well as household balance sheets are acting as an initial shield to higher rates. The expansive fiscal stance of the government is supporting growth in 2023, and the still very tight labour market supports household spending and is likely to keep nominal wage growth elevated for the coming year(s). Indeed, the labour market has not cooled much since the end of last year. The number of job openings continues to exceed the number unemployed workers, with a stable ratio over the last six months of 1.22. The unemployment rate is hovering around 3.5% since the start of the year, which is historically very low. We see some initial signs that labour demand is on track to normalise; future employment expectations by employers were elevated since the pandemic but are returning to longer term averages. Together with a further cooling of the Dutch economy, a continuation of the upward trend in bankruptcies (still below prepandemic levels) the labour market will cool further but stay tight historically speaking. Unemployment is expected to average 3.7% in 2023.
All in all we expect growth to remain very sluggish in the coming quarters. With the q-o-q decline in GDP in the first quarter, a technical recession is certainly possible. We continue to expect the domestic resilience of the Dutch economy to prevent a serious recession. But risks to the outlook are clearly to the downside, with possibly a larger than expected decline in external activity further impacting the Dutch economy, as well as of course the risks around the inflation outlook.
Indeed, inflation is on a downward trend, falling to 6.8% in May, sharply down from the peak of 17.1% in September last year, but underlying price pressures measured by core inflation are still rising (8.2% in May). We expect inflation to come down over the year and average 4.4% in 2023 and 3.4% in 2024. This means inflation will remain above the ECB’s 2% target, mainly because elevated wage growth is likely to feed through to services inflation. With the Dutch economy running above capacity and eurozone core inflation having likely peaked, the risk that Dutch inflation will become a negative outlier in the eurozone, and stay persistently above target, had increased.