The Netherlands - Growth to pick up before inflation starts to bite

The lockdown and the winddown of public Covid spending weighs on growth in the first quarter

Last Tuesday’s Q1 GDP report showed a flat quarter compared to 4Q21. Despite headline GDP not moving, the subcomponents painted a different picture. Consumption – both private and public – declined. For government consumption (-4% qoq) this was anticipated. The ramping up of testing and vaccination capacity during the pandemic has boosted public spending. Now that more than 70% of the population is vaccinated and new infections are low this capacity has been wound down. Lower government consumption weighed heavily on growth (-1 pp). Private consumption also disappointed (-0.1% qoq), reflecting the lockdown in January and part of February, still, we expect the rebound in the remainder of the quarter to be stronger. On the upside, investment continued to expand, continuing a trend from 4Q2021. Investment has been lagging GDP growth since mid-2021 when supply-chain issues materialised. The same issues and the war in Ukraine have also contributed to a decline in exports (-0.5% qoq), while the details showed a rebalancing in export composition. Goods exports declined but services exports, which had been lagging behind through the pandemic, continued their catch-up.

We expect a stronger second quarter before inflation starts to bite

As we expect a further recovery in global trade in the year ahead, Dutch exports should follow suit. In particular, the export of services is expected to normalise, boosting total exports in the near term. As for private consumption, our own transaction data point towards solid consumption growth in April and in the first weeks of May. We expect an expansion of private consumption in the second quarter. Services also plays a pivotal role here. Lockdowns left services consumption below trend. A further rebalancing in the composition of consumption is expected to drive consumption growth in the coming months. There are a number of other factors supporting domestic demand in the near term. Firstly, the significant stock of excess savings acts as an initial shield to price rises; secondly most households are currently not yet affected by energy price inflation as roughly 50% of Dutch households have longer term energy contracts with fixed prices. Thirdly, the tight labour market acts as a backstop for consumption. Indeed, most recent figures showed a new tightness record being set in the Dutch labour market: in 1Q22 there were 133 vacancies for every person unemployed, the highest on record.

All of this does not mean inflation will not affect growth. In the second half of 2022, as inflation broadens and more households become exposed to higher energy prices, we expect consumption to slow significantly. Similar to the broader eurozone, we currently do not expect a recession, however, and forecast 2022 growth at 3% and 1.3% in 2023.

The broadening of inflation and elevated energy prices cause inflation to stay high until the end of 2023

We expect CPI inflation to average 8% in 2022 and 3.8% in 2023. A major driver of this is elevated energy prices until the end of 2023, as the war leads to continued upward price pressure. Sustained elevated energy prices also adds fuel to second round effects, as more businesses pass-on higher energy and input prices to customers. The increase in core inflation from 2.1% in March to 3.5% in April signals this broadening and persistence of inflationary pressures.