The Netherlands: Normalization continues, but with downside risks
Private consumption remains strong, but higher prices are weighing on consumer confidence. Pass through of higher energy prices in industry primarily confined to energy intensive sectors
In the coming quarter, the Dutch economy will turn the corner from catch-up driven growth resulting from the unwinding of Covid restrictions, towards a more normal growth profile. This shift was confirmed in recent monthly consumption figures for August. These showed that the volume of household consumption was still strong (+3.4% compared to August 2019), although coming off from July highs (which is likely largely seasonal). The decomposition of expenditure however showed a continued reversal of pandemic trends; consumption shifted away from goods and showed stronger growth in services. Services consumption increased by 9.7% compared to pandemic lows in August 2020 and durable goods consumption increased by 3.6% compared to August 2020.
The outlook for consumption points towards a slowdown, something we had expected given the fading catch-up effect. Consumer confidence has also declined in recent months, dipping below the long-term average in October. The main drivers of the decline were the willingness to buy and the expected financial situation, which can be explained to an extent by consumer fears for higher prices stemming from surging energy prices and supply bottlenecks. Indeed, the percentage of consumers expecting prices to rise faster in the coming year than at present rose to 49% in October, a multi-year high. Consumer worries over higher prices should be alleviated by just-announced government support measures that compensate for higher energy bills via a reduction in energy taxes. We ultimately expect inflationary pressure to dissipate during 2022, although these headwinds pose a downside risk to consumption in 2022.
It remains to be seen to what extent the supply-side of the economy will be hit by the current headwinds. Aside from the sectors hit directly by Covid restrictions, most of the Dutch supply-side was already at pre-covid levels of activity in the beginning of 2021. Producer confidence points towards continued expansion, and increased slightly again in September after the August decline. Industrial production also remains at historic highs. But if the expectations of producers in Germany – a major trading partner for Dutch producers – are any indication, a decline is on the cards, with the IFO index peaking in June and having since declined over the past three months.
One way to assess the impact of higher energy prices on the rest of the economy is to look at the extent to which higher prices are passed on. We find that the energy dependency of sectors matters a great deal in determining how much higher energy costs are passed on. Three sectors in Dutch industry, namely Food, Chemicals and basic metals production account for roughly 75% of total industrial energy consumption. These sectors have raised prices significantly over the past few months. Price rises in other industrial sectors have been notably more muted, meaning that only a relatively small share of Dutch firms are contributing to broader price pressures affecting the economy. All told, we expect these headwinds to weigh modestly on short term activity, but we see bigger downside risks to growth expectations from the second quarter of 2022.