Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
Netherlands Towards a triple dip? Country Risk Level MEDIUM
Overview There is no longer any doubt about the double dip expected in 2012. After virtually zero growth in the first two quarters (+0.1% q/q), GDP contracted markedly in Q3 (-.1% q/q) under the weight of political uncertainty in the run-up to the early elections in September and the renewed weakness in global activity. In addition to the ongoing decline in investment (for the fifth consecutive quarter) and the acceleration of the decline in consumption (for the seventh consecutive quarter), exports slumped (-2.4% q/q). The contraction in GDP promises to be substantial (-0.9% in 2012) and the outlook for 2013 remains bleak: household consumption should continue to suffer from excessive debt and the acceleration in fiscal consolidation process, while investment should continue to suffer from overcapacity in industry. Only a rebound in exports in the second half of the year can prevent a new recession in 2013 - a year marked by significant budgetary adjustment. 2014 should see a more pronounced recovery.
A recovery in exports, an essential growth engine, may be a long time coming. Exports, which are crucial for the performance of the economy given their weight in GDP (80% at end-2011), recorded a marked decline in Q3 2012, while the decline in order books, exten- ded into Q4, is likely to cap any noticea- ble recovery in the short term. However, exports are expected to gain more momentum from mid-2013 onwards, supported by foreign trade outside Europe. The decline in house- hold purchasing power is likely to curb imports, which should pave the way for a positive contribution of foreign trade to growth in the coming two years.
Household consumption will be constrained by negative fundamen- tals for a long time. The downturn in the job market, while substantial, is not the only negative factor. Household debt levels are still excessive (150% of gross disposable income), in addition to which property prices continue to decline (-11% since the 2011 peak) and the decline in gross disposable income (for the fifth consecutive year) is wei- ghing on the burden of debt servicing and eroding household purchasing power. The latter will continue to be weakened by the austerity measures implemented throughout 2012: wage freeze, reduction in pensions, 2 pp hike in the VAT rate to 21% and tax increases. Against this backdrop, hou-
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sehold confidence, which is back at its 2009 low, is likely to remain depressed and fuel the rise in precautionary savings.
Investment is unlikely to rebound until 2014. The lack of vigor in activity rapidly spread to the health of compa- nies, with the upturn in insolvencies that started in 2011 continuing to gather pace throughout 2012 to reach +23% at end-October. The outlook is for a fresh all-time high of 8,900 insolven- cies over the year, and slightly more still in 2013 (9,070). Business invest- ment is expected to contract again in 2013, once more hampered early in the year by overcapacity and a very high corporate debt load. In 2014, the out- look is expected to improve on the back of a recovery in exports and a stabiliza- tion of the labor market.
The construction sector could hit a trough in 2013. Having contracted sharply in recent years following the bursting of the property bubble, the construction sector should begin to gradually pick up in 2014. Regulatory changes on rent price setting and a reduction in taxes on property trans- fers could boost investment in rental housing; a recovery in demand for hou- sing could lead to an upturn in buil- ding permits and a gradual rise in pro- perty prices, which are currently 30% below their pre-crisis peak.
The political will to reduce the deficit to -3% of GDP in 2013 remains firm. While the reduction in the fiscal deficit is likely to prove limited in 2012 (-0.4 pp of GDP to -4% of GDP), a return to -3% of GDP from 2013 seems credi- ble. The coalition government, in power since mid-October following the early elections in September, has indeed succeeded in passing a series of fiscal measures (spending cuts, tax hikes, pension reform). Thus, public debt is likely to remain contained at 73% of GDP in 2014._AB/ML
To watch…
>The trend in export order books. >The trend in the real estate market. >The reduction of the fiscal deficit to 3% of GDP in 2013. >The stability of the coalition government in light of its fragile majority (53%)._