The Netherlands - Government steps in to soften the blow

This is part of the Global Monthly, see here

In the second calculation by Statistics Netherlands, the stellar Q2 growth rate of 2.6% qoq was maintained. We expected a slight downward adjustment given revisions in recent figures due to economic volatility. This Q2 growth rate provides a solid basis for the second half of 2022, in which we expect a considerable slowdown in growth, ultimately leading to a small GDP contraction at the end of 2022 and start of 2023. For now, we maintain our full-year growth forecasts of 4.7% in 2022 and 0.5% in 2023. We expect this slowdown to be broad-based, led by external demand – reflecting our view of a serious recession in the eurozone including Germany (most important export destination). We already see this materializing in new export order components of producer confidence indices. Zooming in on sectors that are either energy intensive (chemicals and metals) or those integrated more strongly into global supply chains (textiles, transport), the drop in confidence is more profound. With the deterioration of external demand to continue over the coming months, we expect business owners to halt investments. Also in more domestically orientated sectors which take on a large share of investments, such as housing/real estate, we expect a cooling of investment activity, in part driven by the tightening of financial conditions.

GM Turning to the consumer side, with inflation (HICP) hitting 13.6% yoy in August and consumer confidence reaching a new low for the fifth consecutive month this year, one would expect the slowdown in consumption to already be more pronounced. Consumption growth is indeed slowing down, and our anonymised spending data for August and the first weeks of September point towards a continuation of this trend, but a sharp decline has not taken place yet. This is in part caused by the differences between the official inflation measure and the inflation rate that consumers experience ‘on the ground’. Around 50% of the current official inflation figure is caused by energy prices, but not everyone sees this reflected in the energy bill yet. In a previous article (see here), we signal that on average energy bills in August 2022 were up 26% yoy, which differs sharply from the 151% yoy increase reported by Statistics Netherlands. Still, as time passes, more and more households will face higher energy prices. This means that we still expect consumption to contract slightly at the end of the year. However, the extent to which consumption is hit depends on how big the blow to purchasing power will be.

On this year’s ‘Prinsjesdag’, the government announced a budget containing a EUR 17bn (2% of GDP) support package which will soften the blow to households’ purchasing power significantly. The budget contained tax relief through measures such as lower levies on gasoline, as well as handouts for the poorest. Meanwhile, the minimum wage was raised by 10%. The budget was outdated the moment it was presented, as a price ceiling for energy up until a usage threshold was announced additionally. As a lot remains unclear regarding this price ceiling, we hold on to our current growth forecasts. However, we believe this package to significantly ease the burden on households, especially those on the lower end of the income range, which will contain the expected drop in consumption. If any, this package combined with the stronger pickup in wage growth supported by the higher minimum wage risks fuelling demand more than what optimal policy would prescribe in an inflationary environment in which the supply side is constrained by, for instance, the historically tight labour market.