The Netherlands - Minor 2023 growth upgrade due to gas price cap

This publication is part of the Global Monthly of October 2022

As signalled since the start of this year, we expect the Dutch economy to slow by the end of 2022, ultimately leading to a small contraction in Q4. Supportive of this view, we saw the first cracks appearing at the end of Q3 in the form of slower economic activity and faltering demand. The slowdown is being driven by a more rapid deterioration in the external environment compared to the domestic economy, where demand is also slowing but less profoundly. ­For the first time in two years the headline NEVI manufacturing PMI points towards a contraction in business activity. So far, the ability of industry to keep production broadly stable, while sharply reducing gas consumption, has been remarkable. However, weaker demand is now weighing on the outlook. Headwinds in part coming from the energy crisis may have already tipped the eurozone into a recession in Q3, which is visible in demand for Dutch goods. New (export) orders contracted sharply, and this drove the headline deterioration of the PMI. Two bright spots included: 1) current orderbooks still suggesting an increase in backlogs, which buffers the slowdown, and 2) the share of firms reporting shortages of materials which limit production is decreasing on the back of globally easing supply bottlenecks.

On the domestic front, with each passing month, more households are exposed to higher energy prices which is weighing on private consumption. Our anonymised transaction data shows a slowdown in private spending over Q3, with consumption outright contracting year-over-year in September. This picture is echoed by declines in retail and – to a lesser extent – services confidence indices. Details of the government’s energy price ceiling have come out. It is estimated to cost another EUR20 bn on top of the earlier announced package of EUR17 bn. The generic support coming from the price ceiling as well as the fact that the package is redistributive, means that purchasing power for the lowest income households will actually improve over 2022-3. As such, we expect a smaller overall hit to consumption next year than we did previously. On the back of these measure we have lifted our growth forecasts for 2023 by 0.2pp: from 0.5% to 0.7%. For 2022 we continue to expect 4.6% growth.

Energy is not the only headwind that the economy is facing. Higher interest rates are also lead to a much needed cooling in the Dutch housing market. After double-digit price rises in the past two years, recent figures show declining prices in Q3. We expect this correction to continue in the coming quarters, which means that we have adjusted our yearly house price forecasts to +14% in 2022 and -2.5% in 2023 (previously +15% and +2.5% respectively). In the past, house price corrections have constrained consumption due to the decreased wealth effect, as households are forced to deleverage instead of consume. Our current take is that this outlook means house prices will be less supportive of consumption going forward; the negative effects on consumption are present only for the small share that faces negative equity problems. The strong price rises in recent years limits the share of households that are likely to face these problems. Recent buyers – often first time buyers with high LTV-ratios – will bear the brunt, but their share from a macroeconomic perspective is limited. The downside hit to consumption would naturally be bigger should the drop in house prices turn out to be larger.