The Netherlands - Resilient consumers drive solid Q4 print
Q4 GDP growth of +0.6% qoq surprised to the upside and reflects an easing energy crisis, government support and strong employment growth. We expect further cooling of headline inflation but ongoing broadening of price pressures to core. We raised out annual average inflation forecasts (HICP) to 4.6% in 2023 and 4.1% in 2024. The labour market is expected to soften a touch, but overall tightness is here to stay. Given still elevated inflation, softening external demand and increasing monetary headwinds, we expect annual growth to slow to 1.2% in 2023 (from 4.5% in 2022).
As pointed out in our monthly, private consumption was remarkably sturdy in the final months of 2022. The fourth quarter upward surprise was mostly driven by solid consumer spending, investment and exports, pushing GDP growth to 0.6% qoq. Particularly in light of inflation (HICP) averaging 13% yoy in Q4 and low consumer confidence, this resilience in spending is remarkable. There are three reasons for this. First, ever growing employment – the net participation rate climbed to an all-time high of 72.9% in December – supported aggregate spending, and lasting labour market tightness also supports expectations of future job security. Second, the savings rate is on a downward trend since the pandemic. While still being higher than in 2019 we still see larger shares of income funnelled to consumption. Third, government support cushions the blow to disposable income from high (energy) inflation, especially in lower parts of the income distribution. The energy allowance of EUR 1300 granted to the minima, for instance, is roughly the equivalent of an extra month’s income.
Decomposing net exports, the positive contribution to growth was primarily driven by goods and re-exports, whereas services exports declined qoq. Weakness in services exports likely contributed to declining value added qoq of the export heavy financial services sector. Investments expanded compared to the previous quarter. Our calculations suggest that public investment was driving this expansion. We expect strength in exports and investment to be temporary and fade over the course of the first quarter, as eurozone demand is already softening and higher interest rates hamper private investments.
We expect growth to be lacklustre in the first quarters of 2023 as inflation remains elevated, external demand cools and the lagged impact of monetary policy tightening will increasingly be felt over the course of this year. Higher interest rates have already caused a clear correction of the housing market and the first signs of slowing loan demand in the broader economy are visible. Still we expect growth to pick up over the year as wage growth intensifies, making up some lost ground in purchasing power, the labour market continues to be a bright spot from the point of view of households, and the government supports growth with the price ceiling and other targeted measures as well as an ambitious investment agenda. Based on these factors, we continue to expect the Dutch economy to outperform the eurozone throughout the year and grow by 1.2% in 2023 and 1.3% in 2024.