Subject: persbericht
Number: 7
Date: 19 March 2008
For more information, contact: Dick Morks (tel. +31-70-3383410), Mark Roscam Abbing (tel. +31-70-3383301), Johan Verbruggen (tel. +31-70-3383404), Wim Suyker (tel. +31-70-3383456) and Michiel Bijlsma (tel. +31-70-3383490)
During the press conference on December 18 from 13.00-15.00 PM, please contact Henk Kranendonk for more information (tel: +31-70-3383406)
Dutch economy will shrink by ¾% in 2009, meagre recovery in 2010
The credit crisis is causing a drop in economic activity in the Netherlands that has not occurred since the early 1980s. The Dutch economy is expected to shrink by ¾% next year. Exporting firms are being hit particularly hard by the international economic malaise. Furthermore, private non-residential investment is being inhibited not only by diminished production but also because the sources of financing are drying up.The new projections include a modest recovery of both world trade and the granting of credit. This will stimulate Dutch economic growth, resulting in an increase of 1% GDP in 2010. The uncertainties about the timing of the recovery are considerable, however. Due to the slackening economy, unemployment will rise markedly in the next two years, to 6½% in 2010. Lower prices of energy and raw materials will push down inflation, which will help to sustain purchasing power. The unfavourable economic situation will also be visible in the government balance. The budget surplus in 2008 will change to a deficit of 2.4% GDP in 2010. This deterioration can mainly be attributed to lower taxes, social security contributions and natural gas revenues, in combination with rising expenditure on unemployment benefits.
These are some of the headlines in CPB's December projections, published today. These quarterly projections contain analyses and forecasts for the world economy and the Dutch economy in the years 2008, 2009 and 2010. Because of the extraordinary economic situation due to the credit crisis, these projections include not only the usual forecasts for the present year and next year, but also a forecast for 2010. A separate document, also published today, explores in greater depth the causes of the credit crisis and the possible consequences for economic policies.
World trade volume will decrease next year
The problems on the international financial markets, which
were already substantial, have intensified since the bankruptcy of Lehman
Brothers on 15 September 2008. And the outlook seems rather bleak for nearly
all of the western economies. The economies of both the US and the euro zone
will shrink. Emerging economies will not be able to escape the financial
crisis, although GDP growth in China will remain high, compared to growth in
the rich countries. This will be followed by a limited recovery in the US and
the euro zone in 2010. Expansive monetary and budget policies in several
western countries will contribute to this upturn.
CPB, in contrast to other analysis and forecasting institutes, expects world
trade volume (the part that is relevant to Dutch producers) to diminish by
2¾% in 2009, due to the worldwide recession. These other institutes expect a
small increase in world trade in 2009. World trade has not decreased since
the early 1980s. (Dutch-relevant) world trade may show a modest growth of 3%
in 2010, as a result of the limited economic recovery in the US and the euro
zone.
Unprecedented uncertainties
The projections for the Dutch economy are surrounded by considerable
uncertainties. For how long and to what extent will the financial markets
remain hostage to the economic crisis? There are substantial downward risks.
The financial crisis might affect the real economy more than projected.
Research on financial crises in the past decades in Spain, Sweden, Norway,
Finland and Japan shows that crises such as the one we are now experiencing
usually last longer than normal cyclical downturns. Furthermore, the present
crisis stretches worldwide. To take account of the risk of even more severe
developments, CPB has made projections for an alternative scenario that
assumes lower world trade growth.
Unemployment will rise rapidly
This year will see an end to a period of three years of decreasing
unemployment. The labour market always reacts with a certain delay to a
decline in production. Unemployment will thus rise rapidly, especially in
2010- although in 2009 already it is expected to grow to 4½% of the labour
force. Unemployment is projected to be 6½% in 2010. The average number of
unemployed persons will then be almost 200,000 higher than it was in 2008.
This will undo the reductions in unemployment that occurred during the last
three years.
Moderate inflation and wage increases
As a result of the worldwide slackening of economic activity, prices of raw
materials- particularly the price of oil- have dropped considerably during
the last months. The oil price is projected at $50 per barrel Brent in the
next two years, almost half the average price in 2008 ($98). This will temper
inflation. The expected rise in the consumer price index is 1½% in 2009 and
1% in 2010, vis-à-vis 2½% in 2008. Together with the worsening labour market
situation, this lower inflation will have a moderating influence on wage
developments. Contractual wages are projected to rise at 3% in 2009 and 1½%
in 2010.
Wealth losses temper consumption growth
Household consumption, which will increase by 2% on average this year, will
show zero growth next year. It is remarkable that real disposable household
income will rise more in 2009 than in 2008, thanks mainly to lower inflation.
This positive effect will be undone completely by the effects of the losses
in wealth that have occurred. By the end of November 2008, the Dutch stock
market price index (the AEX) was almost 50% lower than it was at the end of
2007. This will considerably hamper consumption growth next year. The
projections assume that there will be no further losses in wealth in 2010. In
addition, since real disposable household income is expected to improve
somewhat in 2010, consumption will probably grow by 1½%.
Improving purchasing power in 2009 and 2010
Static purchasing power (which does not allow for individual changes such as
promotion, unemployment, marriage or divorce) will, on average, improve by
1¾% next year. Projected purchasing power in 2009 has improved considerably
compared to the previous projection (in September), thanks to the drop in the
oil price. Average income growth will be rather high in 2009, due, in part,
to the fact that many contractual wage settlements were based on expectations
of high inflation and low unemployment. Furthermore, employees will be left
with more disposable income because they no longer have to pay unemployment
insurance contributions as of 2009. The purchasing power of many old-age
pensioners will increase in 2009, in spite of the lagging indexation of
additional pensions. Pensioners 65 years and older with an income of over
34,000 euro will likely see a loss in purchasing power because they do not
benefit from the increased tax deduction for the elderly.
Firms invest less
The volume of private non-residential investments is projected to decline in
the next two years. There will be little need to invest in new machinery, due
to weak demand. Moreover, lower profits diminish the return on investments.
The credit crisis also leads to higher interest rates, making investments
more expensive. Finally, the stiffer credit conditions employed by banks will
make it more difficult for firms to find investment financing.
International slump strikes exports
The deteriorating international economic situation will probably lower the
exports of goods by 2¼% in 2009. Although price competitiveness will improve
because of the recently depreciated euro, this will be to little avail, since
both domestically produced exports and re-exports decline. It is expected
that especially re-exports will be touched severely. Compared with exports in
general, re-exports consist of relatively more goods that are cyclically
sensitive. World trade will pick up somewhat in 2010, followed by an increase
in exports. Re-exports, in particular, will profit from this development.
Public finance
The rapidly deteriorating economic situation will also rear its head in
public finance. The surplus in the general government budget balance of 1.3%
this year will become a deficit of 1.2% in 2009 and 2.4% in 2010. The adverse
economic development will manifest itself through substantially lower
receipts on taxes and social security premiums, and through higher
expenditure on unemployment benefits. In addition, government supports the
cyclical development by decreasing the tax burden. Next to the reduction in
the tax burden that has already been decided upon for next year, an
additional relief measure will allow an accelerated fiscal depreciation on
investments. The Dutch EMU debts are increasing considerably as a consequence
of the central government interventions in the financial sector. These debts
are countered by more possessions, so the net wealth position will not change
at first. The effect on the budget balance is limited, as the higher interest
payments will be accompanied by larger dividends and interest receipts.
CPB has published several articles today, all on the credit crisis:
- Tough times ahead: an article on the development of the Dutch economy and world economy in the years 2008-2010 (see above);
- The credit crisis and the Dutch economy...in eight Frequently Asked Questions: an article on the causes of the crisis and the actions that will be needed in reaction;
- Pension savings up in smoke: this article discusses the consequences of the credit crisis for pension funds;
- Don't throw out the baby with the bathwater: a column by CPB director Coen Teulings on the credit crisis.
Major changes needed in the financial sector and in supervision of the sector
The credit crisis will lead to adjustments in supervision of financial markets. Over the course of the past few years, too much credit has been made available worldwide, due to financial innovation, overly optimistic expectations and loophole-ridden regulation. The difficulties started last year with sub-prime mortgages in the US, leading to heavy losses for banks. Subsequently, banks lost money on other products, which strongly undermined their capacity to extend credit. At the same time, mistrust increased among banks, while disquiet grew among bank clients. Governments worldwide rightly took steps to avoid a situation of massive bank failures. This would, as it did in the 1930s, lead to a deep recession and widespread unemployment. The Dutch government has thus far committed 30 million euro in capital to banks, promised 200 million euro in credit guarantees, and extended the legislation governing deposit insurance. This crisis will lead to major changes in the financial sector and in the regulation of that sector. In creating new legislation, governments should take care not to overshoot, since efficient financial markets stimulate both investment and innovation. While the recent interventions by the Dutch government have been necessary, it is desirable that the state moves as quickly as possible toward decreasing its stakes in the financial sector, in order to avoid harmful economic effects.All of the above-mentioned articles were written for CPB Newsletter 2008/4 (in Dutch), which will appear on 18 December, 2008. Due to the special circumstances brought about by the credit crisis, all of these articles are also available in English.
