Limited slow-down of Dutch GDP growth
- GDP growth 3,25% in 2001, 2,75% in 2002
- Exports growth near-halving compared to last year
- Private consumption growth still high
- Inflation temporarily at high level
- End to longstanding fall of unemployment
This year export growth is expected to slow down to 5.5%, which means a near-halving compared to last year. For 2002 the exports growth is forecast a little higher at 6.25%. The role of exports as the major growth engine will be taken over by private consumption.
Thanks to the considerable burden relief resulting from the recent tax reform, private consumption is likely to grow by 4,5% this year and by 4,25% in 2002.
Because of the lower growth rate, the projection shows an end to the longstanding fall in unemployment. Contractual pay rises and inflation will temporarily come out at high levels this year, both around 4%. Next year both growth rates are expected to slow down to 3% and 2% respectively.
Leading indicators suggest a near stagnation of US GDP growth in the first half of this year. One of the most hard-hit industries in the US economy is the computer and software industry. Its slow-down is affecting the East Asian economies, in particular, which depend on the export of semi-conductors and electrical equipment. Industrial production in this region fell steeply towards the end of last year, and activity is likely to remain depressed in the first half of 2001.
Latin America and the NAFTA region are highly dependent of the condition of the US economy and thus a substantial deceleration of production growth seems inevitable in these countries.
Up-to-now the European economy has been relatively little affected, but a slow-down in 2001 seems unavoidable. European GDP growth will probably fall from around 3.5% in 2000, to 2.5% in both this and next year.
In the first half of this year the international business cycle is expected to bottom-out. World trade growth in 2001 slows to 6%, but could accelerate somewhat in 2002 to 7.5 percent. The for the Netherlands relevant world trade volume growth amounted to 11% last year and is expected to slow to around 6.25% this year before picking up somewhat in 2002.
In 2000 inflation in the euro-area accelerated, mainly as a result of external price impulses, in particular from crude oil, and the effective depreciation of the euro. Both developments seem to have passed a turning point. Crude oil prices have fallen already substantially, and since November last year the euro has seen a steady recuperation, which is expected to continue its slow upward climb throughout this year and next. Consumer prices in the euro area could rise to 2% in 2001, on average, and will diminish to 1.25% next year.
Consumption, wages and inflation
Private consumption is taking over the role of major growth engine of the Dutch economy. Real household income will probably increase by around 5.25% this year, mainly caused by the considerable burden relief resulting from the tax reform in January 2001. This purchasing power impulse will take some time to be translated into expenditure, so private consumption growth will lag slightly behind income growth. In anticipation of the VAT rate hike, which took place in January 2001, a lot of consumers made their purchases of durable goods such as cars already in 2000, which also affects this year's consumption growth forecast downwards. Next year consumption is expected to grow by 4.25%, which is higher than the increase of real disposable household income of 3.5%.
Inflation is likely to accelerate from 2.6% last year to around 4% this year. For next year the consumer price index is estimated at around 2%. Increases in taxes (especially the VAT and regulatory energy tax) from the beginning of this year are the main cause of this year's acceleration. Stripped of tax effects 'adjusted' inflation will probably amount to 3% in 2001.
Under the influence of the continuing tightness of the labour market and despite the substantial burden relief, contractual pay will probably increase by 4% this year and 3.25% in 2002. There is a risk that next year's contractual pay rates may even increase steeper than projected. To illustrate this an uncertainty variant of a 1% higher contractual pay increase in 2002 is included in the text.
Labour market, profitability and investments
In recent years the Dutch labour market has been characterised by strong employment growth, which has even exceeded the also strong growth of labour supply. Unemployment thus fell from 7.8% in 1995 to 3.6% last year. This year a more modest growth of employment of 1.75% is foreseen, mainly as a result of the cyclical downswing. In 2002 growth will even tighten to 1.25%, caused by the ongoing slow-down of economic growth and the increasing labour productivity.
Labour supply is expected to stay in line with employment growth this year and exceed it slightly in 2002. Therefore, unemployment will probably stay at the same level this year, but may slightly rise in 2002 for the first time since 1995.
In spite of the expected slow-down, profitability this year will be similar to last year's level due to improved terms of trade. Next year profitability will probably worsen somewhat.
The growth of investments in the current year and in 2002 is expected to sustain by scarcity of personnel, considerable wage increases and process- and product innovations -- especially through the adoption of information and communication technologies
As a result of the expected GDP growth of 3.25% in 2001 and 2.75% in 2002 public finances will continue to develop favourably. On the revenue side this is reflected in a big windfall of more than 30 billion guilders next year, compared to the cautious scenario 1999-2002 that was used in the coalition agreement. On the expenditure side CPB expects a small overrun of the real expenditure ceiling for 2002. The general government financial balance(EMU-definition) is currently projected to come out at 1.1% of GDP in 2001 and at 1.5% next year. The cabinet has just started discussions for the 2002 budget. Final decisions may have a major impact on the financial figures.
Sectoral developments in the Dutch economy
Due to the less favourable international economic climate, output growth of enterprises is expected to slow down from 4.4% in 2000 to 3.25% in 2001, and to slacken further to 2.75% next year. The slow-down in growth is especially noticeable in the industries that depend to a large extent on exports or on the sale of capital goods, like manufacturing, construction and wholesale trade. Branches feeding this industries will also be affected, like business services, transport and banking, finance and insurance.
International risks and uncertainties
As usual the expectations for this and next year are surrounded by uncertainties. This year, these uncertainties especially regard the recovery of the US economy and the future direction of the dollar. Therefore, three uncertainty variants are presented, which show the effects of (i)a 1.5 % lower rate of growth of US GDP; (ii) a dollar exchange rate of 2.40 guilders in 2001 and 2002; and (iii) a dollar exchange rate 10% below baseline in 2002.
Also in CPB Report 2001/1
The forecasts as presented above, are published in the April 2001 issue of CPB Report and are in accordance with CPB's Central Economic Plan (CEP) 2001 (only in Dutch). CPB Report is a quarterly, English language magazine, that reviews the most recent forecasts on the national and international economy and highlights research activities. This issue contains articles on various subjects, including employment in the 1990's and innovation and productivity performance in Dutch business services.
Employment in the 1990's
In the 1990's the Dutch labour market showed a remarkable development. The sharp increase of employment was fuelled by a fast growth of labour supply. At the same time unemployment fell significantly. After a strong increase in both labour supply and unemployment in the period 1973-1983, a period of structural reform started. This reform of the eighties had left the economy in a favourable starting position for recovery in the nineties, contributing to wage moderation and increasing profitability.
In the 80's participation rates of women started to raise rapidly. This rapid and ongoing increase of labour supply was the dominant factor affecting the Dutch labour market in the nineties. Although labour supply increased sharply, unemployment fell in this period. In the last decade of the twentieth century more than 110,000 persons entered the labour market each year. The fast growth of employment occurred mainly in the period 1994-1999. In this period all economic indicators pointed in the same, positive direction: profitability had been restored and equilibrium unemployment (i.e. the level of unemployment that results after correcting for incidental and cyclical elements) had been reduced. Government policy shifted its focus to tax relief and deregulation, and aimed to reduce the use of social benefits.
In 1994 the labour income share dropped from 86 to 82,5% and remained low during the rest of the period. This favourable development was also a significant factor behind the rapid absorption of labour supply.
Growth of world trade is a vitally important cyclical determinant which contributed significantly to the growth of employment.
Other elements that influenced the absorption of labour supply, were the strong increases in consumer demand, caused by the stock market and real estate boom, the use of temporary contracts and temp agencies, active labour market policies, deregulation of product markets and the policy of deficit reduction.
In order for the Netherlands to continue the employment success of the previous decade, first of all, a focus on (re-)integrating people living on social benefits into the labour force is required. Second, the success can only be continued with wage levels that allow the absorption of the new labour supply into employment.
Innovation and productivity performance in Dutch business services
In the US, labour productivity growth suddenly accelerated during the second half of the nineties. In the Netherlands it slowed down from an average of 2.25% in the eighties to 1.25% in the nineties. This slow growth mainly stemmed from developments in one single sector, i.e. the commercial services industry, and in particular the business services, which hardly improved its labour productivity in the 90's.
Using firm-level data from the Dutch business services sector, this article aims to explain the poor productivity growth in business services by analysing whether this is due to a lack of innovation in this industry.
The analysis shows that, on average, innovative firms appear to realise higher labour productivity growth rates than do non-innovative firms in the sector. This holds for incumbents as well as new firms. On the other hand, innovators realised slightly lower output growth rates, on average, than non-innovators. Hence, the higher productivity growth of innovators is almost completely due to lower employment growth rates.
Innovation itself is certainly no safeguard for success in Dutch business services. Many innovative firms are still confronted with a decline in their labour productivity level. However, firms that are willing to take more risks seem to be better off, in terms of improving their efficiency, compared to risk-averse firms. Moreover, non-technological (e.g. organisational) changes seem to be necessary in order to reap the full benefits of innovations.