CPB REPORT: GDP-GROWTH 2.75%; UNCERTAINTIES IN PROJECTION REMAIN HIGH

• GDP growth 2.75% in both this year and next year
• Exports suffering from lower international trade growth
• Inflation set to peak in 2001
• Unemployment rate 3.25% in 2001 and 2002

This year's slowdown in Dutch economic activity is mainly caused by lower growth of exports, which are suffering from lower international trade volumes, loss of competitiveness and the foot-and-mouth crisis.
Despite of the decelerating growth rates, employment growth is estimated at 2% this year, even 0.25% higher than in the April forecasts of CPB Report, and at 1.25% in 2002. Labour productivity growth will be low this year, which will have an additional upward effect on unit labour costs.
Inflation is expected to rise to 4.5% in 2001, an increase of 0.5% compared to the April 2001 forecasts. Next year, inflation will probably slow down to 2.5%.
The still favourable projections for GDP-growth and inflation next year are surrounded by serious uncertainties. In case of additional adverse developments in world trade and competitiveness, the picture might come out substantially less rosy.

World economy
World trade growth fell sharply at the end of 2000 and completely vanished in the first quarter of this year. Leading indicators show an ongoing stagnation in the second quarter. The downturn of the American economy is likely to last longer than foreseen in last quarter's CPB Report. For this year the forecast for US GDP growth is 1.75%. In 2002 American growth is likely to pick up to 2.5%. The prospects for Japan have deteriorated dramatically. The forecasted 0.5% GDP-growth for this year and 1% for next year could still be too optimistic.
Relevant world trade is expected to increase by 5% this year, which is less than half the outcome of 2000. Although surrounded by serious uncertainties, relevant world trade is projected to pick up in the second half of this year and lead to a 7% growth next year.

Risks attached to recovery of export growth
Dutch export growth is expected to recover late this year and next year, as a result of a pick up of world trade growth. However, a later pick up of world trade growth than expected at this moment is a serious risk. Particularly so since international leading indicators, which point out trade developments up to and including September, do not yet point to a pick up. If world trade recovers six months later than expected, the adverse effects on Dutch export growth and GDP-growth will be considerable. Exports would then grow by slightly more than 4% next year and GDP growth would be limited to just over 2%. This unfavourable prospect may even be aggravated by stronger than envisaged competitiveness losses by Dutch manufacturing industry. There is a risk that the high contractual wage increases, concluded for 2001, will set the example for high wage increases next year. This in turn may depress employment growth in a longer term perspective.

Inflation set to peak in 2001
Dutch CPI, national definition, is expected to rise by 4.5% this year. The Dutch haven't faced an inflation rate like this since the early 1980s. High inflation this year is the result of a combination of several foreseen and unforeseen one-off factors, and some structural factors. Consumer prices are pushed up by the increase in the VAT-rate and regulatory energy tax on 1 January. Unforeseen factors have been upward pressures on energy prices, due to temporary supply shortages in the US, and on food prices, due to the foot-and-mouth and BSE-crises and due to weather conditions in Southern Europe. A structural factor like the high unit labour costs increase pushes up inflation as well. And last but not least, import prices continue to rise. Next year, CPB expects inflation to slow to 2.5%. The one-off factors mentioned above will drop out of the index. Furthermore, import prices are expected to fall on the back of a stronger euro and as a result of sluggish global economic activity. Unit labour costs increases continue to push up inflation. However, there are risks attached to the inflation forecast. If the euro remains at the present low level, or if wage increases continue to be high, next year's inflation figures may come out higher than expected.

Tight labour market continues
Despite the slowdown of economic activity, employment in the Netherlands continues to grow rapidly this year. Employment growth outpaces additional labour supply. Hence, the unemployment rate is expected to drop to 3.25%, a 22-year low. However, a slow down of employment growth is expected next year, as a consequence of lower production growth this year. Under these circumstances, the unemployment rate will no longer fall. In all, the Dutch labour market remains tight.

Also in CPB Report 2001/2
The forecasts as presented above, are published in the June 2001 issue of CPB Report. 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 'Should tuition fees be increased?','Parental Leave', 'Dutch growth potential in the medium term', 'The Dutch UMTS auction in retrospect','Beyond harmful tax practices', 'Obstacles in the climate policy arena', and 'Pharmaceutical promotion as a signal of product quality'.

Should tuition fees be increased?
Dutch government pays about three-quarters of the direct costs of higher education. CPB developed a tentative social cost-benefit framework to evaluate the effects of tuition fee increases. The conclusion is that raising tuition fee by for instance 1000 Dutch guilders (454 euros) may lead to an increase in social welfare. However, social gains can be negative when higher tuition fees severely discourage student enrolment at universities and vocational colleges.
Also, results from this cost-benefit-analysis indicate that net benefits from tuition fee increases are less obvious when human capital spillovers are large. Thus, when the government is able to identify fields of study that generate substantial spillovers to society (for example, engineering, natural sciences and medicine), it would be efficient to target public support to these fields.

Parental leave
Most parental leave arrangements in the Netherlands currently only provide for unpaid leave. An economy-wide introduction of paid parental leave will encourage parents with young children to combine labour market participation with care for children.
CPB research shows that overall paid parental leave will not provide extra labour supply. On the contrary, these arrangement will reduce the number of working hours, both for parents who are entitled to paid parental leave, and for other employees who do not qualify for parental leave, the latter having to pay more premiums.
Nevertheless, paid parental leave can be an attractive policy to reach other goals, like a more equitable distribution of formal work and informal care over men and women, or a redistribution of income towards working parents.