Robust economic growth

Given this favourable cyclical development, the EMU balance will improve to 0.7% of gross domestic product (GDP). Since the policy measures in the Coalition Agreement of the new Cabinet have not yet been worked out completely, they could not be included in the analysis.

These are some of the headlines from the summarising first chapter of the Central Economic Plan 2007, as published today by CPB Netherlands Bureau for Economic Policy Analysis (CPB). The complete Central Economic Plan will be made public on Wednesday, 4 April 2007 (only in Dutch). This will include special topics on balances of payments and the US dollar, and initial experiences with the new medical insurance system.

International economic prospects are positive
Once again, the world economy showed an excellent performance last year. Average economic growth was high, especially in the rising economies in Asia. This favourable global development is expected to continue this year and next, although problems on the housing market will lead to lower economic growth in the United States (2.25% in 2007, and 2.75% in 2008). Economic growth in the euro area will diminish somewhat this year, to 2.25%, due to restrictive budgetary policies and the appreciation of the euro. Nevertheless, also in the euro area the expected development remains positive with economic growth above trend, a further decline in unemployment and moderate inflation.

Dutch economy performs well
Dutch economic growth, 2.75% in both 2007 and 2008, is broad-based: domestic expenditure and exports each account for approximately half of this growth. This rosy outlook for the Dutch economy is even more remarkable if placed in an international context. For the first time in six years, Dutch GDP growth will probably be higher than its counterpart in the US. Moreover, the Dutch economy is expected to grow faster than that of the euro area as a whole during each year of the period 2006-2008.

Tightening labour and goods markets
Employment is increasing substantially faster than labour supply in the years 2006 through 2008, resulting in a rapidly declining unemployment figure. Unemployment is assessed to be, on average, 4% of the labour force in 2008- almost 1.5% lower than the estimated equilibrium rate of unemployment. The number of vacancies has by now reached an all-time high. Moreover, the capacity utilisation rate in the market sector is rising both this year and next. As a consequence of these developments, the output gap will be approximately 1.5% in 2008. In other words: actual production in 2008 is expected to be 1.5% higher than the potential level of production.

Increases in pay accelerate; inflation remains low
The rapidly tightening labour market causes a rise in the expected contractual wage increase, from 2.25% this year to 3.25% in 2008. In addition to this, employers will have to pay higher social security contributions because of the increase in the income-related medical insurance contributions from 6.5% to 7.3%. In total, the rise in labour costs accelerates from 1.3% in 2006 to 2.5% this year and 4.25% in 2008.

Despite the increases described above, inflation is estimated to be only 1.25% in both 2007 and 2008, thanks to the expected decrease in the oil price and the appreciation of the euro vis-à-vis the US dollar. Core inflation - excluding changes in energy prices (among other things) - is picking up from 0.8% last year to 1.25% this year and 1.75% in 2008. The increase in core inflation reflects the cyclical upsurge.

Purchasing power
On average, household purchasing power improves by 1.75% in 2007 and by 0.75% in 2008, thanks mainly to the rise in real income. This positive development will be tempered next year, however, by higher medical insurance contributions. Low-income households are compensated for the increase in medical insurance contributions through both a healthcare allowance ('Zorgtoeslag') and tax deductibility of exceptional medical expenses.
The purchasing power forecast for 2008 is likely to change as soon as the policy measures stemming from the Coalition Agreement will be taken into account.

Government budget in balance in 2007
The government budget this year is expected to be practically balanced. The projected favourable cyclical developments will improve the EMU balance to 0.7% in 2008, presuming no change in policy measures. More than half of this improvement is a consequence of the cyclical situation. Although higher medical insurance contributions and progressive income tax rates spur on the favourable development in the government budget, they are also responsible for an increase of the collective burden to the tune of 1% of GDP.

Coalition Agreement measures: not yet in these projections
It was not yet possible to incorporate the effects of the Coalition Agreement in these forecasts for 2008. That cannot be done until the plans have been worked out in concrete policy measures. The new Cabinet will present these in September on "Prinsjesdag", a day when the Queen delivers a speech setting forth the government's plans, budget and position for the next year. The unavailability of this information increases the degree of uncertainty of the current projections. According to the time schedule in the Coalition Agreement, the burden increase in 2008 will be larger and public expenditure will rise less than is assumed in this Central Economic Plan. The burden relief and expenditure heightening that have been planned regard later years. As a consequence, taking into account the detailed Cabinet plans probably causes the economic growth and purchasing power in 2008 to be less favourable than in the present forecast. On the other hand, the EMU balance will show a larger improvement.