June 29, 2007

Sunny prospects

At the moment, the Dutch economic climate is sunny and will probably stay summery for some time. Last year, the speed of GDP growth doubled to 3%, and economic prospects are still favourable for 2007 and 2008: 2¾% in both years. Economic tensions will rise further, especially at the labour market.

Unemployment is expected to decrease to an average of 4% of the labour force in 2008, which will consequently lead to upward pressure on contractual wage growth. The Dutch economy is not expected to become overheated this or next year, however. Financial burden increases by the new cabinet, among other things, will keep private consumption from growing as fast as it did in the beginning of this century. Several policy measures contribute to an improvement of the general government financial balance in 2008.

These are some of the headlines from the short-term forecast as published today by CPB Netherlands Bureau for Economic Policy Analysis (CPB). The economic prospects were presented in the CPB Newsletter 2007/2.

Sunny prospects for the Dutch economy
The Dutch economy will continue to perform well, with economic growth of 2¾% expected in 2007 and 2008. As in 2006, domestic expenditure and exports both count for 50% of GDP growth, which means that this growth is broadly based. Private consumption is expected to increase by 2½% this year. Due to rising wages and employment, disposable household income will come out higher. In addition, household capital has increased, thanks to higher house prices and share prices. Greater wealth and the ensuing optimism stimulate the purchase of mainly durable private consumption goods. Next year, private consumption growth will smooth to 1¾%. Higher taxes and social security contributions and higher inflation contribute to negative purchasing power developments, putting pressure on private consumption.

Entrepreneurs in the manufacturing industry are optimistic about the economy. Influenced by the pick-up in production and by favourable profitability, gross fixed investment is expected to increase in both 2007 and 2008, after a strong decline in the first half of this decade. Re-exports keep on growing spectacularly, by more than 10%. The 'made in Holland' exports have the potential to grow by 3½% in this year and in 2008, driven mainly by favourable international developments.

Further tightening of the labour market
Employment in the market sector will probably rise by 2% in full-time equivalents- the highest growth since 1999. Also in 2008, employment will continue to rise, although the growth speed will moderate slightly. Employment in both years will increase considerably faster than the labour force, causing a steady decrease of unemployment, to an average of 4% of the labour force in 2008. This figure falls amply short of the estimated level of equilibrium unemployment, which means tightness on the labour market.

Wages rise and inflation increases
Due to increasing tensions on the labour market, contractual wage increases pick up in the estimate from 2% in 2007, to 3% next year. In 2008, social security premiums for employers increase due to the estimated rise of the income-related contribution for medical expenses. Due to both effects, the rise of labour costs in the market sector accelerates from 2½% this year to 4½% in 2008. Inflation is expected to increase from 1½% in 2007 to 2% in 2008- partly as a consequence of higher labour costs and higher indirect taxes.

Financial government budget positive in 2008
The general government balance is likely to come out at -0.8% of GDP in 2008. Among other things, financial setbacks in health care, the increase of disablement insurance benefits, and diminishing natural gas revenues lead to a 0.7%-point of GDP lower general government balance than previously estimated in the Central Economic Plan 2007. With a better cyclical development, higher natural gas revenues and new policy, the general government balance will probably improve to 0.4% of GDP in 2008. Despite the fact that the cabinet intensifies more than it restructures next year, the general government balance improves, as a result of financial burden increases. Due to higher health care premiums and new policy measures, for example, taxes and social security contributions increase by around 1%-point of GDP, mainly landing with households.

International prospects remain positive
In the first quarter, GDP volume growth in the euro area came out above the trend again. Economic growth is estimated at 2¾% in 2007, during which time mainly investment and exports are expected to increase strongly. Due to a stronger euro and higher interest rates, growth will probably weaken to 2¼% in 2008. The US economy hardly grew in the first quarter of 2007, mainly as a consequence of the vigorous decrease of residential investment. A slight recovery is expected in the second quarter. In the forecast, US GDP will rise by 2% in 2007. For the first time since 2001, this growth figure is lower than growth in the euro area. Due to expanding monetary policy and the return to a more stabilised situation at the housing market, US growth might accelerate to 2½% in 2008.


Johan Verbruggen
Dick Morks