CPB Report 2002/1
The main cause of this loss of price competitiveness is the strong increase of unit labour costs, influenced by the tight labour market. Although unemployment will grow to 3.75% this year and to 4.5% in 2003, the tightness of the labour market will still hold. As a consequence of the lagged reactions to the business cycle, the EMU balance will probably deteriorate steadily to a deficit of 0.5% of GDP in 2003. Inflation will fall less quickly than previously thought, and will still average 3.25% this year. A further fall, to 2.5%, is forecast for next year.
- Dutch economic growth expected to increase by 1.5% this year and 2.5% in 2003
- Employment will only increase by 0.5% in both years
- EMU balance likely to deteriorate to a deficit of 0.5% of GDP in 2003
World economy will recover from slowdown
World trade volume is expected to grow firmly from the beginning of this year, after an obvious decline in 2001. Due to the low level at the start of the year, average growth for 2002 will probably be confined to 3.5%, but for next year an increase of more than 10% is foreseen. The slowdown of the US economy lasted relatively long. In the fourth quarter of last year growth was positive again, mainly due to surging private consumption and government expenditures. Leading indicators suggest a rapid firming of the recovery in the first half of this year, resulting in a greater-than-potential growth from the second half onwards. The economies of the euro-zone countries slowed down much later than the US economy, but the upturn will not lag far behind that of the US, although monetary easing has been much less aggressive than in the US and fiscal impulses have been nearly absent. On the other hand, the euro countries took advantage of their improved competitiveness due to the weak euro. The recovery in Europe will at first be mainly supported by a swing in the stock cycle and by private consumption and exports. Also the falling inflation rate and low interest rates lend a hand. Investments will probably pick up at a later stage, when the profitability of firms is in better shape.
Dutch growth lags behind the euro-zone average
The Dutch economy will be able to benefit from the projected recovery of the international economic situation, but this pickup will be modest. This year CPB expects a growth of 1.5%, in 2003 growth may accelerate to 2.5%. For the first time since 1988, GDP volume in the Netherlands last year expanded less than the euro zone average. The projection indicates that Dutch economic growth will continue to lag behind that in the euro zone this year and next year as well, mainly due to the rapid loss of price competitiveness since 1998 compared to the European competitors.
In the period 1988-2000 the Dutch economy grew much faster than the economy in the euro zone, all together by 10%-points. This was the main cause of the decreasing unemployment in these years. The tight labour market brought about a stronger increase of unit labour costs than with the euro competitors. This puts pressure on Dutch exports. Until last year the appreciating dollar offered some relief, but the projection assumes a gradual depreciation in the dollar over the coming years.
Exports will increase by 2% in 2002, almost completely due to re-exports, and by 6.5% next year, thanks to the international recovery. Although re-exports will again account for most of the export growth, domestically produced exports are expected to expand by 2.75% next year. This is again well below the expected increase in the relevant world trade of 8.25%. Hence the steady decline in Dutch exporters' market share, evident since 1993, will continue in the foreseeable future.
Higher consumption growth after meagre 2001
Last year private consumption grew by only 1.2%, a meagre rate given the sharp rise in real disposable incomes that accompanied the introduction of the new tax system. The savings ratio rose by almost 5 percentage points. The current projection forecasts an increase in private consumption of 2.75% this year, slightly higher than the increase in real disposable household incomes. That means a slight decline in the savings ratio, owing to the lagged effect of the sharp rise in real disposable incomes in 2001. Like last year, wealth effects are making a negative contribution to consumption growth this year, although to a much smaller extent than last year. For next year consumption growth is again expected to increase by 2,75%, in line with the increase in real disposable household incomes.
Labour market remains tight despite increasing unemployment
Until this year the fall of production growth has not been reflected into a declining employment growth. CPB foresees for this and next year a stagnation of employment growth in the market sector. The growth of total employment by 0.5% in both 2002 and 2003 is completely due to the increasing government employment growth. Labour supply will increase by 1% in this and next year. This is more than the expected increase of employment, thus unemployment will grow for the first time since 1993. The unemployment rate is forecast at 3.75% in 2002 and at 4.5% next year, an increase of almost 100 000 persons in two years. This means that unemployment will still be lower than the estimated equilibrium rate. All in all the labour market will remain tight this year and next, although it is gradually slacking.
Inflation and wages remain high in 2002, pressure on wages and prices will decline in 2003
The tight labour market and the high inflation rate are the main causes of firmly increasing wages. The high inflation rate also puts upward pressure on wage negotiations. The contractual wages are expected to increase by 4% in 2002. Next year the increase will come out a little lower, at 3.5%, mainly due to the diminishing inflation rate and increasing unemployment. Despite the lower import prices, the higher labour productivity and the drop out of the VAT and regulatory energy tax from the consumer price index (CPI) in 2002, prices will probably increase by 3.25% this year, because of a lagged pass-through of rises in costs in 2002. In 2003 the CPI will slacken to 2.5%.
Government budget: EMU deficit in 2003 at 0.5% GDP
The cyclical situation in the recent period is also reflected into the state of the public finances. Thus the steady decline of public-sector expenditure as a proportion of GDP, which started in 1992, will come to a halt. This is due above all to relatively high price inflation in the public sector, which is expected to exceed the GDP deflator significantly in 2002 and 2003. The EMU balance in 2002 will probably come out at 0.1% GDP and will deteriorate steadily to an expected deficit of 0.5% of GDP in 2003.
Risks and uncertainties
A separate box in this CPB Report outlines two uncertainty variants, which give an impression of the most serious risks attached to the projection. A lower euro exchange rate has a positive effect on Dutch price competitiveness and hence a positive effect on GDP growth, but it also leads to a higher inflation rate. However, expected GDP growth in 2002 and 2003 will come out lower if consumer willingness-to-buy, which was exceptionally weak in the early months of this year, does not recover in the course of the year.
CPB emphasizes the importance of a moderate wage development
Since 1997 unit labour costs in Dutch manufacturing industry increase much stronger than in the other countries of the euro zone. The consequences of this deterioration lag behind, but become visible more and more. This means that, to prevent Dutch growth to come out at a lower rate for a long time and that the Dutch inflation rate will remain higher than in other countries of the euro zone, a timely reaction in the form of moderate development of contractual wages in the Netherlands is required.
Sectoral developments
Under the influence of the expected economic upturn, the volume growth of enterprise production will recover somewhat this year from 0.8% in 2001 to 1.5%. A growth rate of 2.5% is expected for next year. Production growth this year (only 0.25%) will remain forthcoming in manufacturing, partly because of fierce competition with foreign suppliers and the concomitant loss in market share. Nevertheless, next year's growth of manufacturing production may be substantial and come out at 1.75%. However, this means that manufacturing growth will be slow, compared to the growth of the rest of the Dutch economy.
The headwind was fiercest in the metal-electro branch, with the worldwide loss of demand for ICT-products causing much of the decline in production. The recovery of growth expected for this year and next will become clearly visible next year; demand for computer hardware will then pick up, followed later by demand for mobile phones. The basic metal industry is expected to pick up early with reviving demand. At a later stage, production of the metal processing industry is likely to increase as well. Yet, growth in the metal-electro branch will not become clearly visible before next year.
Chemical production will increase somewhat this year. Exports of the basic chemical industry will increase considerably, not only because world trade is picking up, but also because new, large-scale production units in Terneuzen and Rotterdam are coming on stream. Next year, higher world trade will spur on further growth improvement. Domestic sales, which consist chiefly of intermediates delivered to other industries, will also increase further next year.
The recovery of domestic and foreign demand also positively affects the production of commercial services, except the temporary employment branch. The number of temporary employees decreased sharply in 2001, especially in the second half of the year. Because economic recovery will be modest this year, employment opportunities for temporary workers are expected to shrink even further in 2002. The economic upturn will not lead to higher production volumes in the temporary employment branch until next year.
The projected profitability of the market sector will diminish this year, compared to last, and will improve again next year. Most industries show this general pattern. An exception is the construction industry, for which an increase of the capital-income ratio is expected for this year, too. This is due to sustained demand for the products of the industry, while the opportunities for extending its production capacity are limited because contractors have great difficulty in hiring qualified people.
Labour productivity growth in the market sector was negative last year. The decline is due to the slowdown of production growth, while employment in the market sector continued to grow quickly. Employment will adjust with some timelag to changes in production. Moreover, employers are now more than usually inclined to hold onto their personnel because of scarcities on the labour market. Further employment growth in the market sector is not expected this year. Productivity growth will therefore equal production growth in 2002. Next year's growth of labour productivity is assessed to rise to 2.75%.
The pattern of investment growth corresponds to the projected development of profitability. The decline of investment in 2001 is expected to continue in 2002. For next year an increase in investment is likely - almost in line with the general economic recovery.
Also in CPB Report 2002/1
The forecasts as presented above, are published in the April 2002 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: Meta-analysis in policy-oriented economic research; Taxation and foreign direct investment; and Emission trading in the Netherlands.
Meta-analysis in policy-oriented economic research
Meta-analysis is a research method to synthesize previously obtained research results. It is best seen as a statistical approach towards reviewing and summarising the literature. The article introduces the research method of meta-analysis and to illustrate its potential use in applied economic policy analysis. For instance, what role can meta-analysis play as a tool to improve the quality of the calibration of macroeconomic models? Can value transfer be useful to arrive at estimates for sectors, time periods and institutional or geographical entities for which currently credible data are lacking?
The application of meta-analysis in the field of applied macroeconomics poses several challenges. To ensure usefulness for applied general equilibrium modelling, a close collaboration between theorists and empirical researchers is desirable. Given the low costs of doing primary research in these fields, the 'natural scepticism' of many researchers against meta-analysis may be predominant--at least initially. An increase in the number of available meta-analyses in macroeconomics, which seems merely a matter of time, will most likely add to an increased understanding of and familiarity with the methodology. Also, the development of techniques to cope with the most common problems of meta-analysis will contribute further to its popularity and usefulness in applied policy research. Although carrying out a proper meta-analysis is not an easy task, and although it requires the meticulous and time-consuming construction of databases, it enables researchers to obtain improved 'consensus estimates' and detailed insights in the available empirical material. Where econometrics is sometimes regarded as the best way to learn something about a series of data, meta-regressions constitute the best way to learn something about the literature on a particular subject.
Taxation and foreign direct investment
In this article meta-analysis is used to synthesize the evidence on the impact of company taxes on the allocation of foreign direct investment. The literature reports a mean value of 3.3 for the tax rate elasticity--i.e. a 1%-point reduction in the host-country tax rate raises foreign direct investment in that country by 3.3%. Substantial variation across studies exists, however. Systematic differences between studies are found with respect to the type of foreign capital data used and the type of tax rates adopted. Systematic differences in the responsiveness of investors from tax credit countries and tax exemption countries are not found.
Emission trading in the Netherlands
Should the Netherlands introduce a national system of CO2-emissions trading in anticipation of a European trading scheme? This article concludes that a national system is an expensive policy instrument, due to the high transaction costs. The first-best option is to impose CO2-emission trading with an absolute ceiling on an international level. In the meantime, improving the design of the energy tax system may be an efficient alternative.