December 7, 2006

Dutch economic growth: robust and steady

The Dutch economy is performing well, with an expected economic growth of 3% in both 2006 and 2007. This marks the second phase of recovery, after an already substantially higher growth rate in the previous two years, compared to the meagre years 2002-2003.

The economic growth is broad-based: consumption is picking up as a result of an increase in purchasing power and employment growth; exports and investments are rising considerably. Employment growth is expected to accelarate to 1.25% in 2006, stabilizing in 2007. Unemployment is decreasing rapidly. Nevertheless, inflation and wage developments are expected to be moderate in 2006 and 2007. The budget will be practically balanced this year and next year.

These are the headlines in CPB's short-term forecast published today. The economic prospects are published in the December 2006 issue of the quarterly CPB Newsletter.

World economy
Global economic growth is projected to accelerate to 5¼% in 2006. China and other emerging economies are again very dynamic, while the upswing in the euro area has gained strength. In contrast, the United States are experiencing a slowdown prompted by a correction on the housing market. The outlook for the world economy is favourable, but world trade growth is projected to soften somewhat next year. As oil prices drop, inflation in advanced economies is likely to diminish.

Tightening markets in Dutch economy
The output gap - i.e. the difference between the actual and the (estimated) potential level of production - was still negative last year, but will probably turn out to be positive in 2007. This indicates that the economy is tightening more and more, which can be observed in both the labour market and the commodity markets. Since employment increases substantially faster than labour supply, unemployment will decline rapidly, with growing tensions in the labour market as a result. In 2007, unemployment is expected to be 4.75% on average: lower than the equilibrium rate of unemployment. The capacity utilisation rate, which indicates how tight commodity markets are, is expected to rise this year and next year. The forecasted investments are not enough to make capacity development keep pace with production growth.

Consumers and producers spend more money
Mainly due to the favourable developments of employment and purchasing power, private consumption is expected to increase by 2.25% in 2006 and 2007. The increased private consumption manifests itself especially in more consumption of durable goods.
Thanks to the higher production and the favourable level of profitability, producer confidence has risen sharply and entrepreneurs are more inclined to expand their capital stock. Gross fixed investment will probably increase for the first time since 1999. Compared to the nineties, however, the level of investment is still relatively low.

Inflation and wage rises remain moderate
Contractual wage rises in the market sector are expected to pick up to 1.75% in 2006 and 2.25% in 2007. The acceleration of the contractual wage rise is moderate in the light of the rapid recovery of the labour-market situation. In part, this is caused by the fact that collective labour agreements have already been effected for about one-third of the employees; the business cycle was less favourable at the time of the negotiations. The rise of contractual wages is somewhat higher than the expected inflation of 1% in 2006 and 1.25% in 2007. In both years, several government measures will have a mitigating effect on inflation.

Budget in balance
This year and next year, the government budget will roughly be in balance. The strong recovery of the EMU-budget balance since 2003 has mainly been caused by substantial adjustments and financial burden increases in 2004 and 2005, and by the cyclical recovery and the strongly rising gas revenues in 2006 and 2007. Next year, the gross debt of the general government will probably amount to less than half the value of the gross domestic product for the first time in 25 years.