CPB Report: Dutch economy in a relatively mild slow-down

Next year export growth will pick up, but consumption growth is expected to decelerate. On balance Dutch GDP will expand by 2% in both 1999 and 2000 in the central projection.
With a time lag, employment growth will follow the downswing in output growth. This means the falling trend in unemployment will come to an end: in 2000 the unemployment rate will rise for the first time since 1994 (to 5.25% in 2000). Profit rates are falling fast. Inflation will drop to around 1% per year in 2000.
Public finances are facing harder times ahead. The slow-down in economic growth in the Netherlands will make itself felt in the year 2000. Tax receipts on corporate profits will be lower than expected half a year ago. On current policies, public expenses will exceed the target in 1999 because of the additional compensation payments in connection with the heavy rainfall in the Autumn of 1998 (Dfl. 0.9 billion) and because of the higher than envisaged outlays for asylum seekers.
The economic slow-down is rather sharp, but still relatively mild compared to the slow-down of 1992-1993.
Uncertainty variants for 1999-2000 include a delayed recovery of world trade. The resulting smaller increase in exports will depress overall economic growth. This can mean an average GDP growth of 1.5% in stead of 2% for 1999-2000. Other uncertainties, like a 5% stronger dollar and pound, or higher wage increases than expected, can lead to higher inflation.

These forecasts of CPB Netherlands Bureau for Economic Policy Analysis are published in het April issue of CPB Report, and are in accordance with CPB's Centraal Economisch Plan 1999, published simultaneously. CPB Report (written in English) reviews quarterly the most recent CPB forecasts on the national and international economy, and highlights research activities. This issue, CPB Report 1999/1, contains articles on the Millennium problem; NAIRU; Macroeconomic impact of child care subsidies; Crowding out and unskilled unemployment; Teachers' pay; and R&D policy of the European Union. The conclusions of some of these articles are summarized below.

The millennium problem
The millennium problem will have no visible effect on the macroeconomic annual figures, provided both enterprises and government do everything within their power in 1999 to make their software 'millenniumproof', and provided they draw up contingency plans to deal promptly with any disruptions to production which may nevertheless occur in the year 2000. Possible temporary disruptions in some enterprises or sectors are likely to be compensated for on an annual macroeconomic basis.
However, a certain risk of negative macroeconomic impact does exist. In a scenario which combines a number of pessimistic assumptions, there will be a negative effect on GDP in the order of 0.75 to 1% in 2000. This effect will not, for the most part, be structural.

NAIRU: Non-Accelerating Inflation Rate of Unemployment
In the past twenty years equilibrium rates of unemployment may well have been substantially lower than actual unemployment rates in many European countries. In the Netherlands, 1998 is the first time in twenty years that the short-term equilibrium rate appears to have risen above the actual unemployment rate. This will lead to upward wage pressures.
In another article on the NAIRU, CPB researchers attempt to explain the apparent non-constancy of equilibrium unemployment. They find that the three major determinants of equilibrium unemployment are tax rates, the replacement rate and the real interest rate. The rise in unemployment in the 1970s and early 1980s was mainly due to a rise in the first two factors. That equilibrium unemployment remained high when tax rates and the replacement rate were reduced in the 1980s and early 1990s is ascribed to the rise in real interest rates during this period.

Macroeconomic impact of child care subsidies
The Dutch government recently announced an increase in government subsidies for child care. Advocates of this policy claim that this is an important instrument to stimulate the labour market participation of women with children. Opponents, on the other hand, believe that raising subsidies for child care only stimulates substitution from informal to formal work without generating much additional labour supply.
CPB investigated the labour market effects of child care subsidies with the general equilibrium model MIMIC. Simulations show that an increase in the number of subsidised places stimulates labour supply, although there is a substantial deadweight loss arising from substitution from informal child care to official, subsidized child care.