April 12, 2000

CPB Report: Dutch economy will continue to grow strongly

The Dutch economy grew by 3.6% last year. The upturn that started after 1995's mild economic decline, had lasted already 16 quarters by the end of 1999. Such a prolonged period of boom has not occurred for the past 50 years.

Thanks to favourable international conditions, the period of strong growth continues in the forecast this and next year, with GDP growing by 4 and 3.5% respectively. Exports are expected to make a substantial contribution to growth. Export growth of goods excluding energy will accelerate from just above 5% in 1999 to over 9% this year and only slightly less next year. Investments last year rose by almost 5%, thanks to the unexpected strong rise of market sector production, and the resulting high capacity utilisation rate. Investment growth is projected to accelerate to some 6% this year and next. The buoyancy of the economy in the past years has been based largely on private consumption. Consumption growth is expected to weaken this year, from 4.2% in 1999 to 3.75% in 2000, due to saturation effects and decreasing impulses from employment growth and accrued capital gains. Next year, however, consumption growth is likely to pick up again, at 4.25%, given substantial purchasing power gains due to the tax reform.

Unemployment has decreased sharply in recent years, and probably will fall further to 2.75% of the labour force in 2001. This low rate last occurred in the mid 1970s. Since the mid-eighties, a rapid increase in labour supply has driven the growth of employment to a large extent. The supply of labour can still increase significantly, even though the participation rate has risen substantially: in particular the participation of women, low-skilled and elderly people, and immigrants may increase further. Labour productivity growth is expected to speed up because of the tight labour market. Yet, employment could still increase this and next year by respectively 2.25% and 2%.

Contractual wage growth could accelerate from 2.5% last year to 3.25% this year, stemming from stronger productivity growth, higher inflation and the fall in the unemployment rate. Next year, contractual wage growth could slow again to 2.75%, as a result of the substantial tax relief and the decreasing replacement rates that will accompany the tax reform. Consumer price inflation will probably be 2.25% this year, but rise to 3.25% next year as a consequence of increasing VAT en environmental levies. These increases in indirect taxes are amply compensated for households in the large decreases of direct taxes.

The projected healthy economic development is also reflected in the public finances. The public spending ratio will fall to 45% of GDP next year, more than 3%-points lower than in 1999. Decreasing social security spending and lower interest rates create windfalls on the expenditure side. On the income side, windfalls will be substantially higher. Income from taxes and social security contributions rise strongly, while gas revenues will be buoyant as a result of higher energy prices. In 1999 the EMU balance showed a surplus of 0.5% of GDP. On current policies, this surplus could be 1.1% in 2000 and 0.8% in 2001. However, within the budgetary rules the cabinet may decide to use expenditure windfalls for higher spending and half of the income windfalls for tax relief. On current expectations, such decisions could even produce a budget deficit in 2001. The debt ratio will fall below 60% of GDP this year and decrease still further next year.

These forecasts of CPB Netherlands Bureau for economic Policy Analysis are published in the April issue of CPB Report and are in accordance with CPB's Centraal Economisch Plan 2000 (only in Dutch), published simultaneously. CPB Report is a quarterly English language magazine, which reviews the most recent forecasts on the national and the international economy and highlights research activities. In addition to the forecasts, this issue contains articles on the renewing economy; falling R&D in oil companies; and the marginal wedge and individual wage growth. The first two articles are summarised below.

The renewing economy
The 'new economy' raises many questions about the influence of Information and Communication Technology (ICT) on the economy. Will the economy grow faster because of ICT? Will ICT fundamentally change old economic laws and experiences? Does ICT imply the end of business cycles? Will inflation remain low? How will all of this affect economic policy?
The article in this issue of CPB Report analyses these questions using recent insights from economic literature. The answers to the first four questions are respectively: not necessarily, no, no, no. However, the article also states that ICT holds a crucial position in the process of economic growth and that it is incorrect to call ICT a hype.

CPB prefers the name 'renewing economy' rather than 'new economy', because it expresses a considerable degree of continuity. ICT is the next stage in an ongoing process of change, comparable to the introduction of electricity, railroads and petrol engines. These general purpose technologies modernise and support the economic development process and thus keep economic growth going.
This process of renewal goes hand in hand with major changes. ICT appears mainly to be productive when companies readjust their organisation and when employees learn to properly fit in ICT in their work. However, these changes do not mean that existing economic laws are obsolete. On the contrary, current economic insights can be useful to investigate the influence of ICT in various markets. ICT reduces transaction costs in almost all markets with possible major consequences to welfare. Markets for ICT- and information goods will experience more profound changes.
It is unlikely to expect significant effects on the business cycle and inflation, because the underlying mechanisms will only have a small impact. By all means, ICT has weakening effects on the business cycle and on inflation because of lower stocks of inventories and a more efficient match between supply and demand on the labour market. However, these effects can at most explain a few tenths of percentage points.

At the interface of ICT, knowledge and the economy, many fascinating developments are unfolding which are already radiating out to society, economic research and public policy. On the one hand public policy should give room to players in the market, who usually know best how to handle major changes. On the other hand a number of points of special policy interest announce themselves: education, lifelong learning, competition in markets for ICT- and information goods, and knowledge diffusion of ICT related organisational changes.

R&D decline in the oil industry may have serious consequences
Pollution due to the use of oil challenges technological development in the oil industry. But in fact the major oil companies dropped their world-wide real research expenditures in the last decade, probably for two reasons. First, they see few opportunities for research as the current oil products and technologies are mature, and they consider research on renewable energy as too risky. Second, their R&D follows competitors' research. Because they all reduce their R&D efforts simultaneously, the oil companies keep their market shares.
The drop in research budgets can have serious consequences for three reasons. First, the research centres did not improve their productivity measured by the number of patent applications per million US$. Hence, an R&D-fall entails less research results. Second, the oil companies tend to conduct much similar research. They keep their process innovations secret because they acquire a competitive advantage on their own unique production technologies. This leads to duplication of research. Finally, the oil companies conduct little research on renewable energy, as is apparent from the small number of their patent applications in this field. This may hamper the development of renewable resources.


Dick Morks