December 11, 2014

Low euro exchange rate and oil price contribute to recovery

Economic growth is projected to increase next year to 1½% GDP. Although the recovery remains fragile, consumption will grow more than this year. Employment will increase, with unemployment levels decreasing to 6½%. Inflation will remain low, in line with European price developments, and the chances of long-term deflation are slim.

These are the conclusions of CPB Netherlands Bureau for Economic Policy Analysis in its December projections for 2014 and 2015, published today.

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In recent months, the value of the euro has declined by 7% compared to that of the US dollar. In addition, oil prices have dropped by 30%. Both developments are favourable for the Dutch economy. Exports profit from the improvement in the country's competitive position and consumption levels are growing, in part due to lower energy prices. The economic growth is stimulating employment opportunities in the business sector. In contrast, employment in both the public sector and the healthcare sector is projected to decline in 2015, while the labour force is increasing. On balance, this will result in a slight decrease in unemployment, from 6¾% in 2014 to 6½% next year.

Inflation will remain low, in part as a result of decreasing oil prices. For both this year and the next, inflation is projected to be 1%. Over the past months, there has been considerable public debate on the consequences of low inflation, or deflation. The risk of deflation cannot be separated from low economic growth, and carries the added effect of increasing both household and government debt. However, low inflation is also favourable for wealthy households as well as for the purchasing power of all households.

The EMU deficit in 2014 will come to 2.8%, taking into account the back payment to the EU of 0.2% over 2014. For 2015, the EMU deficit is projected to improve to 1.8%. Factors with a positive impact in this respect are the higher economic growth, lower unemployment and ongoing spending cuts (compared to planned expenditures) particularly in healthcare. On the opposite side is the lower natural gas income. The structural EMU balance is estimated at -0.5% of GDP for both 2014 and 2015 and, thereby, equals the medium-term objective.

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