December 15, 2009

CPB December Projection: The economy is reviving

The Dutch economy is set to revive in 2010, with economic growth projected to be 1½%. The economy is expected to contract by 4% this year, primarily due to a sharp fall in exports.

The projected growth rates for the Dutch economy in 2009 and 2010 are in line with those for the entire euro area. Upwards revisions have been made to the economic picture on nearly all fronts compared with the previous estimates, released on Budget Day (September 2009). However, the risks and uncertainties surrounding the projections remain high.

These are the key results of the December Projection. The explanatory notes to these estimates are published today in the December issue of the CPB Newsletter. In this issue, the Netherlands Bureau for Economic Policy Analysis (CPB) presents its projections for the Dutch economy in 2009 and 2010. Another article in this CPB Newsletter cover CPB’s world trade monitor.

The economy in rich countries is recovering
GDP in the euro area, the United States and Japan increased in the third quarter compared to the previous quarter. Recovery was driven by the exceptionally vigorous stimulatory measures, extremely liberal monetary policies, improvements in the situation in the financial markets and the positive impact of stock building by businesses. Leading indicators suggest the recovery is likely to continue in the fourth quarter. The projected GDP growth in the euro area is 1½% in 2010.

Further reduction in the turbulence in the financial markets
March 2009 saw the end of an extremely perilous period for the financial markets, which began on 15 September 2008 with the bankruptcy of the American investment bank Lehman Brothers. The difference in the interest on corporate bonds and government bonds continued to narrow during recent months, indicating a fall in levels of uncertainty. However, conditions remain far from normal, which is why there is still considerable uncertainty regarding the projections. Renewed unrest cannot be ruled out, e.g. because investors might fear a country such as Greece could face difficulties servicing its public debt.

The Dutch economy is climbing out of the trough
Production in the Netherlands began to rise again in the third quarter after falling in the four previous quarters. It seems likely that economic growth will continue to grow for the remainder of the projection period (2009 and 2010). The actual figures for the third quarter were better than expected at the time of the Macro Economic Outlook 2010. This, together with the improvement in the international economic climate, led to the economic prospects for the Dutch economy being revised upwards, particularly those for next year. However, this improvement is still a long way off reversing the effects of the shock at the start of 2009.

Unemployment set to rise further next year...
When production began to fall from the third quarter of 2008 onwards, this was accompanied by a fall in the demand for (new) employees in many sectors. This effect was visible immediately in the substantial fall in the number of job vacancies. There has also been a substantial reduction in employment in the private sector since the start of 2009. The reduction this year, measured in labour years, is expected to reach 2¾%. The reduction next year is set to be even more substantial, at around 3½%. On average, there will be 250,000 fewer people working in the private sector next year compared with last year. The rise in unemployment is smaller because employment in health care continues to increase steadily; also certain groups are deciding not to enter or to withdraw from the labour market: young people continue their studies, women postpone their return to the labour market and the elderly are retiring early. The part time unemployment measures are also helping to keep down unemployment, although that effect is much smaller than in Germany, for example. Unemployment is expected to average 5% in 2009 and to increase to an average of 6½% next year.

...but the increase is moderate in view of the circumstances
Unemployment increased by about two percentage points in two years during the cyclical dip in 2002 and 2003, with cumulative production growth of 0.4%. The increase in unemployment during the current economic downturn is expected to be more or less the same, rising from 3.9% in 2008 to 6½% in 2010, despite a far more substantial drop in production.

Indeed, the increase in unemployment is much less than had previously been predicted; as far as 2009 is concerned, this is largely due to the redistribution of the existing amount of work among more people. Where 2010 is concerned, it is primarily the improved economic prospects and increased business sector profitability that are causing a more modest increase in unemployment.

Exports are driving the recovery, consumers remain cautious
As usual, it is the recovery in exports which is driving the cyclical upswing in the economy. The projected GDP growth of 1½% in 2010 is entirely due to exports. Exports of goods are more or less in line with movements in world trade. After a projected fall of 9½% this year, the export of goods is set to grow by 6% in 2010. Re exports show slightly better performance than domestically produced exports in both years. Household consumption is expected to grow by 2½% in 2009. Consumption by households is expected to remain virtually constant (+¼%) in 2010. The developments in real income and wealth give reason to expect a small increase, but this effect is offset by consumer confidence, which is still low and is making consumers reluctant to spend. Consumer confidence has been on the increase since spring 2009, which means that households will not be making further increases in their savings rates in 2010.

Inflation remains low
The projected rate of inflation for this year is 1¼%, half what it was last year. This is due to the fall in oil and gas prices compared with 2008 and the current economic downturn. Next year, too, general inflation will be limited - at 1% - as while energy prices will put upward pressure on inflation, this will easily be compensated by substantially lower unit labour costs.

The average increase in contractual wages will be about 3% in 2009. Next year, the average increase in contractual wages is set to be more in line with inflation, at an estimated 1¼%. Consequently the average purchasing power will fall slightly in 2010 (-¼%), after actually having increased by 1¾% in 2009.

Government: automatic stabilisers at work
The reduction in consumer spending this year means that VAT receipts for the Treasury are lower. Equally, receipts from payroll and income tax are lower due to the fall in employment levels. On the other hand, government expenditure is increasing, in particular due to the rise in the number of benefit recipients. Allowing these mechanisms, the so called automatic stabilisers, to work fully gives the economy a boost but also creates a budget deficit. The general government deficit (EMU definition) is expected to be -4.6% of GDP in 2009 and to deteriorate to -5.8% of GDP next year. This negative balance together with the interventions in the financial sector will cause government debt to rise from 45% of GDP in 2007 to an estimated 67% of GDP in 2010.