December 14, 2010

CPB December Projection: Moderate growth in uncertain times

The Dutch economy is expected to grow by 1¾% in 2010. GDP growth will decrease slightly to 1½% during the coming year. According to the economic forecast, unemployment will decrease to 5% of the labour force on average in 2011. Inflation is forecast to be 1¼% this year and 1½% next year.

The EMU balance is expected to improve from -5.8% of GDP in 2010 to -4.1% of GDP in 2011. The risks surrounding international financial and economic developments and therefore also the uncertainty concerning these forecasts are still significant.

These are the most important figures in the December projection. In this estimate, CPB Netherlands Bureau for Economic Policy Analysis (CPB) presents its forecasts for the Dutch and the international economy in 2010 and 2011.

Worldwide decline in growth rate
Growth in world trade and production was still unprecedentedly high at the beginning of the year, but it has steadily decreased as the year progressed. Early indicators suggest that the growth in the volume of world trade will stabilise at a low level during the last months of the year. In part because of this, the forecasts have been slightly revised downwards in comparison to the Macroeconomic Outlook (MEV). In many highly developed economies the consequences of budget cuts in the public sector will be more and more noticeable. Private expenditures are also expected to remain weak. The estimate for GDP growth in the euro area during 2011 is 1¼%.

Unchanged: major international uncertainties
In Europe the major uncertainty in the short term is the fragile confidence in government finances in various countries, especially in Portugal and Spain. The European banking sector has inadequate resources to meet large new investment losses. Lending can be endangered once again by this problem, and governments may have to step in once again. This persistent turmoil can also undermine producers' and consumers' confidence. In many countries the possibilities of fiscal policy aimed at stimulating the economy are limited.

An unexpectedly strong revival of business investments and a quicker recovery of capital supply in the private sector as a result of improving share prices, can be upside risks.

The Dutch economy
After four consecutive quarters of (quarter-on-quarter) growth, manufacturing in the Netherlands declined by 0.1% during the third quarter of 2010, according to preliminary information from Statistics Netherlands (CBS). This decrease is however partly a reflection of the relatively strong growth in the previous quarter when, for example, gas production was high. According to the forecast, the economy will not slip back into a second recession in the short term, as long as the above-mentioned downward-trending international risks do not materialise.

On a yearly base, the economy is heading for an increase in production of 1¾% in 2010. During the coming year, GDP growth is expected to decrease slightly to 1½%. The GDP volume in the Netherlands at the end of 2011 will in that case still be under the level reached just before the Great Recession.

EMU balance improves in 2011
Government finances are out of balance due to the Great Recession. Tax revenues have decreased dramatically, while expenditures have remained essentially as they were before the crisis. This resulted in an expected deficit of 5.8% of GDP in 2010. Because of budget cuts, increases in tax and premium contributions, the expiration of the stimulus package and the moderate economic recovery, the deficit is expected to decrease next year to 4.1% of GDP. In addition to the measures in the Dutch Budget Memorandum, these estimates also incorporate the measures included in the coalition agreement. Coalition agreement's measures contribute on balance for approximately ¼% to the improvement of the EMU balance in 2011.

The Macroeconomic Outlook (MEV), published in September 2010, forecasted that the 2011 deficit would decrease to 3.9% of GDP. That the deficit ends up somewhat higher in the December projection, in spite of the measures from the coalition agreement, is a consequence of the somewhat more unfavourable economic development. Dutch government debt, which was 45.3% of GDP before the crisis, will be at 66.9% of GDP during the coming year, in part due to the interventions in the financial sector.

Export growth reaches double digits
Following the trends in world trade, which will grow 10¾% and 4¾% in 2010 and 2011, respectively, the increase in the export of goods is forecast to reach double digits by the end of this year. The re-export of goods imported to the Netherlands, which then leave the country after only little processing, will increase by almost 18%. The growth will all but be cut in half in 2011. Export of domestically produced Dutch goods, which results in a far greater contribution to GDP growth than re-export, will increase by 7½% in 2010. This is the highest growth rate since 1984. During the coming year, growth will decrease to 2½%.

Families continue to save
It is expected that household consumption increases by a modest ¼% in 2010. During the coming year, growth of ¾% is projected. The total real available income will rise this year by approximately 2%, so the discretionary household saving rate will increase from 0.2% in 2009 to 1¾% in 2010. In other words, households save 1¾% of their available income. This is significantly more than past years. Next year the discretionary household saving rate is expected to remain amply positive.

Next year small increase in business investments
Companies are still not working at their full capacity. Moreover, as a result of the moderate development in production, capacity utilisation within the estimate period will only increase in a limited way. Companies still have little need for additional capacity therefore. This year business investments are projected to decline by 3¾% after they already fell last year by 18.2%. Small growth of 2¾% is predicted for the coming year. Mainly replacement investments will drive this growth.

Unemployment decreases
After a peak at 5.6% of the labour force (national definition) in February 2010, unemployment has continuously decreased, to 5.2% in October. The yearly unemployment average will probably be 5½%, or 425,000 people. Next year slightly fewer people will work for the government, but employment opportunities in health care and the market sector will increase, although the projected quarterly growth rate is small. The unemployment rate is projected to fall to an average of 5%.

Slight increase in inflation
Yearly inflation in 2010 is expected to be at 1¼%. Without a sharp increase in demand, the increase of the general price level is projected to remain limited at 1½%. The rise in contract wages in the market sector will be slightly under the level of inflation this year and around the level of inflation next year. The purchasing power of households will decrease on average both this and next year by ¼%.



Edwin van de Haar
Johan Verbruggen
Jasper de Jong