Bijstelling meerjarencijfers 2004-2007

Dutch enterprises will continue to lose export market shares, due to the worsened price competitiveness in recent years. Domestic expenditure is restricted by rising pension premiums, tax increases and extensive cuts in public spending. As a result of the weak economic growth, unemployment is expected to rise sharply. Inflation will probably slow to an average 1.25 percent in 2004. Due to the disappointing development of the economy, the general government deficit will further widen to 2.6 percent of GDP next year, after which the deficit is expected to be reduced to 0.9 percent of GDP at the end of the Cabinet period in 2007.
These are some of the headlines of the CPB projections for the short term (2003 and 2004) and their implications for the economic scenario for 2004-2007 as released today. These forecasts are a prepublication of the Economic Outlook sector in CPB Report 2003/2, to be released on the 14th of July. These articles include the world economy, the Dutch economy and the new Coalition Agreement. The article on the new Coalition Agreement provides adjusted medium-term figures 2004-2007. This is an actualisation of the cautious economic scenario in the Economic Outlook 2004-2007 as presented in December 2002, now including the measures of the Coalition Agreement of the new Balkenende administration and the most recent expectations on the short-term developments. Thus, this note offers a consistent medium-term data framework that can serve as a point of reference for the new Cabinet period.

World economy recovers in second half of 2003
The uncertainties surrounding the war in Iraq have depressed world economic growth in the first months of this year. In the first quarter, world trade even fell by 1.3 percent at an annual rate. CPB expects a pick up of the international business cycle in the second half of this year. The upturn will be supported by lower oil prices, returning consumer and producer confidence, fading negative effects of the fall in share prices, easy monetary policies and low interest rates on capital markets.
The US economy is expected to feature a strong recovery from the second half of this year, resulting in growth rates of 2.25 and 3.5 percent in 2003 and 2004 respectively. The recovery in the euro countries will be later and slower. The euro area's competitiveness has deteriorated further this year, as a result of the appreciation of the euro against the dollar. Assuming an average rate of 1.15 dollar per euro for the rest of the year, growth in the area is expected to be only 0.75 percent this year. In 2004, growth in the euro area could accelerate to 2 percent, supported by the American upturn.

Dutch economy thrown into recession, with weak recovery ahead
According to provisional figures by Statistics Netherlands, quarter-to-quarter GDP growth for the first quarter of 2003 was slightly negative, after having been negative during the fourth quarter of 2002 as well. Two consecutive quarters of negative growth means that the Dutch economy is in recession according to a common definition. But more important is the observation that the quarter-to-quarter growth rates have been fluctuating around zero for the past two years and that there is no strong recovery in view. For the whole of 2003, CPB projects zero GDP growth, and for 2004 a modest 1.25 percent.
The development of production and unemployment in the present recession is strikingly similar to that in the recessions of the early 1980s and the early 1990s. The current downturn is deeper than that of a decade ago, but shallower than that of two decades ago. From a historical perspective, the projected recovery of economic growth in 2004 seems moderate.

Consumption growth at its lowest level in two decades
This year, private consumption is expected to increase by 0.5 percent, the lowest level in the last two decades. Given the projected fall in real disposable wage and benefit income, the growth rate is rather better than could have been expected. In addition, household wealth trends are having a depressing effect on consumption this year. House price increases are lagging behind inflation for the first time since 1990, and share prices are halfway this year still substantially below their end 2002 level. The projected modest acceleration of private consumption growth to 1 percent in 2004 is partly related to the reduced treatment cover in the public health insurance schemes. Public consumption declines because some parts of the collective insurance (such as physiotherapy and certain medicines) are removed from the package. As a result, private consumption of health will increase, because households have to pay the costs themselves, via insurance or not. Of course, this shift will not be felt as real consumption growth by consumers.

Investment growth remains negative
Private non-residential investment is declining since 2001, and this trend is expected to continue this year as well as in 2004. The low capacity utilisation rates do not induce an expansion of capacity. Moreover, businesses are restricted in their financing options by the continuing decline in profitability. Next year, the investments in machinery and computers are expected to pick up, thanks to a substantial recovery of profits. Nevertheless, total investments will fall further, reflecting the sharp reduction of investment in construction because of the widespread lack of occupancy of office space.

Recovery rests on exports
The hesitant economic recovery foreseen for next year can be largely attributed to domestically produced exports. After the estimated contraction of 'made in Holland' exports by 2.25 percent this year, they could expand by the same percentage in 2004. However, also next year, Dutch exporters will experience a substantial loss of market share. The main reason is the deteriorating price competitiveness, over the last five years mainly caused by a surge in unit labour costs, but recently in particular by the strong appreciation of the euro. Next year, the increase in Dutch unit labour costs will somewhat stay behind the euro area average, bringing an end to a long period of deteriorating price competitiveness against the euro competitors.

Doubling of unemployment over three years
Unemployment has surged since the beginning of this year. In response to the longer than expected contraction of economic activity, private employers decide to cut jobs. Moreover, current government policies will bring an end to the substantial job creation in the public sector. All in all, unemployment is expected to rise sharply, to an estimated 530 000 persons (6.75 percent of the labour force) in 2004, which implies a doubling over three years.

Falling inflation and wage rates
Inflation has slowed again from 2.5 percent in April to 2.3 percent in May. Since April this year a majority of euro area countries have higher inflation rates than the Netherlands. Inflation is expected to continue its fall to an average 1.25 percent in 2004, which can be attributed to a smaller increase in unit labour costs and lower import prices thanks to the appreciated euro. The moderation of wage increases is continuing. This year, contractual wages in the market sector are estimated to rise by 2.75 percent. In 2004, this rate will probably be reduced to 1.5 percent, because of the lower inflation and the steep rise in unemployment. Given the collective wage agreements concluded up to now, this forecast implies that the pay rises in the agreements that still have to be negotiated will be below the inflation rate level.

Scenario 2004-2007
In the update of the economic scenario 2004-2007 it is assumed that the weaker than expected economic growth is of a cyclical nature. This implies that the lower growth in 2003 and 2004 will be compensated in later years. Thus, economic growth in the period 2004-2007 could be an average 2.25 percent per year. The unemployment rate is expected to come out at 6.25 percent in 2007.

General government deficit
As a result of disappointing tax receipts and higher expenditures for unemployment, the general government deficit will rise further to 2.6 percent of GDP in 2004, which is 0.8 percentage point higher than assumed in Coalition Agreement. Because a substantial part of the deterioration is of a cyclical nature, the deficit in 2007 will come out at 0.9 percent of GDP, which is 0.4 percentage point higher than in the Agreement. Without the additional spending cuts and tax increases decided by the second Balkenende administration, the general government deficit would have exceeded the 3-percent norm of the Stabilisation and Growth Pact.

Related document: The new coaltion agreement