Economierapportage december 2002

The moderation of pay increases, partly owing to the recently concluded social accord, will have a positive impact on economic growth mainly in later years. Due to the continuing slow pace of activity, unemployment will rise next year by about 100 000 persons, or 1.25 percentage point of the labour force. The purchasing power of households will be under strong pressure next year.

These are some highlights of the December forecasts of CPB Netherlands' Bureau for Economic Policy Analysis, which will be published in full in the CPB Report 2002/4. The forecasts are available on www.cpb.nl as from now. Simultaneously with this prepublication, CPB has released an Economic report to the Minister of Economic Affairs as well as an article in the ESB magazine. All three publications contain the same CPB forecasts, but with a different degree of detail and comments.

Global recovery with ebbs and flows
Following a strong improvement in the first half of this year, the recovery lost momentum in the United States as well as in Japan and Europe. Households are hesitant to consume and firms to invest in equipment and inventories. Thus, the recovery is quite uneven, partly due to the global cross currents of financial markets and geopolitical tensions. The pause in the global upturn is expected to end during the first half of next year, with a more pronounced growth rate thereafter, helped by improving profitability, rising productivity and substantial monetary and fiscal stimulus. Nevertheless, the upturn can be characterized as brisk and uncertain. GDP growth of the industrial world is projected to accelerate to 2.25 percent next year. The US upturn has been quite bumpy this year. Quarters with strong growth were followed by a weaker quarter, mainly due to inventory fluctuations. Although activity is expected to remain weak at the beginning of 2003, monetary and fiscal impulses, and rising profits could push economic growth next year to a respectable 2.75 percent.
In the euro area, disappointing production figures and gloomy leading indicators have been reason for a downward revision of growth prospects. For the present year the area's economic growth is projected at 0.75 percent, and for next year at 1.75 percent.
Mirroring demand, world trade growth substantially decelerated in the second half of this year. For the coming year, with output bouncing back, world trade is expected to accelerate to 7.5 percent, compared with an estimated 3.25 percent for the current year.

Dutch economy from stagnation to weak growth
The Netherlands' economy has shown negligible growth for five quarters in succession. In the third quarter of this year Statistics Netherlands registered a 0.3 percent increase, but this figure can largely be accounted for by an additional working day. CPB's leading indicator is sloping downward for the fourth quarter of this year and the start of next year. With a projected growth rate for the year as a whole of 0.75 percent, the Dutch economy will also under-perform in 2003. Dutch enterprises will lose market share because of a further loss of price competitiveness. Moreover, the 2003 budget plan contains drastic cuts of government spending and tax increases for households. A sharp increase of pension contributions also increases wage costs and reduces the purchasing power of households.

Low exports due to ICT and deteriorating competitiveness
For the first time since the seventies, Dutch export volume will contract this year. Main culprit is a sharp decline in re-exports, in particular of computers and mobile telephones. Re-exports are products which are imported and exported again after some minimal processing. But also domestically produced exports have been developing less well than export market growth for a number of years (the year 2000 was an exception). This is largely due to the deterioration of price competitiveness, which in turn is due to a negative trend in unit labour costs for Dutch exporters relative to European competitors. This year, Dutch exporters also lose competitiveness against non-euro suppliers, due to the appreciation of the euro.

Slow but fairly stable consumption growth
Personal consumption will grow by no more than 1.25 percent this year, due to the stock market fall, smaller price rises of dwellings and a limited growth in income by households. Next year, the consumption of households is expected to rise further by about 1 percent, although the real disposable household income will probably decline. The reasons are that households adjust their spending with a delay, and that a substantial amount of frozen savings balances of the save-as-you-earn scheme for workers will be defrosted.

Investments further down
Investments by enterprises are expected to continue their fall this year and next. Due to sluggish output growth, businesses are more and more confronted with over-capacity. Moreover, business profits have been under pressure for several years already, and a recovery of profits is not yet in view. The labour share in enterprise income will be rising slightly next year. Low profitability makes investment unattractive and hampers the financing from own funds.

Unemployment rising strongly
The number of unemployed has been rising strongly in the first months of this year, but the rise has slowed since summer. The moderate development of unemployment can be explained by a surge in public-sector jobs: employment in the government and the health sector are increasing this year by more than 50 000 persons. Employment in the market sector will come out 0.5 percent lower this year, and a further reduction is expected for next year. Then, the growth in the number of public-sector jobs will slow. The result is a rise in unemployment by more than 100 000 persons.

Slower development of prices and earnings
In the period May to October, the rise in CPI fluctuated between 3.3 and 3.5 percent. In the final months of this year inflation is likely to remain above 3 percent. A distinct deceleration is expected next year, to an average of 2.5 percent, owing to a projected moderation in unit labour cost increases and lower import prices. The expected lower inflation, rising unemployment and an unfavourable development of productivity have a depressing effect on the wage development. Contractual pay rates are estimated to increase this year by 3.75 percent. Not least owing to the recently concluded social accord between government, the employers' associations and trade-union federations, the contractual pay increases are likely to moderate to 2.5 percent for new contracts. Because a number of contracts are already concluded, the average pay increase may come out at 2.75 percent next year.

Purchasing power falling next year
Following several years of, sometimes strongly, rising purchasing power, the propensity to spend will be distinctly lower next year. Contributions for health care and pensions are rising sharply, and also the tax burden is rising. The average decline in purchasing power in 2003 will be 1.25 percent. The reduction is less severe for old aged (-0.25%) and benefit recipients (-1%) than for employees (-2%).

EMU-balance deteriorates
Due to the cyclical weakness, the slight public sector surplus of 2001 turns into a deficit of 0.8 percent of GDP this year, and rises to 1.1 percent in 2003. In view of the persisting slow growth of activity, the deterioration of the public balance is still rather modest, thanks to the tax increases and cuts in the 2003 budget.