September 15, 2009

Macro Economic Outlook (MEV) 2010

Dutch economy: free-fall has ended; slow recovery

Press release
The credit crisis has thrown the world economy into a deep recession. The Dutch economy cannot escape from this and is expected to contract by 4¾% this year. For 2010, zero growth is foreseen.

These developments will have a far-reaching impact on unemployment and public finance: according to today's forecasts, unemployment will rise to 8% in 2010, while the general government budget balance is expected to show a deficit of 4.6% GDP in 2009 and 6.2% GDP in 2010.

These are some of the headlines in CPB's Macro Economic Outlook 2010, published today. This Outlook (in short: MEV) contains analyses and forecasts for the world economy and the Dutch economy in the years 2009 and 2010. CPB Newsletter 2009/3, also released today, provides the main economic indicators from the MEV 2010 in English.

Plummeting of the world economy stopped by public interventions
Unprecedented large interventions by central banks and governments in reaction to the total disruption of the world economy have stopped the free-fall of the world economy, but it is too early yet to say that the situation is under control. The damages are large: consumers and firms in sombre moods have scaled down their expenditure; decreasing demand and lack of commercial credit possibilities have caused world trade to collapse in an extremely fast pace. World production will fall this year - for the first time since World War II.

GDP in the euro area is expected to fall by 4½% in 2009. Total unemployment for the euro area will be more than 10% by the end of this year. In many Asian countries, GDP development has already taken a positive turn in the second quarter of 2009 (as compared to the first quarter), whereas GDP in the rest of the world has, in general, still declined in the period April-June, but much less than in the half year before.

The economic situation will probably show a further improvement in the second half of this year and in 2010. Economic growth will only be moderate, however. Structural adaptations (due, among other reasons, to the necessity of lowering the indebtedness of households and banks) will put the brake on demand. World trade will therefore still be considerably lower by the end of 2010 than it was in the first half of 2008. Unemployment and government deficits will mount to record levels next year.

2009 and 2010 will be meagre years for the Dutch economy
The Dutch economy has gone through rough times - production has declined in five consecutive quarters - and the picture for the near future is not at all rosy. Although the current recession reached rock bottom in the first quarter of this year (in terms of quarter-to-quarter economic growth), the Dutch economy will still perform well below its potential level until the end of the outlook period (2009-2010).

Low exports
As the Netherlands is a small and open economy, the country expressly experiences the consequences of the worldwide drop in demand. Re-exports are expected to decrease by 12½% this year. Domestically produced exports will also show a large fall, of 14¾%. According to today's forecasts, Dutch re-exports will expand by 4½% next year, while the rise in 'made in Holland' exports will then be limited to 1½%. Thus, both export categories follow the pattern of relevant world trade, which will probably decline by a post-war record of 14¾%, followed by meagre growth next year, of 2½%. That will still be well under the average growth rate of the preceding decades.

Reduction in household consumption
Households are expected to consume 2¾% less this year than last year, despite the forecast 3% increase in real disposable wage- and benefit income. Next to the decline in profit income of over 40% in 2009 (almost 7 billion euro), households see their housing wealth diminish as a result of slightly descending home prices. This moderate drop in home prices will probably last for some time, which harms consumer confidence. In addition, households have lost some 60 billion euro in stock wealth. Because of the lack of confidence and the heavy wealth losses, households will choose to save 2½% of their disposable income. Next year, household consumption could drop by another ¾% compared to the already low level of 2009.

Investments will fall back by almost 25% in two years' time
Because of the plummeting demand, from both abroad and home, private enterprise is not in top gear this year. Capacity utilization is relatively low. As a result, firms have little reason to invest right now. What's more, profitability is under pressure. That makes it more difficult to finance investments - all the more so in a period in which banks are sharpening credit conditions. The result is an expected decrease in private non-residential gross fixed investment of 14% in 2009 and another 9½% in 2010.

Unemployment doubles
Usually there is some delay in the reaction of unemployment to changes in production. This year, employment (measured in persons) is expected to decrease by ¾%; for 2010, a further decline of 2¾% is forecast. Under the influence of unfavourable circumstances at the labour market, the so-called cyclical labour supply diminishes: women postpone their return to the labour market, young people decide to study longer, and some of the elderly retire earlier. This exerts a restraining influence on unemployment. The introduction of a part-time unemployment scheme also lowers official unemployment figures: statistics do not count people in this scheme as unemployed, because they still have a job. Nevertheless, unemployment will rise to (on average) 5¼% this year and 8% next year - a twofold increase compared to 2008.

Inflation will remain above zero
As a consequence of the worldwide fall in demand and the lower oil price (and related to that, the lower prices for natural gas and electricity), inflation will go down from 2.5% in 2008 to an expected 1% in 2009. All the same, the rise in contractual wages will be 3% on average this year. This rise is relatively large, compared to inflation, because many collective labour agreements for this year were settled in 2008, when inflation was still high and unemployment low. As it is forecast now, inflation will also be 1% next year. The rise in contractual wages will drop to 1½% on average, as a result of quickly increasing unemployment and low inflation.

Purchasing power in the lift in 2009; small decrease in 2010
Despite the credit crisis, static purchasing power will increase by 1¾% in 2009 (median). Static purchasing power figures reflect how purchasing power develops if individuals do not meet changes such as loss of a job, getting a promotion, working less overtime, marriage or a divorce. This means that the consequences of rising unemployment and of cancelled bonuses and profit sharing are not visible in static purchasing power. However, because of the credit crisis many households will experience these kinds of changes, which means that their actual purchasing power will develop less favourably. And yet, not the consumers, but government and businesses, will be faced most with the consequences of the credit crisis, in the shape of large EMU deficits and lower profits, respectively. In 2010, households will (on average) lose some purchasing power. The median change in purchasing power will then be -¼%.

Government budget in the red
Automatic stabilization has a powerful influence on public finances in 2009 and 2010. Expenditures on unemployment benefits are increasing strongly; tax revenues fall back substantially. While this provides a forceful impulse to the economy, it also creates a hole in the budget. After three consecutive years with a surplus, 2009 is expected to show a deficit of 4.6% GDP in 2009. The general government budget balance will worsen further to a projected deficit of 6.2% GDP in 2010. Combined with the strong interventions in the financial sector, this results in increasing public debt - from 46% GDP in 2007 to an expected 66% GDP in 2010.

Consequences of credit crisis will be felt for a long time
Uncertainties are large. A more timely restoration of consumer and/or producer confidence could lead to a more robust recovery than indicated by the scenarios included in the present forecasts. On the other hand, the bankruptcy of a bank or of (for example) a Baltic state could nip the fragile recovery in the bud. In any case, the consequences of the credit crisis will be felt for quite some time. The rapid increase in public debt will lead to higher interest payments. In addition, households and pension funds have suffered severe losses in wealth, which means lower tax revenues. On top of that, unemployment is expected to stay relatively high for some years, with the accompanying extra government expenditure.


Dick Morks
Johan Verbruggen

Read here the accompanying press release.


Dick Morks
Johan Verbruggen

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