What economy will the new Dutch government inherit?

What economy will the new Dutch government inherit?

Dutch Prime Minister Mark Rutte’s liberal VVD party has won again despite losing seats, keeping the far right in a largely ineffectual position. The Netherlands is one of Europe’s best performing economies, which surely helped see reason ultimately triumph over populism after a campaign dominated by much political noise from Geert Wilders’ anti-immigration party. And yet voters still punished the outgoing coalition heavily. Rutte’s party lost about a quarter of its support and its traditional coalition partner all but collapsed, with the Green-Left party making substantial gains to emerge as an unexpected victor of the night and a potential kingmaker in coalition negotiations. On the face of it the Dutch economy is doing remarkably well, yet voters were clearly not entirely happy with the political status quo. While the Liberals do battle behind the scenes to form a working majority in the fragmented Dutch parliament, we take a look at the economic situation that the new government will inherit.

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Amid the recession of 2011 and 2012, Rutte’s government pushed through harsh spending cuts before the Dutch economy began to see the light again at the end of 2013. Since then, bar a few inevitable bumps and blips on the road, headline figures suggest that the economy has gone gradually from strength to strength, at least in comparison with many of its Eurozone peers. GDP growth reached 2.1% last year, significantly above the Euro area average of 1.7%. This year and next, economic growth will decelerate, as elsewhere, but it will still remain above average. Our March Consensus Forecast, obtained by polling 18 leading local and international macroeconomic analysts, sees Dutch GDP growing 1.9% this year and 1.7% next, compared to average growth in the Euro area of 1.6% and 1.5%, respectively.

A competitive economy, the Netherlands is also a standout performer in terms of its current account balance, which we see hitting a surplus of 8.1% of GDP this year and 7.9% next. These figures are well above the Euro area averages of 3.0% and 2.8% of GDP respectively and even beat Germany’s performance (8.0% and 7.6%), the Eurozone member best known for accumulating colossal current account surpluses. As in that country, the weak euro has benefitted the Netherlands’ strong export sector, which will receive a further boost this year from the expected pickup in global growth.

On the fiscal front too, the Netherlands has a stellar record. It quickly corrected its 3.9% deficit in 2012 to return to well within the EU’s 3% of GDP target from 2013 onwards. After coming in at 0.9% of GDP last year, our analysts expect the Dutch deficit to keep diminishing going forward, recording 0.4% of GDP this year and 0.2% in 2018. Again, these figures beat our average deficit forecasts of 1.6% and 1.5% for the Eurozone as a whole.

Luckily for the Netherlands, it has avoided the explosion in public debt levels seen in so many of its Eurozone peers in the wake of the financial crisis. Public debt, which came in at 63.1% of GDP last year, is expected to continue its slow but steady decline to 61.2% this year before reaching 59.4% in 2018, thereby falling within the EU’s 60% desired limit. In stark contrast, Eurozone public debt overall, which was 90.4% of GDP last year, will only decline to 89.6% and 88.4% this year and next.

So far, so good for the Netherlands then. So why has the outgoing coalition still been punished? Of course, not all of it is entirely related to the economy, with the far right having mercilessly exploited other concerns preying on people’s minds in relation to immigration and terrorism. But some of it most definitely is economic in origin. The Netherlands’ strong economic performance is only relative, given that it comes in a context of ongoing Eurozone woes. And, as seen in other countries such as Spain, which has experienced remarkably robust GDP growth in recent quarters despite difficult political conditions, strong growth does not necessarily translate into tangible improvements in the lives of citizens themselves, many of whom are still feeling the effects of the crisis far too acutely.

In the Dutch case, analysts began to celebrate in the third quarter last year that consumers seemed finally to have fully joined the recovery. Private consumption growth jumped in that three-month period as purchasing power improved on the back of tax cuts, declining consumer prices and increasing employment. But growth in consumer spending weakened again in the final quarter, suggesting it may be too early to jump to conclusions.

Public debt may be faring well in the Netherlands, but private debt most certainly isn’t. Last year, Eurostat produced a debt-to-income ratio by comparing total debt per household to the average income per household. And it was not Greece, Italy, Portugal or Spain that topped the list of the most debt-burdened households in the Eurozone, but rather the Netherlands. Hefty outstanding mortgages are responsible for a large chunk of the problem, as the burst housing bubble continues to hang over Dutch consumers and the economy like a sword of Damocles. House prices may gradually have been picking up since the abyss of 2013, but they remain below pre-crisis levels and the residential mortgage debt load in the Netherlands continues to far outstrip the Eurozone average. Add to this the fact that any benefits of the recovery for consumers have been decidedly uneven, with consumer confidence remaining weak among low earners and unemployment still afflicting far more people than it did pre-crisis, and some of the Dutch discontent starts to make more sense.

Not surprisingly, Dutch consumers have therefore not exactly been jumping up and down with glee as the Dutch economy has consistently beaten average Eurozone GDP growth rates in recent quarters. The Netherlands may have a fine current account balance, but many consumers who have suffered falling house prices, unemployment and government austerity measures are continuing to feel the pinch. Indeed, if we look at real household consumption per person, which is probably the best indication of living standards, the Dutch are still consuming less on average than they were a decade ago, whereas the average of the Eurozone is almost back to normal. Mark Rutte may be celebrating just now, but he and whatever new government he forms face some interesting challenges ahead to prevent any lingering discontent among Dutch citizens from spreading further.

Author: Caroline Gray, PhD, Senior Economics Editor  

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Date: March 16, 2017


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