Turnaround in the economy

In the Autumn Projections of December 2023, DNB projected that the Dutch economy will gradually recover this year. The recovery will follow a contraction in the final quarters of 2023, with gross domestic product (GDP) falling less in the fourth quarter than in the third (-0.4% compared to -0.8%, year-on-year). On a quarterly basis, GDP rose 0.4% in the fourth quarter. Does this mean the economy is on the threshold of a new upward phase? (Figure 1).

Figure 1 - Real GDP growth (year-on-year) and phases of the business cycle

The phases of the business cycle according to the DNB business cycle indicator

Wave motions in the economy

To answer that question, we look at the cycle of GDP growth. This is the movement of year-on-year growth around trend growth. The movement evolves in waves and is known as the business cycle. An upturn in the business cycle indicates that the recovery phase in the economy has commenced. We can detect this in the labour market and the housing market, for example, but with some delay. For instance, soon after an upturn in the business cycle, demand for workers usually increases and house prices rise faster.

Business and household expectations

The DNB business cycle indicator (the red line in Figure 2) signals future turning points in GDP growth. It is composed of five economic indicators that are known to anticipate turning points in the Dutch business cycle. These are indicators of household and business expectations about the economy and an indicator for the money market interest rate. One indicator, for example, is consumer confidence about the economic situation in the year ahead. Another indicator is new orders received by companies.

Households’ expectations and companies’ activities provide input for projecting future economic growth. This information is compiled in the business cycle indicator, which looks ahead six months on average at the wave motion of GDP growth. The business cycle indicator reveals that GDP growth (blue line in Figure 2) has been below trend growth (i.e. below the horizontal line in the middle of the graph) since summer 2023.

Turnaround to recovery

The indicator (red line in Figure 2) turns upwards in March 2024. The turnaround in the business cycle indicator is comprehensive, with each of the five sub-indicators showing a turnaround in the cycle. This is a clear signal that the upward phase in the economic growth cycle has commenced. The near-term recovery in growth will be moderate. Indeed, as long as the indicator remains below the horizontal line, GDP growth remains below trend. A moderate recovery in 2024 is in line with our Autumn Projections and the recent projections published by the CPB Netherlands Bureau for Economic Policy Analysis.

A turning point in the business cycle indicator, as we are seeing now, is a clear signal of the start of an economic recovery phase. The past 20 years have shown that turning points in the indicator have coincided with turning points in the business cycle.