Economic recovery peaked in 2017, with GDP growth reaching 3.3%. For the years 2018 to 2020 we project growth at gradually slowing rates of 2.5%, 2.2% and 1.9%,respectively. All signs point to a sustained boom. With corporate utilisation rates high and labour markets tightening further, businesses in a growing number of sectors are hampered by shortages of staff and other resources. Over the projection horizon, this will put a drag on economic activity, mostly through rising wages and prices. This is evident from the new half-yearly forecast that De Nederlandsche Bank (DNB) published today.
High growth leads to bottlenecks
Over the 2018-2020 period, the Dutch economy should continue to show growth at above-trend but gradually slowing rates. Gross domestic product (GDP) peaked at 3.3% in 2017, and we project growth for 2018 to be slightly lower, at 2.5%. This figure is set to ease gradually to 2.2% in 2019 and 1.9% in 2020 (see Figure 1). With economic growth outpacing potential growth over the projection horizon, cyclical tension will increase further. Growth in those years will be fuelled mainly by domestic expenditure. Household consumption should expand by 3% in 2018, the highest rate seen since 2000, and is due to show further robust growth.
Employed people to benefit more strongly
The favourable trend in private consumption is closely related to the projected sharp increase in real disposable household incomes. Between 2018 and 2020, this income is set to go up by 2.8% annually on average. This is in stark contrast with the 2002-2013 period (-0.2% per annum), and the increase is also relatively steep when set against average growth seen in the past 35 years (1.6% per annum). The higher net compensation per employee will be the principal driver pushing up disposable household income. This means employed people will benefit more strongly from the economic recovery.
Tighter labour market; unemployment rate at historical low
The benign labour market should cause labour supply to widen by more than 1% annually on average between 2018 and 2020, which is considerably more than during the initial years of the economic upturn. Nevertheless, growth in labour supply will lag behind that in employment in 2018 and 2019. This will cause the unemployment rate to decline to an average of 3.8% of the labour force this year. In 2019 and 2020 unemployment is set to stabilise at around 3.5%, the lowest level seen in 45 years, with the exception of the 3.1% rate recorded in 2001. As a consequence, a growing number of businesses are having difficulty recruiting staff. In the second quarter of 2018, 20% of surveyed businesses said their operations were hampered by staff shortages, against less than 3% when the economic recovery set in halfway through 2014. While not all businesses suffer from staff shortages to the same extent, an increasing number are starting to feel the squeeze.
Wage growth and inflation shift into higher gear
The labour market tightness also has an effect on wage levels. In 2018, remuneration per worker in the business sector is set to regain momentum, growing by 1.9%. Our projections show that wage growth will be 3.5% in 2019 and 4.0% in 2020, assuming the usual wage-price dynamics. This will be a major factor in inflation picking up from 1.1% in 2018 to 2.5% in 2019. The increases in energy taxes and the low VAT rate (from 6% to 9%) – both announced for 2019 – will also be relevant factors in that year's inflation rate. The effect of higher tax rates on inflation should have dissipated in 2020, with inflation projected at 1.7%.
Escalating trade conflict poses major risk
Flaring up protectionism, possibly culminating into a trade war between the United States, China and the EU, poses a risk to the projected economic developments. Mutually imposed additional import tariffs weigh on international trade and dampen confidence, thereby putting a drag on the world economy. In an alternative projection scenario featuring an escalating trade conflict, the Dutch economy will be severely affected, with annual GDP growth 0.5 percentage points down in all three years.
For more information, please contact Ben Feiertag on +31 20 524 2304 or +31 6 524 96 142