Economic growth peaks at 3.3% in 2017. The next two years are also likely to show vigorous growth, at 3.1% and 2.3%, successively. Economic growth is broadly based and supported by all expenditure categories. Unemployment is set to fall to 4.9% in 2017, gradually declining further to 3.5% by 2019. Inflation will reach 1.3% this year, remain almost flat at 1,4% in 2018 and grow to 2.3% in 2019, fuelled mainly by higher VAT and energy tax rates. This is evident from the new half-yearly forecast that De Nederlandsche Bank (DNB) published today.
Economic growth continues to exceed trend in the next few years
The Dutch economy maintains its robust performance. Growth in gross domestic product (GDP) is expected to peak at 3.3% in 2017, a rate not seen in a decade. For 2018 and 2019 we project growth at a gradually slowing but still above-trend rate of 3.1% and 2.3%, respectively. Growth in those years will be fuelled mainly by domestic expenditure. Household consumption will increase markedly over the next two years, at 2.2% a year on average. Disposable income should improve on the back of higher gross employment remuneration and a strong pick-up in employment, supported by lower income tax. As in the past few years, GDP growth in 2017 will exceed projected potential growth of around 1.7% a year. As a result, the surplus capacity seen in recent years has now evaporated. Over the projection horizon, cyclical tension will increase further and the economy will clearly enter a boom phase.
Labour market is progressively tightening and wage increases are expected
Better prospects encourage more people to enter the labour market. With employment outpacing growth in labour supply, unemployment is set to drop further, averaging 3.5% in 2019 from 4.9% in 2017. This would bring the figure to a level below that prevailing on the eve of the credit crisis. The rise in negotiated wages will remain moderate in 2017, at 1.6%, but it is projected to be 2.1% in 2018. In 2019, the rise in negotiated wages will accelerate further to 2.5%, reflecting labour market tightening and higher inflation. The higher wage growth in 2018 and 2019 will also nudge up the labour income share (LIS) of businesses, which is projected to increase by around one percentage point, from 72.3% to 73.4%. It will nevertheless remain below the long-term average throughout the projection horizon.
Housing market is going full steam ahead
During the past twelve months, the number of housing transactions reached a record 239,000, leaving no doubt that the Dutch housing market is going full steam ahead. At 7.5% in 2017, the increase in house prices contributes significantly to economic growth through higher financial assets of households, risen consumer confidence and increased residential investment. In our projections, house price growth will ease gradually over the next two years to an average of just above 6% a year. Remarkably, the largest relative increase in the number of transactions can currently be seen in provinces outside the Randstad conurbation, for instance Flevoland and Drenthe. Conversely, the number of transactions dropped in Amsterdam and Utrecht, where markets had become so much overheated that a turnaround became unavoidable.
Higher capital market rates could moderate growthAn exploratory scenario shows the potential adverse effects that a global rise in capital market rates will have on the Dutch economy. If these rates were to rise by one percentage point on a lasting basis, this would depress Dutch GDP growth by an average of 0.4 percentage points a year in the first four years. The impact on growth would be the greatest in the first two years and subsequently wane.In view of the GDP projections for the next two years, which assume 2.7% growth on average, growth may be expected to remain well above its potential even at capital market rates that are one percentage point higher.
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