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Monday, 12 March 2012

Dutch National Bank blames low consumption in The Netherlands on moderate wage development during the first decade of this millennium.

Since former president Nout Wellink left Dutch National Bank ‘De Nederlandsche Bank’ (DNB), it seems that a fresh breeze is blowing through the organization. Under the new presidency of Klaas Knot, the organization tries to win back some of the prestige it lost during the last years of Wellink’s presidency. Whether that is indeed true or a false impression of mine will show itself in time.

Last Thursday, March 8, the DNB published a must-read article on consumer behavior in The Netherlands. Only today I found the opportunity to react to it, but as the content is very interesting I still want to share it. I will show here the largest part of the article, combined with my comments. Inquiring readers can of course read the whole part, using Google Translate.

In the nineties, The Netherlands enjoyed almost the highest growth of consumption of all countries in the European Union. After the year 2000, however, there was virtually a total turnaround of this pattern. Since then consumption growth is very poor, especially since the credit crisis. This is caused by both the stalling income growth and the weaker housing market.

From the data that the Dutch Central Bureau of Statistics ( presented, it became clear that The Netherlands is currently in a recession. The Gross Domestic Product contracted two quarters in a row. A decisive factor in the process was the dropping consumption of households.

The weakness of current consumption is shown by chart 1. The consumption in The Netherlands during the last years has been compared with the consumption during similar slump phases in the past and with the consumption in the whole Euro-zone. The fixed point here is always the peak of the previous consumption cycle (the year t). The chart shows that consumption growth at the moment is still much weaker than growth during the serious economic crisis at the beginning of the eighties. Probably, the trough of this consumption cycle will be reached only this year. In the eighties, recovery of consumption happened more quickly.

1 Private consumption during the cycle
Source: CBS, DNB and OECD
Click to enlarge
Also in European perspective (see the red arrows) the Dutch consumption is deviating. While the consumption in the other countries of the Euro-zone (year t + 3) was about equal to the level of 2008, the consumption in The Netherlands was still 3% lower. The weak Dutch consumption is not something that occured only during the last years. From the beginning of this century, the Dutch consumers are more reluctant than consumers in other Euro-countries. During the last ten years, the consumption growth was nowhere as weak as in our country (see chart two). That is remarkable, as The Netherlands was among the countries with the highest consumption growth during the nineties. What is the explanation for the deviant Dutch consumption pattern?

2 Average growth in terms of percentage in the Euro-zone
Source: European Commission, Eurostat and OECD
Click to enlarge
The relatively sharp turnaround in the Dutch consumption pattern after the millennium change is mainly the result of a much less healthy labor market. During the nineties the wages rose sharply. Employment was growing so quickly that employers, on an increasingly tight labor market, had to offer a substantial higher reward to acquire the personnel of their desire.

The situation since the beginning of this century was very different. The yearly increase of labor income was only moderate in The Netherlands, in comparison to the previous decade as well as to the Euro-zone. In real terms, the Dutch labor income decreased from 2002-2011 with an average 0.7%. During the period 1992-3002, there was an average increase of 3.2%.

An important role is also played by the pension fees. As a consequence of the profits that the Dutch pension funds made on their stock portfolios, the pension fees could be reduced during the second half of the nineties. However, when the fees were not cost-covering anymore, during the first years of the millennium, the reversed effect was occuring. The necessary increase of pension fees and austerity of pension plans reduced growth of disposable income. 

Also the influence of the housing market was very different. The increase in housing prices in The Netherlands took place earlier than in the rest of the Euro-zone and was relatively large. Dutch housing prices doubled between 1995 and 2001, while housing prices in the rest of the Euro-area increased by only 25%. Dutch houseowners felt richer in those years, due to the increasing excess value and entered into extra mortgage contracts. Starters got more indebted than before, as banks softened lending regulations. In this way the rise in housing prices gave a big impulse to consumption. When the Dutch housing market weakened in the first decade of this millennium, this impulse decreased strongly. In many other euro-countries the rise of housing prices gained momentum at the same moment, which increased the difference in consumption growth.

Since the credit crisis the Dutch consumption is mainly under pressure of the limited income growth – also in European perspective – and from the dropping prices on the housing market. Compared to its peak, the Dutch housing prices dropped by 10%. This is less than in Ireland and Spain, but much more than in the other parts of the Euro-zone where the level of the housing prices is only just below the pre-crisis level. Especially the households that stepped into the housing market just before the crisis, couldn’t create excess value on their house. Many households will tend to save extra money or make redemptions on their mortgage, as the value of their house is lower than the mortgage debt they entered into.

This DNB article is a really great piece of research, as it explains both the very low consumption in The Netherlands, as well as the success of Dutch exports during this decade.

The effect of the Dutch reduced wage growth during the last decade was almost equal to the official German policy of wage restraint that was introduced by former German chancellor Gerhard Schröder at the end of the nineties. Both countries became champions of exports that introduced a kind of beggar-thy-neighbor policy towards the PIIGS.

With reduced production costs, due to the (in)voluntary wage restraint in both countries, and with cheap loans that enabled the PIIGS to pay for their excess imports, Germany and The Netherlands exported their economic growth together. That Dutch and German citizens were the victims of this policy and that the inevitable result of this policy was a sharp drop in domestic consumption, was conveniently forgotten by the governments in both countries. Until now…

As a consequence of the sovereign debt crisis in the PIIGS, the consumption in the periphery of Europe dropped sharply and is not likely to return to pre-crisis levels very soon. This will have a very serious effect on Dutch and German exports, as the PIIGS countries were extremely important customers that imported a substantial part of Dutch and German exports. And also France, another important customer, will not grow substantially in the coming years: although it is not in a recession (unlike The Netherlands and Germany), there is no reason for optimism whatsoever.

People that saw the shiny results of BMW and Volkswagen lately may think that the recession in Germany and The Netherlands will only be very mild. My opinion: forget it!

Exports to the PIIGS will drop sharply this year. Exports to China will also drop sharply this year, as the Chinese economy shows serious signs of cooling down. Consumption in the US and in the other BRIC-countries (India, Brasil and Russia) will not be sufficient to fill in this void. Especially Russia, after the reelection of Vladimir Putin, might suffer twelve other years of stagnation, that come on top of the lost Medvedev years.

And domestic consumption in Germany and The Netherlands? It will take years and years to recover, as (in)voluntary wage restraint has long-term effects on consumption.

The only thing that this article by the DNB didn’t disclose was the disputable role that the DNB played during the Nout Wellink years.

Who enabled the low interest rates during the nineties? And who allowed the Dutch banks to overindebt the Dutch citizens with mortgages and personal loans? And who reacted very reluctant concerning the Dutch housing market? The DNB! So although this is a good article, it tells only half the truth.

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