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Wednesday, 6 November 2013

The promised growth in The Netherlands for 2014 turns slowly into a mirage. Surprising? Not really!

Regular readers of this blog know that I had my doubts about the 0.5% economic growth for 2014, as forecasted by the Dutch Central Planning Bureau. I summarized my doubts in an article, of which I print some snippets here:

There should be little doubt that the economic crisis in The Netherlands is not over yet.

The large companies and multinationals desperately try to keep their profits and yields-per-share at level, by drastically cutting costs, getting rid of excess personnel by the thousands and pampering their shareholders; a.o. through stock buy-back programs and bonus dividend payments. The national and local governments do the same, to stay within their strongly diminished budgets.

Stories about mass lay-offs and wage restraints / reductions at large companies and the government appear in the newspapers almost every day. Real success stories are very hard to find.

At the same time, the crisis in Small and Medium Enterprise is still palpable. Tens of thousands of small and larger stores, companies and freelancers are clinging on to life by the skin of their teeth, while thousands of others simply default.

Hundreds of thousands of workers don’t see their wages increase at all and sometimes even decrease, in spite of the fact that (85% government-driven) inflation is eating away their purchase power. The whole situation in the Dutch economy has written the word DEFLATION all over it.

Today, the European Commission printed its outlook for Europe and there was indeed little optimism in it.

The European economy has started growing again in the second quarter of this year. Over the past months, there have been encouraging signs that the economic recovery will continue.

Growth in the second half of 2013 is forecast at 0.5 % compared to the same period 2012 in the EU. On an annual basis, GDP is expected to remain unchanged in the EU and to contract by 0.4 % in the eurozone in 2013. But looking ahead, growth is forecast to gradually gather pace, hitting 1.4 % in the EU and 1.1 % in the eurozone in 2014 (1.9 % and 1.7 % in 2015).
However, the aggregate figures mask substantial differences across EU member countries.

Domestic demand is set to gradually become the main engine of growth in Europe. This also against the background of a weakened outlook for emerging market economies.

Olli Rehn, Commission Vice-President for Economic and Monetary Affairs and the Euro: "There are increasing signs that the European economy has reached a turning point. The fiscal consolidation and structural reforms undertaken in Europe have created the basis for recovery. But it is too early to declare victory: unemployment remains at unacceptably high levels. That’s why we must continue working to modernise the European economy, for sustainable growth and job creation."

Since labour market developments typically lag behind GDP growth by half a year or more, the recovery of economic activity is expected to translate only gradually into job creation. This year, unemployment has remained very high in some countries and employment has continued to decline. However, recent months have seen labour-market conditions start to stabilise.

The outlook is for a modest decline in unemployment towards 10.7 % in the EU and 11.8 % in the eurozone by 2015. But national differences remain very wide, with unemployment ratios ranging from around 5 % to 27 % this year.

Subdued consumer-price inflation is expected to prevail throughout the forecast period. Inflation in the eurozone is expected to be 1.5 % in both 2013 and 2014. In the EU the outlook is for 1.7 % and 1.6 %, respectively.
Public finances

The reduction in general government deficits is set to continue. In 2013, fiscal deficits are projected to fall to 3.5 % of GDP in the EU and 3.1 % in the eurozone. In line with the projections for deficits and growth, debt-to-GDP ratios are still rising and expected to peak in 2014, at around 90 % in the EU and almost 96 % in the eurozone.

Domestic demand is expected to remain weak in the remainder of 2013, as budget consolidation, pension cuts and negative wealth effects, predominantly emanating from the housing market, continue to pose a drag on the economy. The resulting negative real disposable income developments coupled with deleveraging pressures weigh on Dutch economic performance quite significantly, despite a positive contribution from net exports.

While for 2014 domestic demand growth is still expected to be negative, a gradual pick up is set to take place in the course of the year. Investment is forecast to grow steadily on the back of a recovery in production and profitability. The strong rises in the capacity utilisation rate in August and September 2013, coupled with improved producer confidence provide early signals in this regard. At the same time, tightened financing conditions may hamper credit supply, in particular for SMEs, holding back investment.

Conversely, private consumption is forecast to remain weak, albeit less markedly than in previous years, and to pick up only later. In 2014, the positive effects of a stabilisation in the housing market transactions would not suffice to offset the trends in real disposable income and the labour market. In addition, household savings are unable to cushion the negative impact on private consumption due to on-going balance sheet adjustments. The household debt-to-GDP ratio decreased in 2012 and is forecast to decline even further.
Continued household deleveraging is forecast to dampen internal demand.

In 2014, net exports remain the main driver of economic growth, in line with improved international trade prospects. In 2015, domestic demand is projected to rebound, leading to a more balanced contribution of domestic and external demand to growth. In particular, private consumption is expected to recover substantially reflecting rising disposable income, partly due to lower pension contributions associated with reforms to the second pension pillar.

Risks to the macroeconomic scenario stemming from domestic developments are predominantly on the downside. If uncertainties regarding the implementation and effects of foreseen measures in areas such as pensions and the labour market materialise, this may hamper the recovery of domestic demand. On the other hand, a faster and more pronounced stabilisation of the housing market could provide an additional boost.

Unemployment rose sharply in the beginning of 2013 as a result of declining employment and the increase in labour supply which stems from attempts to cover for household income losses.

Whilst the rise in seasonally-adjusted unemployment has moderated over the summer months, the fragile economic outlook and a further rise in labour supply still imply a continued rise in the unemployment rate from around 7% in 2013 to 8% in 2014. In 2015, in line with improved cyclical prospects and the employment response lags, the unemployment rate is forecast to ease slightly.

The Dutch Finance Minister and chairman of the Euro-group Jeroen Dijsselbloem found that the European Commission had been too pessimistic. He tried to downplay the EC’s message:

Dijsselbloem: Forecast Brussels too grim

The European Commission is ‘a little too grim’ in its economic forecast for The Netherlands for 2014. This was stated by Dutch Finance Minister Dijsselbloem this Tuesday, 5 November 2013.

According to Dijsselbloem the Dutch housing market and the inflation develop more favourable than Brussels is estimating currently. ‘We have to sit and wait, but in general The Netherlands comes out of the recession next year. The recovery yet is weak, but there definitely IS a recovery”.

He acknowledges that the falling trend in the EC forecast is in line with the forecast of the Dutch Central Planning Bureau. "The economic recovery starts much more slowly than we hoped for last year", according to Dijsselbloem.

He warranted that there will be no additional austerity next year, on top of the austerity measures from last year’s government agreement and those from this year’s budget agreement with the opposition parties D66 (liberal), ChristenUnie (leftwing confessional party) and SGP (rightwing confessional party).

Oh dear, Minister Dijsselbloem. This afternoon you introduced fact free economics against the well-founded conclusions of the European Commission. Yes, the housing market might be a few notches better than last year, but with the soaring unemployment and the cash-strapped citizens in mind, it is much too early to raise the flag.

And on top of that, you introduced value-free warrants against further austerity measures by the Dutch government today. Because… When Commissioner Olli Rehn thinks that the Dutch economy needs additional austerity measures in 2014 in order to meet the demands from the Stability and Growth Pact, I don't expect you to protest against this. 

Even if you wanted to protest against this, you would alienate the people in the PIIGS countries. These people already suffered dearly from the PM's Balkenende and Rutte, who - in cooperation with Germany - repeatedly banged the drum to force mindless and ruthless austerity upon these countries.

With the following sentence, the European Commission has been spot on:

At the same time, tightened financing conditions may hamper credit supply, in particular for SME's, holding back investment.

Banks have altered their authorization processes for new loans and credit lines towards SME (small and medium enterprise) and corporate customers. This has not been done out of luxury, but in order to cut unnecessary / avoidable losses for on future loans and credit lines.

This is not a sign that the economy will improve; rather to the contrary:
  • It proves once more that the current SME companies have obviously much difficulties to pay back their loans and probably quite often even fail at this. Not surprising, but very important to keep in mind.
  • These measures will obviously hamper the credit supply from the banks to other SME companies, meaning that these companies have less financial fire-power to help the economy recover. 
The consumption and demand of 2007 / early 2008 - the last years before the crisis - will probably not return for many years. This means that the required production and services facilities and, as a consequence, employment will remain at a structurally lower level than in these years of hedonistic consumption (see second red and bold text). People have gotten used to and even feel comfortable with spending (much) less money than they did in f.i. 2007.

This, in combination with (in)voluntary wage restraint and even wage reduction, will put a lid on consumption for years to come.

What did I say? Voluntary wage reduction?! What the heck?!

Read this staggering article from BNR today:

One third of the employees is willing to sacrifice a part of their salary in order to keep their job. This was disclosed by the National Salary Inquiry by Intermediar magazine and Nyenrode Business University. And also for a more interesting job, 41% of employees is willing to sacrifice salary.

“Initially I had been expecting more”, according to professor Jaap van Muijen of Nyenrode Business University at BNR news radio, when it came to the 33%. “You can see that general employment is under heavy pressure in a number of industries. However, at the same time you could state: Why should you sacrifice salary when you are good at your job?! When your job is at stake, why should you lower your salary. This could yield less unemployment benefit in the future eventually”.

Besides that, there are people who simply can’t sacrifice their salary anymore”, according to Van Muijen. “Think about people who recently bought a house, which has gone considerably under water right now. There is little leeway. All in all one third is not very surprising”.

Well, about the red and bold text, I can unfortunately state that not every employer gives you a real choice, when it comes to involuntarily sacrificing your salary. Some companies present it to their employees as an irreversible fact. Take it or leave it… otherwise the company might not survive. Who wants to take the risk of pushing his own employer over the edge?!

The most bewildering circumstance is that The Netherlands has already gone through a period of thirty years of almost continuous wage restraint, starting in the eighties. This was great for Dutch exports and turned us virtually into the world champions of exports, but it has been killing for Dutch domestic consumption.

Still, for the employer’s associations and the labour unions, wage restraint seems to be the single medicine for all economic disorders.

The folllowing must-read article by the distinguished Robin Fransman of Follow-the-Money shows the devastating results of continuous wage restraint on domestic consumption. Please read it in Dutch or use Google Translate: Short history of wage restraint in charts.

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