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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