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Tuesday, 31 December 2013

Ernst’s Economy: The outlook for The Netherlands for 2014: Pt II

This is the second part of my last article of 2013.

The economy

It can be expected – according to the Dutch Central Planning Bureau (CPB) – that the Dutch economy will grow slightly in 2014, but that no large improvement in the economic situation will emerge.

The forecasted growth of 0.2% is insignificant and it is even well within the range of statistical measurement errors: this means that the whole growth is yet uncertain.

Personally, I neither expect a spectacular improvement in Dutch exports, nor in domestic consumption. In my opinion, both will remain at moderate levels.

With respect to the exports, it seems that there is no zone with spectacular economic growth within or outside the Eurozone.

Even the 4.1% of forecasted economic growth in the US seems to be rather based on overly optimistic assumptions than on real growth; Joe Sixpack, the archetypical 'average' American citizen, still seems to be cautiously consuming at the end of 2013.

The economic growth within Europe will also be moderate at best in 2014 and the fairytale of the everlasting growth in the BRIC countries seems to be crushed by reality too.

For me, the most telling detail with respect to forecasted exports for 2014, has been the strongly diminished fleet of cargo planes of the large Dutch airliner KLM: how can it be that Dutch exports will soar in 2014, when one of the largest cargo airliners in Europe reduces its fleet by 30%. That does not match.

This moderate growth of exports, as well as the still handicapped domestic consumption in The Netherlands (see the next chapter), cause that I don’t expect more than only moderate economic growth in The Netherlands. 

That is of course, unless something dramatically happens that spurs growth: a new invention or a dramatic change in the global economic or political situation. The latter does not necessarily need to be good news, as you might suspect. If such events would indeed happen, it could be a whole different ball-game.

Consumption and consumer behaviour

As I mentioned before, the economic growth in The Netherlands will probably only be moderate in 2014. At the same time, the general employment in The Netherlands will not grow yet and unemployment will probably even increase in 2014, according to the CPB.

It is without a doubt that these two conditions have impact on the general consumption in The Netherlands and – as a consequence – on the results of all companies (including the retail industry), that live from business-to-consumer sales (b2c). 

This means that for 2014, the economic outlook for small and medium enterprises and especially retail stores is moderate to poor.

To explain my point, I made a table of the forecasted Dutch consumption for 2014. 

My preassumption was that there are a few different groups of consumers in The Netherlands, with their own consumption patterns:
  • The (financially) independent people (i.e. wealthy people), who earn sufficient income to do whatever they want – now and in the future;
  • The people who have a fixed job and a steady income, but that are not 100% sure that their job survives 2014;
  • The people, whose steady job is either on the line or who have a flex-contract with a high amount of uncertainty about their immediate financial future;
  • Jobless people, who receive either unemployment benefit or welfare or freelancers without an assignment, who are living from their savings alone. 

Expected consumption patterns for different categories of consumers
Chart by: Ernst's Economy
Click to enlarge
Especially the first category of financially independent people has had a very good year in 2013, with the excellent investment results on the stock exchanges and the increasing profits of the larger companies in The Netherlands.

Therefore I expect that their consumption might soar in 2014, especially in the categories for expensive products and services. These people will be among the first to adopt a positive economic change with respect to next year.

However, it is my firm opinion that people, whose job could be on the line (category 2), will remain consuming cautiously with respect to expensive products and services.

Especially the purchases of new cars by this group have often been carried forward to 2013, in order to yet profit from (ending) tax breaks on environmentally friendly cars. This will have a definite impact on car sales in the first months of 2014.

The last two groups will carry on to consume only the products and services that they hardly can live without; all other kinds of consumption will be kept to the bare minimum.

This brings me to the following outlook for 2014: 
  • Supermarkets and especially discounters, like Lidl, Aldi and Dirk van de Broek will continue to grab market share from specialized retailers, like greengrocers, drugstores, butcher shops and bakeries and from the more expensive supermarket chains as well.
    • The price battle that started in 2013 (it is too small in size to call it a price war) will continue well into 2014, but it will not have a clear winner.
    • Losers might be the suppliers and the supermarket chains whose margins are under pressure for various reasons.
  • Outlet stores and other thrift stores (stores with cheap and / or second hand goods), as well as the most inexpensive online stores might flourish in 2014;
  • The same is also true, however, for the very expensive retail stores, which sell the real premium brands to their exclusive clientele (i.e. Cartier, Louis Vuitton and other premium brand stores).
    • The richest people in The Netherlands have only become richer during the last few years and especially in 2013, as this was an extraordinarily good year for the international stock exchanges. 

  • All other (non-food) retail stores and store chains (online as well as brick-and-mortar) will go through a very hard time for the sixt year in a row, since the crisis started in 2008.

The stock exchanges

(Disclaimer: This is by no means an investment advice. As I don’t invest myself, there is none of my personal money on the line here. Therefore I don’t take any responsibility for people who invest, based upon my assumptions, as printed here)

It will be very hard to beat 2013, as an almost perfect year for investments in stock.

The companies, which are traded at the stock exchanges, are well on their way of getting overpriced in the current investment climate, as their profit outlook is still only moderate, according to me.

When the economic growth in 2014 will eventually disappoint (which it might IMHO), then there could be a fierce negative correction at the stock exchanges. For the AEX Amsterdam Index, I see 400-425 points rather as a ceiling than as a starting point for further growth of stock rates.

I therefore advice people to invest cautiously in stock and to be especially careful with social media stock: ‘new’ stocks, like LinkedIn, Facebook, Netflix and Twitter must still show that they have a sustainable future as ‘profit generators’. In my opinion they can't!

Popular does not necessarily mean profitable in this context and especially Facebook and Twitter run a severe risk of getting out of fashion within a few years. And even if the latter does not happen, it will nevertheless be extremely hard for especially Twitter to make any profit at all in the future:
  • Asking money for the Twitter service is out of the question for now and for the distant future;
  • Possibilities for advertising and data mining are reduced on this medium, due to the high numbers and rapid aging process of tweets. Sponsored tweets just disappear in the tsunami of other tweets.

I am less negative about the fixed income market. Although the interest rates on corporate bonds have been rising lately and have put the prices of corporate bonds under some pressure, the various interest rates in the EU and the US seem destined to stay extremely low for a long, long time (due to the deflationary forces that have been emerging the last few years).

On top of that, it seems that gold has finally had its ‘ ten years of fame’ and has returned to pré-2010 prices, only to go down further and further.

At the same time, there is a substantial chance for near-zero or even negative interest rates on sovereign bonds and T-bills from the strongest countries: a.o. the United States and Germany. 

These low yields on sovereign bonds from these investment grade countries will turn corporate bonds from respected and trusted companies into a good investment IMHO. This will probably mean that there will be an ample amount of relatively cheap investment money available for the large companies.

This money supply reduces the necessity for these companies to deploy bonds at higher-than-strictly-necessary interest rates, especially as a negative correction of the stock rates seems plausible in 2014. Consequently, it could be that the fixed income market turns from the loser of 2013 into the winner of 2014.

The banking industry

The Dutch banking industry still has to deal with two nationalized banks on one hand and a very negative image on the other hand. The latter has been reinforced in 2013 by:
  • the nationalization of SNS Reaal;
  • the Libor-gate affair of the Rabobank, followed by the initially indifferent reaction of this bank to this massive scandal;
    • Rabo-CEO Piet Moerland, who was already months before his retirement, was sacrificed, but the main responsible for the scandal, Sipko Schat, stayed put initially, only to retire when his position was untenable eventually.

In the final months of 2013, there has been a fierce discussion between bankers, economists and politicians upon the leverage ratios, with respect to the balance sheets of banks. 

What made this very important discussion somewhat worrisome is how disinformed and pigheaded some of the protagonists in this discussion were.

Instead of looking for good and well-funded arguments to make a useful point, the discussion was often about bashing and punishing the banks for everything that went wrong in 2008 and in the years before that very moment.

The bank(er)s on their behalf kept pushing their arguments ‘that ‘2008’  was something of the past and that the industry had learned its lesson in the meantime’. In other words: ‘Stop bashing us!’ Both reactions seemed out of touch and (somewhat) naïve.

On top of that, there have been the overly emotional reactions of the general public towards banks and bankers, as well as the disconnected reactions of some bankers upon these public emotions.

These events all showed that the financial industry as a whole has some ground to cover, before the situation turns to normal again. I really doubt if this will already happen in 2014.

Besides that, there is the situation within the banking industry that successful and profitable investments – with a reduced level of risk – remain scarce these days: 
  • Especially the demand, as well as the supply, for credit towards the Small and Medium Enterprises remains at a very low level. This will probably not change much in 2014; 

    • While the SME companies are traditionally seen as the motor of the Dutch economy, this motor is yet faltering.
  • Banks, on their behalf, remain busy with their battle for a viable margin and against bad investments.
    • Their risk awareness is still 20 / 20 and they will consequently refuse to hand out credit to companies, which don’t have ironclad investment plans and collateral in exchange.

The building & construction, manufacturing and commercial services

Although there seems to be some movement in the Dutch CRE markets (commercial real estate), especially at the triple A-locations, it is yet too early to declare the crisis to be ‘finished’.

There is still an enormous excess capacity for commercial and office buildings AND building ground, as well as there is excess capacity within the construction industry itself.

Therefore I stick with my opinion that the capacity in the CRE construction industry should be reduced with at least 40%, in comparison with 2008. 

The longer that the government waits with deploying a master plan to enable this, the bigger the chance is that the market does it for them, with disastrous results for employment within this industry.

With respect to the residential building industry (RRE), the market forces will also rather be pointed downwards than upwards. 

When the government plans, to enforce billion euro levies upon the general renting market and especially the building cooperatives, will be taken into consideration and when we consider that the prices of owner-occupied houses are still dropping by 5% y-o-y, there is very little chance that the residential building industry will go through a real revival in 2014.

It could be that the bottom of the owner-occupied housing market is actually reached in 2014, but that is not yet certain, as deflationary forces seem very much at work in The Netherlands lately (see the aforementioned link). And when real deflation gets hold of The Netherlands, the dropping housing prices could last for a long, long time.

I am more optimistic about the manufacturing industry in The Netherlands, especially when it is specialized in business-to-business delivery.

While the consumption in The Netherlands remains awkward, the production of high-quality raw materials (a.o. high-quality steel), high-tech parts, semi-finished products and tools for other industries could profit from the slightly growing global economy and the stable demand for electronic gadgets and hardware-innovations.

Companies like Philips (especially the medical and lighting divisions), TomTom, ASML, ASMI, Stork, Ten Cate, VDL and ArcelorMittal and the high-tech companies in the Eindhoven region could strongly profit from the outstanding quality and extraordinary characteristics of their products in 2014, when the economy keeps growing indeed.

Within the commercial services industry, there is a division between the ICT / data driven services on one hand and the ‘normal’ transport & distribution and commercial services on the other hand.

Since a few years, The Netherlands is rapidly building upon a reputation as a stronghold for data hosting facilities, due to the excellent data infrastructure and the well-educated, multilingual population. 

Large data centers are emerging everywhere within the country and the demand for (private) cloud services is still rising rapidly. This development will continue in 2014 and could be a driver for high-tech jobs in The Netherlands.

This favourable trend has probably a lot to do with the ever-growing curiosity of the American government and intelligence services concerning the data collection of about any company and person in the world. 

Many companies feel probably, that when they store their data in The Netherlands (i.e. outside the US), it might be safer for the watchful eye of American government officials (which I really doubt, by the way).

Good examples of this development are the ‘gargantuous’ €2 billion datacenter that Microsoft is developing in the small Dutch town of Middenmeer and the various datacenters that have been recently developed in Almere. 

Data is hot in The Netherlands.

I am less optimistic about the normal commercial services and especially transport and distribution. These services will still suffer a lot from the diminished domestic consumption and exports and I have little reason to think that this will change dramatically in 2014.

The European Union and the Euro-zone

The euro-zone of 2014 will be just like the euro-zone has been in previous years: two steps forward and one step back. The European Banking Union was a sensible step, but it has not become what it should have been yet.

While the need for further political, economic and financial integration within the EU stands tall, in my opinion, there is still the growing aversion against the EU among the European population. 

Many Europeans want to stop any further integration of the EU and the Euro-zone and the parallel trend of growing xenophobia won’t stop yet in 2014. 

Therefore, I called it a blessing in disguise that the integration of the Ukraine with the EU was stopped, although I feel very sorry for the many Ukrainians, who put their money on the EU.

The best what can happen in 2014 is that:
  • the EU and the Euro-zone first try to cope in a good way with the Rumanian and Bulgarian workers that are now free to work all over Europe;
  • the EU figures out how the economies of the impoverished and shell-shocked EU countries can be moved into action again;
    • This is of imminent importance for the PIIGS  (Portugal, Ireland, Italy, Greece and Spain) and the Eastern European countries, but also for the North-Western EU countries and especially France, which need the economic impulse as well. 

In other words: instead of thinking about expansion of the EU, the EU should work upon economic and political improvement of the EU in its current form

That will be a helluva task for the whole EU in 2014, especially as the member-states still behave like 28 frogs in a wheelbarrow and refuse too often to look at the common benefit.

And now, I have finally nothing left than wishing you – my dear readers – the best for 2014: may it be a healthy, loving, prosperous and successful year for you and your loved ones.

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