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Monday, 22 September 2014

Based on new methodology of the Central Bureau of Statistics, Dutch intra-crisis growth has been higher than estimated previously. Before you raise the flag: this could actually be bad news for the whole retail industry

Every now and then you hear new theories and concepts, that almost sound too good to true. But sometimes it happens that such ‘good’ news is actually a burden-in-disguise.

Mathijs Bouman, the distinguished financial/economic columnist and co-host of the Dutch economic television magazine RTL-Z presented such “good news as bad news-in-disguise”  in his weekly column in Het Financieele Dagblad.

The following lines contain the most important snippets from his column of Saturday, September 20th.

Starting this year, the Dutch Gross Domestic Product is calculated in a new way. A better way, according to the Dutch Central Bureau of Statistics (CBS), using new sources and in accordance with new, international agreements.

This revision of the national accounts, as the operation is called, has considerable consequences for the most important core data of the Dutch economy. Apparently, the Dutch GDP is 7% higher than previously calculated by the CBS. Consequently, the state debt as a percentage of GDP is immediately much better bearable. The revision also changed the economic history of the past crisis years.

This news made this week’s Macro Economic Outlook (i.e. MEV) from the Dutch Central Planning Bureau – the first one based on the new CBS data – particularly interesting.
According to the new data, the investments have dropped less considerably than initially estimated. The gloomy trend of constantly decreasing investments and thus decreasing economic growth potential is not visible anymore in the new data. One worry less…

There is another story which should be rewritten: that of the dropped available income.

According to the old data, there had been a steep drop of total available income coming from labour, by over 7%. It made sense that the consumer had been so frugal, that consumption dropped for years and years and utter silence struck the shopping malls and streets.

However, in the new MEV things look much more favourable. The total available income from labour actually rose during the crisis years and in 2015 it will end almost 4.5% higher than in 2008. This is the consequence of a bigger-than-initially-forecasted growth in 2009, when Finance Minister Wouter Bos skipped the employees’  share of the unemployment benefit premiums.

Nevertheless, this does not mean that national consumption also developed more favourable. The old and new consumption data differ marginally. Why has the consumer been so frugal, when the available income developed much more favourable than expected. The answer is: as a consequence of the dropping housing prices.

The development of the available income from labour had and will have a positive effect on consumption during the period from 2008 until 2015. Only in 2013, this factor suppressed consumption.

But then look at the dropping housing prices; these have suppressed consumption during all years since 2010.

The cashing of surplusses in residential real estate value, through new and higher mortgages, came to an sudden end. The comforting idea of the eternally rising housing prices got replaced by the fear that the own house would come underwater. The shopping streets became empty and abandoned, as a consequence of the plummeting value of owner-occupied houses. The house as private ATM came to a bitter end…

How is that for a bombshell…?!

Personally, I always get a little uptight, when research bureaus of impeccable reputation, like the Dutch CBS, suddenly adopt a new methodology, which is (almost) a new paradigm.

Was their old methodology that wrong?! Have their earlier data in fact been unreliable for all those years? Or is it just a small twist in the reliability of the data: merely a drop of water in the ocean?

Hence, a 7% higher GDP than initially estimated is more than a drop of water. It is rather a landslide difference in these crisis years, even when this higher percentage is earned during 7 crisis years.

If the new CBS methodology is more accurate than the old one indeed, we were actually all much richer than we thought we were.

Nevertheless, we FELT much poorer instead, as we couldn’t use our own house as ATM anymore, due to the steadily dropping housing prices. Personally, I consider this quite hard to believe and not only because my own salary is back at pre-2008 levels these days.

The last seven years have been the years of wage restraint for many middle- and lower class citizens, with a fixed contract in The Netherlands.

It have also been the years of endless flex-contracts for youngsters. And of freelancers, having a race to the bottom with their tariffs and fees, as they have been in fierce competition with knowledge-workers and professionals from the low-wage countries, who were willing to do the same work for much, much less salary.

Yesterday, my dear neighbour told me that her 17-year old grandson had to work long and hard hours in the supermarket, in exchange for very low payment; sometimes even without having a break during six or seven hours of working. And the foreman of this kid still had the nerves to complain that he worked too slow.

As the boy had a zero hour contract without any formal rights, he had to hope and prey every week that his supermarket had some work for him to spare. The “salary” this kid earned, was €3 per hour. This is roughly the same hourly fee as I earned 30 (!) years ago, as a “professional” dishwasher. However, the purchase power of this boy’s money is a fraction of what it was in the eighties.

So, when the CBS states that we – as a nation – earned 7% more money than we thought we did, I take this news with a few grains of salt. Can I be wrong?! I can be wrong!

Yet, if this new methodology of CBS is indeed better and more reliable, and it were actually the dropping housing prices which caused the stalling consumption in The Netherlands and not a stalling or slightly dropping average in personal income, this might have fierce implications on future consumption in The Netherlands.

This is the reason….

I expect that the Dutch economy will cautiously start to grow again in a few years, when the worst effects of the crisis have become a thing of the past. As the aging population has a narrowing effect on the labour market, skilled (knowledge) workers could become scarce, in spite of the influx of foreign workers.

It is implausible that these foreign workers can totally fulfil the demand for ICT-workers, engineers, skilled craftsmen and administrative personnel in The Netherlands. English is the ‘lingua franca’ in many multinational companies, but Dutch SME companies often require thorough knowledge of Dutch, as their main operational language.

I also don’t believe in the full robotization of human labour, which some pundits see as our immediate future; simply for the reason that people are still suckers for top notch quality and handmade objects.

In other words: the average quality of Chinese, robot-made products still distinguishes  Dutch, French, German and Italian quality as exceptional. I do believe that people still want to pay top-dollar for exceptional craftsmanship in any aspect.

This means that salary increases close to or even substantially higher than the Dutch inflation rates are very likely to occur in the near future.

However, when the new CBS data are indeed more reliable and it were indeed the dropping housing prices, which were to blame for the lackluster consumption in The Netherlands, the increased salaries in the near future will not matter much for domestic consumption. Arguably, we already ‘have been there’ after all, during the last seven years.

This would be extremely bad news for the retail industry in The Netherlands, which is already suffering from blatant, excess store capacity, the comeuppance of online shopping and plumetting numbers of spending-happy consumers.

A housing frenzy,  like the one we had between 1995 and 2007, is unlikely to ever happen again within the next 70 years. The mixture of artifical housing scarcity and interest rates hitting rock-bottom in The Netherlands, is really unique and one-off.

This means that the soaring housing prices during those years and the emergence of owner-occupied houses, used as ATM’s for mass consumption, will never come back again. Yet, almost the whole Dutch retail industry and the shocking amount of excess shopping space is based on particularly these years of exuberance and conspicuous consumption.

The result of the coming, prolongued period of reduced growth in housing prices will be – when CBS is right – that the whole retail industry will go through a long and painful process of starvation and annihilation of the weakest representatives in the retail industry. 

Contrary to what you might think, these are not necessarily the owner-operated small shops and unique niche-stores. No, those could very well be the massive store chains with lackluster performance and a boring assortment, which have turned Dutch shopping centres in oceans of boredom, monotony and lack of surprise. I bet you can name one or two of such chains…

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