After the economic boom in 1997 when GDP grew by 3.3%, the term “Dutch miracle” became widely used in reference to the Dutch economy. The nation’s successful polder (literally “dyke”) model – based on an agreement between employers, unions and the government to strive for wage moderation in exchange for shorter working hours – set an example for other countries eager to mimic the buoyant economic growth of the Netherlands. Robust performance in 1997 was continued into the first quarter of 1998 with a quarter-on-quarter growth rate of 1.1%, slowing slightly to 0.8% in the second quarter. However, while economic growth in the Netherlands continues to exceed the European average by one percentage point, preliminary GDP data published by Statistics Netherlands shows a sharp slowdown in economic growth in the third quarter of this year when real GDP expanded by a mere 0.1%. Consequently, analysts have revised GDP growth forecasts: Morgan Stanley Dean Witter adjusted 1998 and 1999 estimates of real GDP year-on-year growth to 3.6% and 2.2% respectively from the original 3.9% and 2.5%. So what has happened?
A hit to foreign trade
The Dutch economy is an open, export-oriented economy with more than half its produce destined for foreign markets. The effects of the Asian crisis are therefore significant. Trade figures show that second quarter exports to east Asia declined by 17% while imports from the region were 26% higher than in the same period in 1997, resulting in a sizeable hit to net foreign trade. In their last quarterly update ABN Amro predicted: “Weaker export growth will act as a significant drag on total economic growth”. This drag has been aggravated by a 1.8% quarter-on-quarter fall in manufacturing output – the goods that are largely traded internationally. However, this trend is less marked in the Netherlands than in Germany and the UK and there is a brighter outlook for exports in 2000 as world trade starts to recover. MeesPierson expects the guilder to depreciate and the export market to grow by 6.5% and concludes that total GDP growth will regain strength.
High consumer confidence
In the domestic market, private consumption has been surging, proving that import growth was significantly outstripping export growth this year. Household spending rose by 4.8% year-on-year during the third quarter of 1998, compared to 4.1% in the second quarter. As a result Morgan Stanley Dean Witter’s estimate of consumer spending for the third quarter was 1.5% quarter-on-quarter, up from 1.2% in the previous quarter. This was a result of a marked drop in unemployment, a pick-up in hourly wages, and low interest rates and inflation. However domestic demand growth is expected to moderate next year as MeesPierson predict in their November update. A rise in unit labour costs as unemployment falls, weaker export growth and declining manufacturing output are expected to fuel inflation and lessen employment growth. This will be reinforced by a tax hike of Fls0.8 billion ($0.42 billion) in 1999. MeesPierson surmise: “The Dutch miracle will come to an end as less stunning domestic demand brings growth in line with the European average”.
Tax reform
In line with other European initiatives the Dutch tax system will be thoroughly overhauled in 2001 in order to achieve a net tax relief of Fls4.3 billion. The objectives of this reform are threefold: to lower income tax rates, to broaden the tax base and to shift taxation from direct to indirect taxes with an emphasis on ecological taxes. These changes will have a number of effects. In their December update, Morgan Stanley Dean Witter estimate that the lower income tax rates will moderate wages and the higher indirect taxes will push inflation up.
Oil
The Asian crisis led to a collapse in oil prices but the Dutch Central Planning Bureau expects oil prices to rise again in 1999 to an average of $14.5 a barrel. On the other hand, in a report published in September 1998 ING Barings points out that if the crisis situation is maintained, “a further drop in the oil price to around $10 a barrel in 1999 cannot be ruled out”. This scenario would cost the state Fls1 billion in gas revenues which in turn would increase the deficit.
Economic outlook
The Netherlands has been one of the first casualties of a global economic slowdown. However, it is generally agreed that, despite slower growth, the Netherlands – and the other nations in the euro-zone – will avoid recession, particularly since while export orders decline consumer confidence is proving resilient. While hopes of a rebound in economic activity in the short term are slim, recovery in the longer term is a distinct possibility. In contrast to the pessimistic real GDP growth estimate of 2.2% year-on-year for 1999, Morgan Stanley Dean Witter expect real GDP to expand by 3.2% in 2000.
