Netherlands - Developments in Individual OECD Countries

OECD Economic Outlook, June, 1993

Output may decline slightly in 1993 in response to the marked slowdown in activity in neighbouring countries. A pick-up in economic activity is projected for 1994 in line with the rebound in continental Europe and a substantial decline in interest rates. Aided by wage moderation, inflation is likely to remain at around current low levels, but unemployment may rise further.

Recent developments. GDP growth fell to 1.5 per cent in 1992. After a strong start, the economy decelerated to around 1 per cent in the second half of the year, and a further deterioration of the economic climate occurred in early 1993. Domestic demand has been weak, partly as a result of fiscal consolidation: increases in indirect taxes and government prices have eroded disposable income and reduced private consumption growth, while government consumption has actually declined. Since the second half of 1992, private non-residential investment has been declining slightly because of worsening sales prospects, a profits squeeze in export markets and declining utilisation rates. However, after falling in 1991, residential investment increased in 1992 due to lower long-term interest rates and steep increases in legal rents which stimulated demand in the unregulated housing market. As imports decelerated more than exports, TABULAR DATA OMITTED the positive contribution of the external balance to growth increased slightly in 1992. In the past few months, worsening economic conditions seem to have caused a long-delayed labour shake-out, and the unemployment rate has rebounded from 6.1 per cent in July 1992 to 8.1 per cent in March 1993. Inflation, measured by the 12-month increase in the CPI, decelerated sharply from 4.4 per cent at the beginning of 1992 to 2.3 per cent in April 1993, helped by the appreciation of the guilder and the reduction in the standard VAT rate by 1 percentage point.

Policies and other forces acting. The current weakness in the economy is likely to continue in the near future. The leading indicators have been on a steeply downward trend and the latest surveys suggest a fall in business fixed investment this year and a deterioration in consumer confidence. Because of the recent loss in international competitiveness, exports may not grow much until foreign demand picks up. The authorities are relying on wage moderation to preserve international competitiveness, business profits and employment. Following a new central agreement, government wages and social security benefits are to be frozen for 1993 and 1994 and private wage growth is expected to decrease substantially, thereby restraining private consumption over the projection period.

Domestic interest rates are projected to decline further, in line with German rates. Reflecting the strength of the guilder, interest-rate differentials vis-a-vis Germany should remain close to zero. The inverted yield curve is expected to reverse in the second half of 1993.

Despite the economic slowdown, the central Government achieved its 1992 budget deficit target of 4 per cent of GDP. For 1993 and 1994, additional measures were announced at the end of 1992 and in April 1993 (including the partial privatisation of the post and telecommunications company (PTT)) to ensure a further reduction in the deficit by 1/2 per cent of GDP a year, in line with the medium-term fiscal targets. But in view of the sluggish economy, the OECD Secretariat expects the general government deficit as a percentage of GDP to rise this year, before declining in 1994 as a result of decreasing interest rates and the economic recovery. On a cyclically-adjusted basis, the deficit should decline significantly in both years.

Prospects. Real GDP may decline slightly in 1993 before rebounding in 1994, as a result of a pick-up in exports and private investment. Because of the sound financial position of the Dutch business sector, the revival of exports should be followed quickly by an increase in business investment. Lower interest rates and improved income prospects should boost residential investment and lead to a rebound in private consumption. Employment is expected to deck throughout the projection period and the unemployment rate may rise to over 9 per cent in 1994. Growing labour market slack and the recent agreement on wage moderation should progressively curb the increase in labour costs. However, inflation is expected to increase marginally in 1994 as the impact of lower labour costs may be offset by large increases in legal rents, environmental levies and medical costs. The current-account surplus may widen again to 2 per cent of GDP in 1994.

The projections are heavily dependent on developments in surrounding countries, especially Germany. The balance of risks is on the downside. The impact on the economy of the expected decline in interest rates might not be as strong and as rapid as embodied in the projections. Also, wage moderation will reduce the increase of disposable income, at least in the near future; and given the low degree of confidence now prevailing, this may weaken consumption more than expected.