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Ernst & Young Eurozone Forecast June 2013 Outlook for Netherlands 17 Eurozone countries Finland Estonia Ireland Netherlands Belgium France Germany Luxembourg Austria Slovenia Slovakia Italy Spain Portugal Greece Malta Cyprus Published in collaboration with
Highlights Widespread deleveraging points to slow and painful recovery A weak domestic economy is keeping the Netherlands in recession, despite an improved contribution from the external sector. But this should turn around gradually as we move through 2013 and some of the domestic headwinds begin to ease. Our forecast shows GDP falling by 1% this year, before a weak recovery yields growth of 0.7% in 2014 and 1.2% a year in 2015 17. The poor performance of the domestic economy has both short- and long-term causes. In the short term, it is suffering from a lack of demand, brought about by a significant squeeze on households caused by high inflation and sharply rising unemployment and an aggressive austerity program. Inflation has started to come down, providing some respite, but unemployment is likely to continue to increase throughout 2013, so the stabilization of real incomes will be a gradual process. The Government s recent decision to abandon more than 4b (0.7% of GDP) of additional austerity measures was sensible, but fiscal tightening of 1% of GDP in 2013 will weigh heavily on growth prospects. As these domestic headwinds gradually ease, recovery should follow in 2014, supported by further solid growth in net trade, which we expect to contribute 0.4 percentage points to growth this year and next. Nevertheless, the pace of recovery will be constrained by the need to deal with serious longer-term structural problems centered on the household and banking sectors. The Netherlands has the most heavily indebted household sector in Europe, which consists mostly of mortgage debt accumulated during a housing bubble encouraged by a very loose tax and regulatory regime. The banking sector is vulnerable not just to these high levels of domestic mortgage debt, but also its exposure to peripheral Eurozone economies. With households, banks and the Government all seeking to deleverage, the recovery is set to be painfully slow. Ernst & Young Eurozone Forecast June 2013 Netherlands 1
Widespread deleveraging points to slow and painful recovery Recovery forecast from late 2013 as domestic headwinds ease A weak domestic economy is keeping the Netherlands in recession, despite an improved contribution from the external sector. But this should turn around gradually as we move through 2013 and some of the domestic headwinds begin to ease. Our forecast shows GDP falling by 1% this year, before a weak recovery yields growth of 0.7% in 2014. Medium-term growth prospects will be constrained by simultaneous deleveraging by consumers, banks and the Government. We forecast GDP to grow by just 1.2% a year from 2015 17. Netherlands remains mired in recession GDP fell for a third successive quarter in Q1 2013. It is now just below the level it had been at the start of 2010 and still some 3.5% below its pre-crisis peak. The domestic economy has been responsible for the poor performance. Even though exporters have been hampered by the poor performance of the wider Eurozone economy, net trade has contributed 2.5 percentage points to GDP growth over the past three years. Households have endured a prolonged squeeze on real incomes The weakness of the domestic economy has both short- and longer-term causes. In the short term, it has been suffering from a chronic lack of demand, which is partly due to a severe and prolonged squeeze on household spending power. Earnings growth has struggled to rise above 1.5% over the past three years, while inflationary pressures have increased. This is in part due to the influence of higher imported fuel costs, but also because of the value-added tax (VAT) increase late last year. The net effect has been a substantial squeeze on real earnings, with spending power (measured by average monthly earnings less inflation) having fallen by around 5% since the start of 2010. This has been compounded by a sharp rise in unemployment. The national measure has risen from just below 6% in Q1 2012 to 8.2% in April. Perhaps the best indication of how these twin forces are hurting households is the fact that the Misery Index (the sum of the inflation and unemployment rates) has reached its highest level since early 1995. In these circumstances, it is little surprise that consumer spending has been falling for most of the past two years. and fiscal policy has been tightened much too aggressively Some of the pressure on the consumer sector can be attributed to the Government s aggressive austerity program, though this has also had a much wider impact on the economy. The Netherlands has been one of the most enthusiastic supporters of Eurozone austerity and has sought to lead by example by trying to reduce its own structural deficit rapidly. The International Monetary Fund and the European Commission (EC) estimate that Table 1 Netherlands (annual percentage changes unless specified) Source: Oxford Economics. 2012 2013 2014 2015 2016 2017 GDP -1.0-1.0 0.7 1.0 1.2 1.4 Private consumption -1.4-1.7 0.3 0.6 0.9 1.3 Fixed investment -4.6-2.0 1.4 2.0 2.1 2.0 Stockbuilding (% of GDP) 0.8 0.5 0.5 0.5 0.5 0.5 Government consumption 0.0-0.1-0.3-0.3-0.1 0.5 Exports of goods and services 3.3 1.8 2.7 3.5 3.4 3.0 Imports of goods and services 3.1 1.4 2.5 3.4 3.2 3.0 Consumer prices 2.8 2.6 1.4 1.3 1.1 1.1 Unemployment rate (level) 5.3 6.8 7.2 7.1 7.0 7.0 Current account balance (% of GDP) 9.9 8.4 7.9 8.0 8.2 8.4 Government budget (% of GDP) -4.0-3.4-3.4-2.7-2.4-2.0 Government debt (% of GDP) 69.7 72.8 75.1 76.4 76.9 76.9 ECB main refinancing rate (%) 0.9 0.6 0.5 0.5 0.5 0.7 Euro effective exchange rate (1995 = 100) 115.5 118.5 115.6 112.0 111.1 110.9 Exchange rate ($ per ) 1.28 1.29 1.21 1.17 1.17 1.17 2 Ernst & Young Eurozone Forecast June 2013 Netherlands
fiscal policy was tightened by around 1.25% of GDP last year and it is scheduled to be tightened by a further 1% this year. We have long argued that such a policy is far too aggressive given the relatively low level of government debt and low borrowing costs and this will weigh heavily on growth prospects this year. Domestic headwinds should gradually ease These headwinds should begin to abate as we move through this year and into 2014. Inflation has come down in recent months and is likely to slow further, particularly later in the year, once the VAT rise has fallen out of the year-on-year calculation. And firmer output trends should see unemployment flattening off later this year. These factors point to real incomes gradually stabilizing and then recovering from next year. We can also derive some encouragement from the Government s recent decision to abandon more than 4b (0.7% of GDP) of additional austerity measures which had only been announced in March and instead ask for an extra year s grace from the EC before it has to reduce the deficit to 3% of GDP. We would still argue that fiscal policy is being tightened too aggressively, but this policy move does send out a clear signal that there are unlikely to be further austerity measures in the short term. And with the pace of austerity due to decline substantially from 2014, the drag from this should also ease. As these domestic headwinds gradually ease, recovery should follow in 2014, supported by further solid growth in net trade. Though the Eurozone as a whole is expected to recover very slowly, prospects for key trading partners, such as Germany and the Scandinavian countries, are better and we expect growth in world trade (weighted by Dutch export shares) to accelerate from 1.2% this year to 4.4% in 2014. but serious structural problems still need to be addressed Beyond next year, growth prospects will be constrained by the need to deal with serious longer-term structural problems centered on the household and banking sectors. The Netherlands has the most heavily indebted household sector in Europe, with the household debt-to-income ratio having reached 272% by the end of 2011 the latest period for which we have data. The housing market was central to this buildup of Dutch household debt, with a very loose tax and regulatory regime allowing a sizeable house price bubble to develop. Figure 1 Misery Index* Figure 2 Household debt-to-income ratio Percentage points 11 % 300 Forecast 10 250 9 200 8 7 150 6 100 *Defined as CBS unemployment rate plus CPI inflation rate 5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Haver Analytics. 50 1992 1995 1998 2001 2004 2007 2010 2013 2016 Source: Oxford Economics. Ernst & Young Eurozone Forecast June 2013 Netherlands 3
Widespread deleveraging points to slow and painful recovery Given that the buildup in debt levels has been matched by an increase in housing wealth, and that debt-servicing costs remain very low, this does not represent an immediate problem. However, it will become a problem if homeowners are forced to sell their houses, or if interest rates rise sharply. So some deleveraging would be desirable in order to reduce the degree of risk. There has been some deleveraging so far, but much less than in other countries that have seen housing bubbles, such as the UK, Spain and Ireland. So consumers look set to continue to deleverage for several years to come. The mortgage boom has also led to the banking sector becoming very highly leveraged, with assets now just over 400% of GDP, one of the highest ratios in the Eurozone. Three of the four largest banks have required financial support from the Government and, though some of this has been repaid, there is pressure to repay the rest quickly. Banks are also being encouraged to reduce their reliance on wholesale funding and strengthen their balance sheets. This combination has led to credit availability being tightened substantially for households and businesses. With households, banks and the Government all seeking to deleverage simultaneously, the recovery is set to be at best painfully slow and heavily dependent on exporters continuing to perform strongly. Our forecast shows GDP growth of just 1.2% a year from 2015 17. In the 10 years prior to the financial crisis, GDP grew by 2.6% a year. Deleveraging may not be orderly This forecast assumes that the deleveraging process is relatively orderly, but this assumption is far from certain. The housing market is a key risk. The bubble has burst spectacularly over the past five years, with prices falling almost 20% relative to their peaks. Though the overall situation remains manageable at the current time, there are pockets of risk. In particular, with banks having allowed very high loan-to-value ratios, around 25% of homeowners have been tipped into negative equity, while around half of mortgages are thought to be interest-only, with no designated mechanism for principal repayment. The number of non-performing loans has already begun to increase. But these characteristics leave the banks particularly vulnerable to further sharp increases, should house prices fall further or unemployment continue to rise sharply, thus reducing homeowners ability to service their debts. Furthermore, while the banking sector is vulnerable to further losses on its domestic loan book, it also has large cross-border exposures, including to the peripheral Eurozone economies. Further sharp increases in unemployment or declines in asset prices in these countries could trigger new waves of bad debt, so further state bailouts are not out of the question. Figure 3 Bank assets as a % of GDP % of GDP 450 425 400 375 350 325 300 275 250 2000 2002 2004 2006 2008 2010 2012 Source: Haver Analytics. 4 Ernst & Young Eurozone Forecast June 2013 Netherlands
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