Rabobank: Growth of the Dutch economy is past its peak

The Dutch economy looks to have reached the high point of its rapid growth. There is still growth, but at a slower pace. Gross domestic product (GDP) is expected to increase by 2.8 per cent this year and 2.1 per cent in 2019. The growth is supported by strong domestic demand. There are however significant international risks. Trade tensions between the US and the EU and between the US and China could intensify further, oil prices could rise further, and a hard Brexit is still a possibility. This is the message from the Rabobank economists in their Economic Quarterly Report published today.

Increasing employment, growth of real wages, high consumer confidence and rising house prices are driving the increase in consumption. Business investment is also strong, driven among other things by higher corporate earnings and higher capacity utilisation. Nonetheless, the Rabobank economists needed to adjust their forecast for economic growth in 2018 and 2019 to the downside. “This is partly due to weak imports by our major trading partners in the first quarter of 2018, leading to a contraction in Dutch exports,” explains Rabobank economist Carlijn Prins. “We have also reduced our forecast for home sales, somewhat reducing our expectations for housing investment.”

Prins also believes that a Brexit in which the UK leaves the EU without new agreements is still a risk for the Dutch economy. “A ‘hard’ Brexit is still a possibility, and would lead to higher import tariffs and non-tariff barriers. This could cause serious damage to the Dutch economy, due to the close trade relationships between the Netherlands and the UK. Our estimate currently is for an orderly exit, involving a transition period followed by a free trade treaty.”

A sharp increase in import duties between the US and the EU could also harm the Dutch economy. “The damage could increase rapidly if we have an escalation into a full-blown trade war. If for instance the US and its trading partners impose import tariffs of 20 per cent on all imports, an open economy such as the Netherlands could lose 3 percentage points of growth until the end of 2022. This would amount to 20 billion euros,” says Prins.

Lastly, a further increase in oil prices could have negative consequences for the Dutch economy. Prins: “In a scenario in which the oil price rises to 115 dollars a barrel, the Dutch economy would lose 1.2 percentage points of growth until the end of 2022. Inflation would rise, and household purchasing power in particular would be seriously affected. The Netherlands is after all a net importer of energy.”

The global economy will grow by 3.8 per cent both this year and next. International economist Ester Barendregt: “We have adjusted our forecasts for various economies to some extent. We see slightly higher growth for countries including the US, Australia and New Zealand, while we are adjusting our forecasts for the eurozone and Brazil in 2018 among others to the downside. The uncertainties on the global stage have also increased. Trade tensions have intensified further in the past period, several emerging markets are facing serious challenges and there are various geopolitical issues lurking in the background. Global growth could thus be lower than we currently expect.”

Read the full Economic Quarterly Report