Recession Prolonged

As expected, GDP declined in Q2 by 0.2%. It was the fourth straight contraction. The economy’s poor performance is due to the deleveraging of the private sector in combination with fiscal tightening. In September, the government might present a new austerity plan, but this is unlikely to pass.

As expected, GDP declined in Q2 by 0.2%. It was the fourth straight quarterly contraction. The only positive note was that the growth declines are diminishing. In Q1 the economy contracted by 0.4%. GDP was 1.8% lower from a year earlier. The economy is expected to contract in 2013 by around 1.25%.

The economy’s poor performance is due to the deleveraging of the private sector, partly in response to a fall in property prices (See BNP Paribas Conjoncture July 2013: Netherlands: Putting its housing market in order). In addition, the growing job insecurity is weighing on confidence. Unemployment has risen to 8.7% of the working-age population (national definition). Household confidence is at record low levels. In addition, household purchasing power has been affected by the government’s austerity policy, which has reduced government transfers, a pay freeze for civil servants and a 2-point VAT hike last October. This has severely dented purchasing power. In July, CPI inflation was even over 3% (national definition), whereas the contractual wages only increased by 1.2%. Hence, it is not very surprising that in Q2 household consumption was 2.4% lower from a year earlier.

As in previous recessions, the government has embarked on an austerity policy. The grand coalition between the liberal VVD and the Labour Party is implementing a EUR 16 billion austerity package. In the past, austerity policy in combination with wage moderation was very successful in getting the economy out of recession and public sector finances back in shape thanks to improved price competitiveness. This time is different, as all European countries are pursuing similar policies and world trade growth is still sluggish. Exports in Q2 were even 0.3% lower from a year earlier. Nevertheless, trade continued to have a positive contribution to GDP growth, as imports fell even sharper (-1.7%) due to the decline in domestic demand (-3.2%).

Against this backdrop, it is understandable that businesses are scaling down their capital spending despite favourable financing conditions. This is in particular the case in the construction sector, which is not only confronted with falling house prices but also severe problems in commercial real estate. Total investment was 9.4% lower from a year earlier.

BY Raymond VAN DER PUTTEN

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