Fri, Apr 26, 2002 page18

• Dutch economy registers growth

  ECONOMIC GROWTH Although exporters in a small open economy like that of the Netherlands are sensitive to international cyclical swings, Dutch exports still recorded modest growth

  • NETHERLANDS TRADE AND INVESTMENT OFFICE
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  The deteriorating international economic situation also left its mark on the Dutch economy. Following the attacks on September 11, the forecast for economic growth was revised downwards to 1.5 percent. Although exporters in a small open economy like that of the Netherlands are sensitive to international cyclical swings, Dutch exports still recorded modest growth.

  The unusually long period of strong economic growth came to an end in 2001. For 19 consecutive quarters, year-on-year GDP growth had fluctuated between 3.5 percent and 5 percent. But the expansion of the Dutch economy slowed significantly in the first half of 2001, with growth being around 1.75 percent. Average inflation in 2002 is estimated at 2.25 percent.

  Foreign trade

  Dutch exports (excluding energy) grew by 2.5 percent in 2001. The increase in exports was entirely attributable to re-exports. Domestically produced exports are expected to have declined by 0.75 percent. The price competitiveness of Dutch exporters worsened by 1.5 percent due to the appreciation of the euro and the rise in unit labor costs. Another factor that slowed exports was the fact that labor productivity increased more slowly than in other countries in the euro area.

  Imports to the Netherlands rose by 3.25 percent. The Netherlands is buying more and more goods and services from abroad. This has to do with its weakening competitive position vis-vis other countries. In particular, the high wage costs in the Netherlands make Dutch products relatively expensive. In relative terms, the greatest declines occurred in imports of durable consumer goods and spending by Dutch tourists abroad.

  Consumer spending

  Although real disposable incomes improved by 5.5 percent, consumer spending in 2001 rose by just 1.5 percent. In previous years consumption grew much faster than real disposable incomes thanks to substantial capital gains for owners of houses and shares. The greater uncertainty, the fall in share prices, the slower rate of increase in house prices, the abolition of tax relief for interest on consumer credit and the new VAT rate introduced on January 1, 2001 all dampened growth in the first two quarters of 2001. With the slowdown in consumer spending, the individual savings ratio increased by 3 percent.

  Business investment

  Under the influence of less favorable developments in production and yields, business investment in fixed assets grew by 0.5 percent. The economic slowdown has reduced the need for businesses to invest in expanding their production capacity. The confidence of industrial producers in short-term prospects has declined sharply. Industrial production expanded more slowly in the first half of the year but so did production capacity, which meant that the utilization of capacity rate remained stable.

  At the end of the first half of 2001, the capacity utilization rate was 84.4 percent. The profit ratio declined by 2 percent and fell, as did profitability, to its lowest level since 1993. The decline in the profit ratio was mainly attributable to the increase in the labor income ratio and the growing burden of net interest charges on added value.

  The constraining factors are offset by pressure from the labor market which encourages investment. Although the tightness on the labor market will probably ease, the continuing scarcity of staff provides a stimulus for businesses to increase the capital intensity of the production process.

  Unemployment

  Despite the slower economic growth, employment expressed in terms of man-years is still expected to have expanded in 2001 by 1.75 percent. There were 140,000 registered unemployed persons in 2001, compared with 181,000 in 2000. Of those who were unemployed in 2001, 93,000 had been out of work for less than a year. The number of long-term unemployed fell particularly sharply last year, by 31,000.

  Because the new tax system introduced in January 2001 reduced the tax wedge and widened the income differential between the employed and the unemployed, the equilibrium unemployment rate declined. Higher capital costs in 2002 will probably cause the equilibrium unemployment rate to rise in 2002. Wage moderation is required to sustain the expansion of employment in 2002.

  Wage costs and prices

  The unit wage costs in Dutch industry rose by around 4 percent. The higher wages are likely to further undermine the Netherlands' competitiveness in 2002. Because of the foot-and-mouth disease and BSE crises and the effects of poor harvests the prices of some foods rose sharply. Petrol prices rose because of a temporary reduction of refining capacity in the United States and the United Kingdom. Scarcity of materials and employees led to higher prices for new houses. The prices of existing houses once more rose faster than the rate of inflation.

  Government income and expenditure

  Because of the slower growth in consumption and in expansion of employment, revenues from tax and social security contributions did not rise as fast as in previous years. This was balanced out somewhat by windfalls on specific taxes and higher real wages. Windfalls on expenditures on unemployment benefits and interest charges were used to increase spending on education, care, law and order and the infrastructure.

  Higher prices on the housing market led to a substantial increase in the revenues from the property transfer tax. In 2002 tax cuts will focus mainly on stimulating the supply of labor. By lowering the corporation tax rates, the government will also try to improve the climate for companies wishing to locate in the Netherlands.
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