30-11-2012 — /europawire.eu/ — Very low economic growth rates are becoming the rule rather than the exception in the Netherlands, and 2013 will not be different, with just 0.25% growth expected. Therefore, by the end of next year, Dutch Gross Domestic product (GDP) will remain lower than before the inception of the crisis in 2008. At the global level, it is mostly the emerging markets that will drive economic growth, although they are by no means immune to trends in the industrialised countries. In the Outlook 2013, published today, Rabobank economists project that, mainly as a result of the euro crisis, the global economy will grow by only 3.75% in 2013.
In the Netherlands, exports will prevent the economy from contracting in 2013. The Dutch government will continue its stringent austerity programme next year, and, at EUR 15 billion, the extent of fiscal tightening is unprecedented. This will have a significant impact on private consumption, which is expected to decline further in 2013. Even though corporate investment is forecast to rebound slightly, it will remain well below pre-crisis levels.
Growing urgency to switch to a more sustainable economy
In the years beyond 2013, Dutch economic growth will remain decidedly moderate, hovering around 0.5%. There are several causes for this stagnation. For one, a financial crisis is invariably followed by a growth slowdown thanks to private sector deleveraging. From an international perspective, gross household debt in the Netherlands is especially excessive. While this is somewhat mitigated by assets in the form of retirement funds and home equity, the high level of gross debt in our balance sheets makes our economy more vulnerable to wealth effects. Furthermore, and on a more long-term basis, demographic trends such as population ageing and – eventually – population decline (along with other factors) will result in a slowdown in growth. Lastly, there is a need for making a transition towards a more sustainable growth model. This will, unfortunately, dampen short-term growth and it will take some time until the society will reap the benefits of the transition., but will eventually help create a more sustainable society. For the Netherlands, as a Western nation, a move towards a more sustainable growth model is therefore more important than simply aiming for strong economic growth. Not only do we need to restore order to our public finances for the sake of future generations, we should also be able to preserve our planet for them. This is a viable objective given the high standard of living in the Netherlands.
Europe has yet to resolve the crisis
We are very gradually seeing some progress in the battle against the European debt crisis. The ECB’s recent decision to potentially buy unlimited quantities of government bonds from crisis-hit countries, with strict conditionality, has appeared to have turned things around. Whereas before we were seeing a pattern of ‘two steps back and one cautious step forward’, that process now seems to have reversed, at least where market sentiment is concerned. We are now taking two steps forward while taking one step back every now and then.
Markets continue to press for a far-reaching and more extensive mutualisation of debt within the region, which is commonly referred to as a ‘fiscal union’. Therefore, although the crisis continues to rage, the crisis mood has become a great deal more manageable, while the string of measures implemented – specifically the recent ECB decision – have somewhat silenced speculation on the end of the euro for now. Since this is likely to be another long and tortuous path, public confidence and, as a result, market sentiment, will continue to take new hits in 2013. And even once the crisis is completely resolved, it will take policymakers many years to fully implement the long-term reforms and restore the economic and fiscal losses suffered throughout the crisis.
Substantial economic risk remains
Economic risk will remain substantial going forward. The economists of Rabobank are cautiously optimistic about the years beyond 2013, because the frustratingly slow economic recovery in the eurozone is a result of the painful form of macroeconomic rebalancing within the monetary union. The purpose of the structural reforms and restoration of competitiveness is to preserve this rebalancing. In addition, they also support Southern Europe’s growth potential, enabling it to contribute to Northern Europe’s growth capacity once again. The Rabobank economists emphasise that restoring economic growth potential should prevail over short-term fiscal adjustments. Within the parameters of the stricter European Stability and Growth Pact, they call for more lenience towards countries that are on schedule with their long-term reform agendas but are unable to meet their budget targets due to economic setbacks. This type of approach also helps control the (socio-political) risk of austerity/reform fatigue. The eurozone economy will have contracted by 0.5% by the end of 2012, only to bounce back slightly with a growth rate of 0.5% in 2013.
There is still policy flexibility, especially in the emerging markets
The choice faced by policymakers between further austerity measures and reforms, on the one hand, and (further) increasing policy flexibility to support economic growth, on the other hand, is one we are witnessing across virtually the entire industrialised world right now. And in those countries where there is sufficient policy space – this is true mainly for a number of emerging economies – governments are currently reluctant to use this space, preferring instead to save their resources for more trying times. Two notable exceptions to this rule are the Middle Eastern and the North African countries, where public expenditure for income support has increased as a result of 2011’s Arab Spring. In a global context, however, this is a mere drop in the ocean.
Theme: Funding for Growth
The publication of the macroeconomic Outlook 2013 coincides with that of the thematic brochure Funding for Growth, which focuses on how businesses might be able to fund their growth in the coming years. The Rabobank economists analysed the capital structure of non-financial firms in the Netherlands, and concluded that large companies fund themselves to a significant extent with equity, whereas small and medium-sized enterprises (SMEs) depend mainly on bank lending for their funding. Additionally, they also note that the financial strength of the Dutch private sector has remained stable at the macro level, even though the buffers having been weakened in recent years.
On a less positive note, profitability has fallen sharply since the start of the crisis, making it more difficult to fund growth with retained earnings.
You can download Outlook 2013 from www.rabobank.com/Outlook2013