More poor economic news from the ‘core’ of the eurozone last night with the Dutch government and central bank warning that their economy is looking weaker than expected.
The Dutch government’s financial think-tank has joined the central bank in forecasting a recession in 2013 as a result of waning global trade prospects.
The Central Planning Bureau said Wednesday the Dutch economy would shrink 0.5 percent, in contrast to its previous forecast of 0.75 percent growth. Last week the central bank predicted a 0.6 percent contraction, reversing its previous forecast of a 0.6 percent expansion.
If the Dutch economy shrinks again in the fourth quarter following the 1.1 percent quarterly contraction recorded in the third quarter, it will be in recession, officially defined as two straight quarters of negative growth.
The economic downturn has led the government to reassess it’s budget with warnings that they are now likely to miss their deficit targets.
The Netherlands will miss its 3.0 percent budget deficit target in 2013 as the economy contracts for the second year running, the cabinet’s economic forecaster CPB said on Wednesday.
Its projections follow close on the heels of an even gloomier outlook from the Dutch central bank and add to signs that the government will need to deliver more budget cuts if the country is to retain one of the euro zone’s few triple-A credit ratings.
This all follows on from last week’s re-iteration by Moody’s that the outlook for the banking system remains negative due to the risks presented by a household sector highly leveraged toward the local housing market.
The outlook for the Netherlands’ banking system remains negative, says Moody’s Investors Service in a new Banking System Outlook published today. The outlook principally reflects the difficult operating environment that will persist throughout Q4 2012 and 2013, which, combined with structural economic weaknesses, will negatively impact the banks’ financial profiles over the 12-18 month outlook period. The structural weaknesses include (1) the high household indebtedness; (2) the banking system’s high leverage; and (3) banks’ high reliance on wholesale funding. In addition, commercial-real estate portfolios, and to a lesser extent, residential mortgages, will be the drivers of higher loan losses.
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“The main driver of our negative outlook on the Dutch banking system is the domestic operating environment, which will remain difficult for financial institutions. This reflects the currently weak macroeconomic conditions in the Netherlands and associated risks resulting from the high leverage of domestic households”, says Stephane Herndl, a Moody’s Assistant Vice President-Analyst at Moody’s.
As I’ve been warning over the last month, 2013 will bring a re-newed push across the euro-zone for further fiscal consolidation as the slowing economy has meant government revenues are weaker than expected. In response national governments have re-newed their efforts, but as we’ve seen in many countries this has created further economic retrenchment as the private sector’s response to tightening government budgets and falling economic activity has been to try to do the same themselves.
The Netherlands will be joining the party in 2013 with the Dutch Prime Minister, Mark Rutte, looking to implement €15bn of austerity measures over 5 years and his government has also stated that it will stick to its current budget rules which require it to reduce expenditure further if targets are not met.
The Dutch economy is suffering from the flow-on effects from the Eurozone crisis, but as I’ve spoken about previously, the main reason for concern is that the household sector is high-leveraged on the housing market due to poor housing policy. ( Please see UE’s excellent post on this topic here ). Over time the crisis has slowly seeped into the Netherlands and house prices have fallen approximately 15% since 2008. For a number of years it appeared the country was weathering the downturn relative well, but most recently the signs are that the building slump, falling consumer spending and lower exports has begun to take their toll.
The Dutch economy shrank by 1.1% in Q3 with a YoY fall of 1.6% driven mostly by a 6.4% yearly fall in investment along with slowing household consumption and declining export growth. Unemployment, although low by Eurozone standards, has been steadily rising since mid-2011 and , as we’ve seen in other nations with indebted private sectors, this tends to be the trigger for problems in the banking system if not arrested quickly.
All up, the Dutch economy is looking increasingly at risk of entering a self-feeding spiral down similar to what we have seen in the European periphery, and I suspect that, like France, the country’s AAA will come into doubt next year.