There was great surprise this week when the Central Bureau of Statistics released the figures for the fourth quarter. The economy grew by 0.6 percent compared to a quarter earlier. And consumption, corrected for price increases, even increased by 0.9 percent from quarter to quarter.
The surprise was understandable. Not only had the Dutch economy contracted in the third quarter and economists actually expected a formal recession. But the fact that consumption was the driving force behind growth clashed with pretty much all assumptions. Just think: at the end of last year it was almost nothing else than the sky-high inflation, which in September it peaked at 14.5 percent. The purchasing power of citizens was eroded at a rapid pace, mainly due to the exploding energy costs. And who knew what was to come in the months that followed? Energy poverty was lurking for hundreds of thousands of householdsthe Central Planning Bureau calculated.
Consumer confidence – an indicator that includes economic expectations and willingness to buy – stood at -59 in September and October, a low point. Frugality became the motto, and announced purchasing power repair would in any case be insufficient to absorb the blows. At the beginning of December, the CPB calculated, after the cabinet had presented a package of income support to dampen the increased energy costs, that the fourth quarter was going to really hurt. Household consumption is expected to contract in the last months of 2022. Quod nun.
The economy is a bit broken
After fifteen years of extraordinarily accommodative monetary policy, a pandemic with accompanying government support, a war and an energy crisis with again billions in state support, the economy seems to be a bit broken. Normal processes no longer run as before, the flywheel sometimes continues to turn while the emergency brake is already applied. And statistically, the last three years in particular have been so ‘polluted’ by all the tens of billions of euros in support measures that some figures can hardly be compared, such as the consumption figure published this week.
The total growth of consumption in the entire year 2022 was also extremely high at 6.6 percent. But that makes sense if you compare that to the previous corona year, which was ravaged by lockdowns and in which consumption was therefore paralyzed by the state. Buying stuff was possible (via mail order), but spending money on catering or theater was simply impossible. So that 2022 would be a catch-up year was a safe assumption, even with a war in Europe.
But the consumption growth of 0.9 percent in the fourth quarter was not relative to the same period a year earlier, but relative to the quarter before. And – remarkable in times of high inflation – the growth in expenditure was mainly in services, and much less in products. While normally high inflation actually leads to a buying impulse of durable consumer goods (white goods, furniture, cars): after all, these are more expensive the following month.
Anyone who wants to understand how a country that has almost reasoned itself into a consumer crisis subsequently continues to spend readily, has to look behind the bare 0.9 percent. First of all, that 0.9 percent is of course an average of people who started spending less and people who started spending more. Peter Hein van Mulligen, chief economist at CBS: “For people whose living situation has not changed much, consumption may really have decreased.” He is referring to people who have kept their jobs and have received at most a collective wage increase. “That [loonstijgingen] were reasonable, especially in recent months, but did not come close to inflation. So those people will probably have spent less.” Energy poverty has also been a real reality for many people. They have had to cut back on their normal consumption pattern in order to pay the energy bill. “But in terms of households as a whole, that is a relatively manageable group,” says Van Mulligen.
The fact that the average figure eventually ended up in the plus has everything to do with corona and the labor market. In 2022, despite an extremely tight labor market, almost half a million jobs will have been created, even 85,000 in the last quarter.
That continued job growth is partly related to the pandemic. Government support has saved many companies from bankruptcy during the pandemic. They also did not have to put their staff on the street. When the pandemic ebbed and the economy picked up again, people were suddenly needed again in the hospitality industry, theaters, technology, healthcare and education. The economic demand is so great that despite the inflation and contraction in the third quarter of last year, the labor market continued to grow. And those who get a job generally see their income rise sharply, and therefore have more to spend. Statistics Netherlands cannot yet say whether the majority of the 0.9 percent, or perhaps even more, is caused by job growth.
Also corona-related is the consumption growth resulting from dissaving. In the fourth quarter, the income of many people rose more slowly than inflation (which should therefore have led to less consumption), but because people saved less or sometimes even consumed their savings, the consumption tsunami, as economist Mathijs Bouman called it this week, continued roll on at full power.
Van Mulligen: “In corona times we could not lose the money, everything was closed, and tens of billions of extra were saved in those years. People have stopped doing that now.” That trend is not yet reflected in the monthly figures of De Nederlandsche Bank, deposits are still rising there. But much less hard than in the corona years.
And then there was the temporary allowance for energy costs, which the government issued over 2022. What started with lower taxes on fuel and energy culminated in November and December in a concrete subsidy of 190 euros per month for each household. Essential for families in energy poverty to pay the bill, but a gift for the vast majority of the Netherlands that could still easily pay the bill without that contribution. That was a total tax reduction of 2.6 billion euros, a plus of 0.3 percent of GDP. And what do the Dutch do with a gift of 380 euros just before the holidays? Exactly: spend.
Unrealistically optimistic
On balance, the conclusion must be that consumption continued to grow at the end of last year because, on average, the Netherlands is simply too rich to really suffer from the high inflation. The question remains how it is possible that consumers say they are very pessimistic about the economy (low consumer confidence), but then fail to act accordingly.
In this context, behavioral economists speak of a disconnection between what people think and what they actually do. For years, studies by the Social and Cultural Planning Office, among others, have shown that the Netherlands is relatively pessimistic about the state of the country, but is optimistic about its own situation. Unrealistically optimistic perhaps, but time will tell.
A version of this article also appeared in the newspaper of February 18, 2023