This is how an academic determines that there is a recession: you wait until there are formally two consecutive quarters of negative economic growth and you say, ‘Wow, what the hell’. Of course, that moment does not come as a surprise to many companies. They have been feeling the economy cool down for a while, and have seen demand decline. Consumers have become more concerned, more anxious too.
So let us not wait for the late verdict of the official accountants. If we now put a thermometer in the Dutch economy, will we feel a rising fever? Yes, according to a survey by de Volkskrant among Dutch economists and companies. According to them, the second half of the year will result in a mild recession, with two quarters in which the contraction figure starts with a zero. ‘More clouds, but no downpour yet’, says ING economist Marcel Klok.
Remarkable, given that European Commissioner Paolo Gentiloni (economy) emphasized this week that the eurozone will not end up in recession this year, according to new estimates from the European Commission. ‘That is partly thanks to Italy and Spain,’ explains Klok. ‘They will benefit in the third quarter from the pick-up in summer tourism, which is giving their economy a boost.’
Okay, so a slight fever for the Dutch economy, no more than a winter flu. At least, probably not. Because if Russia suddenly turns off the gas, we will have a recession that bites hard.
How are we going into this recession?
‘We are coming out of a solid second quarter’, says Klok. ‘Consumption, goods exports and investment were all quite good. In June, however, we were able to establish a serious decline in spending for the first time thanks to our data on debit card transactions.’ Similar sounds at ABN Amro. ‘The catch-up growth after the corona crisis came to a head in the second quarter,’ says Nora Neuteboom. ‘In those three months, the number of debit card transactions hardly increased year on year, while in the first quarter the transactions had increased by 13.5 percent.’
We are sliding, not bouncing into a recession. The economic downturn is ‘obviously annoying’, says Luc Aben, chief economist at Van Lanschot, ‘but dramatic is different’. He expects two or three bad quarters. ‘Inspired by the higher energy prices coming from outside. That is quite different from a depression caused by systemic factors, such as in 2008, when the entire financial system started to falter. Today I don’t see such a disturbing imbalance.’
‘The funny thing is that almost all the lights are green for the economy,’ says Neuteboom. ‘The wealth of the Dutch is historically high, partly because they were forced to save during the corona crisis, and because house prices have risen sharply. Moreover, household debt is low, as is unemployment.’
Nevertheless, there are also major uncertainties. ‘Trust is crucial to continue spending, and Dutch consumer confidence is at its lowest level since 1986.’ Dangerous, because so-called consumer spending makes up about sixty percent of our economy. However, that low confidence will not translate into considerably lower consumption for the time being. Historically, there is always a few months between a significant decline in consumer confidence and a fall in spending. For example, the new kitchen had already been ordered, or that expensive trip abroad had already been booked. Families sit around the table and see what they can save on from now on.’
Where is the contraction first felt?
In contrast to the exceptional recession that was prompted by the corona crisis, this is one of the classic textbooks, says Neuteboom. ‘The first to be affected are companies that sell directly to consumers. For example, think of the catering industry, these are expenses that people can easily save on.’
Other choices are quickly made in the retail sector as well. ‘Now that the prices in the supermarket continue to rise, we see the volumes fall by more than 6 percent’, reports Sjanny van Beekveld of research agency IRI Nederland. This sees signs that consumers within certain food groups are increasingly opting for the cheaper option (for example, minced meat instead of steak) and are opting more for private labels instead of A-brands. Cheaper supermarkets are also regaining market share compared to the more luxurious chains such as Jumbo and Albert Heijn.
The amount that households can spend on non-elementary expenses could take a major hit this month, says Marcel Klok of ING. ‘Many households will then receive a new rate for their energy bill. About three quarters of Dutch households spend roughly what comes in each month, which means that the higher energy prices come at the expense of other expenses.’
The government can devise measures to accommodate families and thus support consumption and thus the economy. But it is precisely there that lurks the danger of a much greater recession, Aben notes. ‘You see that European governments are under pressure to compensate for the eroded purchasing power of citizens. In the short term, that is good for the economy, but in the longer term it only makes headache files bigger. Italy is already having problems with excessive government debt. If that goes off track, we’ll be looking at a new euro crisis, which can really hurt the economy.’
How much pain is the industry in?
All economists point out that business confidence in the Netherlands is still at a reasonable level, and that the order books in the industry are quite full. It often concerns delayed production, points out Nora Neuteboom of ABN Amro. “Orders that companies previously couldn’t fulfill because they didn’t have enough staff, or because there were problems in the supply chain that left them waiting for parts.”
One sector where the alarm signals do light up is that of the growers. Due to the high energy prices and the war in Ukraine, they are faced with rising costs, says Michel van Schie of Royal FloraHolland, the largest flower auction in the world. ‘Our biggest concern is that they decide to set their greenhouses a few degrees colder, so that they can produce less.’
Remarkably, business confidence in construction is the highest of all sectors, while it is known as one of the most cyclically sensitive sectors. ‘The housing shortage remains very large and many building plans with long lead times have been approved’, explains Klok. He is more concerned about the industries that are already showing a decline. This mainly concerns the producers of investment goods, such as machine builders or car manufacturers. ‘In May, production there declined. We have to see if that is the harbinger of a deeper recession than we expect so far.’
Should we fear for our job?
Recessions are particularly feared because of the job losses that typically accompany them. In the first half of this year, companies screamed for staff, and for the first time since Statistics Netherlands started measuring, there were even more vacancies than unemployed. But will that screaming soon turn into whispers? Or worse, in the announcement of redundancies?
If you want to gauge sentiment on the labor market, the temporary employment sector is at the right place. Temporary workers generally act as ‘cushions’ for companies: in the event of an economic downturn, they are the first to lose their job because of their flexible contract. If things go better, they will also be the first to get back to work.
Steven Gudde, director of impact and labor market at temporary employment agency Olympia, calls the demand for temporary workers ‘undiminished high’. But it is precisely in this that he sees a signal that companies are exercising some caution in their search for personnel. ‘Normally in times of extreme staff shortages we see the number of temporary workers level off and the number of permanent contracts rise, but that is not yet the case.’
There is therefore generally no question of a reduction in the workforce at companies. ‘They have had to go to so much trouble to find people that they will not just fire them,’ says Klok. ‘So they are going to hoard staff, and they can also pay for it. On average, the Dutch business community is in good shape.’
The same voice at Van Lanschot’s Luc Aben: ‘Only if companies expect the economy to really go down the drain, they will start laying off their jobs. In a mild recession, the shortage on the labor market will not disappear.’
What is the black scenario?
How deep this recession will cut mainly depends on what happens next to energy prices, believes Luc Aben. On July 21, maintenance on the Nord Stream 1 pipeline must be completed and it must be determined whether Russia is supplying gas again. ‘But what if Russia turns off the tap? The predictions about the consequences of the energy price in that scenario really shoot in all directions. An oil price of 70 dollars per barrel means something different for the Dutch economy than one of 170 dollars. How will consumers react to a new energy shock?’
In extreme cases, the Dutch government can decide to ration gas, or to shut down large companies, so that they can no longer consume gas at all. This would especially hurt the chemical industry, which accounts for a quarter of Dutch energy consumption, concludes ABN Amro. Other sectors hit hard in this scenario are the basic metals industry, the construction materials industry and the refineries. Whether it will all happen remains to be seen. But the opening sentence of the bank’s most recent analysis is not very promising: ‘At first glance, the economy is still in good shape, but the relative calm seems to be the calm before the storm.’
With the cooperation of Marieke de Ruiter, Anna de Haas, Freyan Bosma and Wilco Dekker.