The Dutch economy is well on its way to writing its ninth recession in the history books in more than fifty years. In the third quarter, gross domestic product shrank by 0.2 percent compared to the three previous months. The explanation for the disappointing figure lies mainly in the disappointing investments, especially in housing and infrastructure, reports the Central Bureau of Statistics (CBS). Trade, transport and the hotel and catering industry in particular contributed negatively to economic development. Business services continued to grow.
If the growth figure also starts with a minus sign in the fourth quarter, the recession will be a fact according to the common European definition (‘two consecutive quarters of contraction’). An unclear fact, that is, because one economic downturn is not the other.
How do recessions arise?
Recessions occur for a variety of reasons. For example, due to the bursting of a bubble on the stock market, due to an explosion in commodity prices, due to a pandemic, or due to the outbreak of a war. They also come in different shapes. Some recessions are like a bleak winter, with many bankruptcies and soaring unemployment. Others are more like a summer shower. The economic damage will be limited, and few jobs will be lost. That is called a ‘technical recession’: technically it is correct, but in the experience it is not much noticeable.
It is coffee grounds to see how serious the recession we are now going through will become. In any case, it started as a summer shower rather than a harsh winter. In the third quarter, the labor market was still very tight, according to figures from Statistics Netherlands, for example. There were 121 vacancies for every 100 unemployed.
Yet there are also signs of cooling. In the second quarter, there were still 143 vacancies per 100 unemployed. This trend is expected to continue. In an economic slowdown or contraction, companies look for savings and are more likely to lay off than recruit. The appetite for new ventures is understandably small, and workers who are less secure in their jobs, or face more competition from job seekers, are less likely to demand a pay raise. Consumers are more cautious, try to save more, and postpone major spending.
Where is this recession coming from?
This recession has been prompted by what economists call a ‘negative supply shock’. The war in Ukraine has caused the prices of energy and other raw materials to skyrocket. The costs of companies have increased, they often pass them on to consumers, so that inflation erodes purchasing power. ‘The most important economic report in the coming period is the weather forecast,’ says Luc Aben, chief economist at Van Lanschot. If energy prices fall again, the prices of food and other essential products for consumers will follow naturally.
Rabobank economist Hugo Erken agrees with this. This year we will probably manage with gas reserves that are 95 percent full, he thinks. ‘But next year will be much more difficult, because then we can no longer fall back on Russian gas.’ He also warns against over-optimism about lower prices for products and services. ‘It could take months for companies to fully incorporate the higher producer prices that they have already tapped into their sales prices in recent months. So we still have to get some of the price pain.’
It is certainly not the first time that the Dutch economy has faced a supply shock. This was also the case in the recession of the 1970s (oil crises) and that of the corona pandemic in 2020. In the latter recession, the problem was not only that countries went into lockdown, which disrupted supply chains. There was also a demand shock, because citizens started spending less due to the great economic uncertainty and fear of infections.
How painful can a recession be?
An important reason why the corona recession did not turn out to be a traumatic experience is that the government was ready to take all kinds of support measures to alleviate the pain of citizens and companies. As a result, the economy was quickly above Jan. Even now, the government has set up various schemes to limit loss of purchasing power and to support companies. Think of the energy ceiling and the energy support package for the business community.
Furthermore, the government is already leaning against the wind with its fiscal policy anyway, via the so-called automatic stabilisers. For example, people who lose their job receive unemployment benefits. This higher expenditure is offset by lower income because corporate income tax, personal income tax and VAT yield less during recessions than during booming times.
Countries have learned from this intervention from the past and what happens if they sit on their hands. In the United States, after the outbreak of the Great Depression in 1929, Secretary of the Treasury Andrew Mellon advised President Herbert Hoover to take the crap out of the system by liquidating everything. This means that companies had to lay off employees, investors had to dump stocks and debtors had to put their houses up for sale. A healthier economy would then rise from the ashes. But this “liquidate everything” recommendation only made the depression deeper and longer-lasting.
Are there any good sides to a recession?
Recessions can be useful. That’s why generous government intervention comes at a cost, and not just because it drives up government debt. Recessions can help cut the undergrowth in the economy, paving the way for fresh impulses. When companies disappear, personnel and capital become available for other companies.
If this process is not started because the government supports too generously, it will undermine the economic growth of the future. “Any artificially stimulated revival leaves some of the work of a recession unexecuted,” the legendary Austrian economist Joseph Schumpeter once stated. “Not only does it allow undigested problems to remain, but it also adds new ones, which can create another crisis.”
How will this recession end?
Since the publication of the CBS figures, economists have been pondering which ‘letter’ symbolizes the growth path of this economy, and thus will typify this recession. The chances of a V-shaped recession seem slim. After all, the economy did not collapse quickly, so it is unlikely that it will rebound sharply in the future. Something like this happened during the corona recession of 2020, when the economy shrank by more than 9 percent in the first half of the year, only to grow by 6.2 percent within three months.
We may be heading for a U-shaped recession, with the economy caving in, only to stabilize for a while before the recovery starts. That would in any case be better than with an L-shaped copy, where the recovery is not at all. Or maybe it’s going to be a recession with a K-shaped recovery, with only a few sectors finding their way back up, while others continue their way down. So there is a clear divide in the economy. Such a course was seen in the recovery from the corona pandemic.
What all these letterforms share is the uncertainty about the strength of the eventual recovery. Will we then return to the same growth path as before by catching up, or has the economy ended up on a structurally lower growth path? The future is still surrounded by too many uncertainties to give any definite answer. For example, it depends, among other things, on the further course of the war in Ukraine, the success of the fight against inflation, and therefore even the weather.
