The other Dutch disease

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.

“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.

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  1. That report on the Dutch housing policy looks like the same thing that is starting to happen in Australia. So I guess we could use what is going on there as a rule of thumb.

  2. Sell Australian dwellings and buy in US?

    1) Aud is very high so an unhedged position could be a big winner or you could fund by borrowing USD and have a small net exposed or hedged position.
    2) Cash flow positive in some markets (rents greater mortgage costs).
    3) US housing has already got back to about “normal”
    4) US employment growing
    5) Australian house prices have had very strong growth and few are forecasting strong growth

    1) Transaction costs
    2) Currency risk
    3) Austerity in US could cause recession
    4) Australia is currently the miracle economy (largely on the back of China’s fixed capital investment, which will likely reduce over the medium term
    5) Lower liquidity of housing investments, but if you already hold one you might be comfortable with the risk
    6) Could pursue other investments instead of US housing if goal is to avoid Australian house price falls, avoiding many possible pitfalls.

    • darklydrawlMEMBER

      Agre with all the “for” points and would add “Low interest fixed loans” – 15 or 30 year fixed, which is a pretty good deal.

      On the against side I would argue a couple of your points.

      “Transaction Costs”: They were far far lower in the states in the US (AZ and WA) than in Oz, including all taxes. escrow, title insurance and exchange and bank charges. It is likely to vary between state to state in the US though.

      “Currency Risk”: Agreed if you are using AUD to fund the deal, but if you get a USD loan from a US lender and earning rental income in USD, it is largely good. There is some risk if you have additional expenses and the AUD is back to $0.60 cents USD.

      “US Recession”: Perhaps, but property has dropped a lot already and in many markets there doesn’t seem to be much more downside, even with a recession factored in. Also consider that much of US population have been doing it tough now for the past 5 years. A recession wouldn’t be good, but it wouldn’t be the huge shock to the system it was back in 2008. I think there is much more risk of this in Oz, but that is just me.

  3. Thanks DE.

    Yup, The NL is certainly starting to look worrisome and a lot of it is due to the housing slump. That said, it is a recession we need to have as the level of private debt is just not sustainable (although it is mostly serviceable due to mortgage interest deductions – until people loose their job).
    In my opinion recession is a direct and unavoidable result of letting air out as we are really seeing a bubble deflate.

    One thing which is a huge difference between the NL and Oz, and which makes me optimistic about the NL is a typical Dutch thing called “polderen”.

    “Polder” is the Dutch word for reclaimed land. When we began reclaiming land centuries ago we soon found out that not everyone had the same interests as some really needed to keep dry feet whereas others required the occasional fresh deposit of fertile soil. This led to a culture where society has learned to find common ground, even on hot topics.

    While this highly effective approach was forgotten during the last ten or so years, the current Government seems intend on bringing it back to life. Yesterday marked the start of this revival with a meeting between what we call the “social partners” (the term itself highlights the different take on things) – government, employers and employees.

    The intend is to repeat what worked well during the downturn in the 80’s: an agreement where everyone does their bit to get out of this crisis stronger. In the 80’s this led to Government cutbacks (not always an incorrect approach!), abstaining from seeking wage growth and shortening of workhours (i.e. sharing of the available demand for labour).

    Now obviously back then the NL still had the guilder, although I’m not sure whether it devalued (much), and I assume private debt was nowhere near as high. However, I am a firm believer that when people drop their adversarial stance and start working together on improving the (economic) situation they will more than likely succeed.

    I see this happening in the NL while Oz is still having a hard time admitting action is required.

    • “I see this happening in the NL while Oz is still having a hard time admitting action is required.”

      Based on my experience in Spain (20 years and counting), NL is at the same stage as Spain was in 2010 whereas Australia is Spain in 2008. This is like a conveyor belt and the pain is unavoidable once you get on it. Keynesian economics doesn´t work unless you do your homework in the good times. The tragedy is that Australia had time after the GFC and instead chose to believe that it was somehow better and above basic economic tenets. People never learn.