Eco Perspectives

Waiting for a new government

04/08/2021

Thanks to healthy government finances and a light lockdown strategy, the Netherlands weathered the crisis better than the surrounding countries. Nevertheless, the economy was in a mild recession in Q1 2021. Economic sentiment indicators point to rapid recovery in the second half of the year. Despite the clear victory of the outgoing government at the general election in March, the formation of a new coalition is in turmoil. Doubt has increased whether Mark Rutte can lead his fourth government in succession. The main task of the coalition is to put a recovery programme on the rails.

Mild recession in Q1 2021

The government’s light lockdown strategy announced in March 2020 initially paid off. In 2020, the economy contracted 3.7%, – similar to the fall recorded during the financial crisis in 2009 – but this compared favourably with the surrounding countries. As the number of infections rose rapidly after summer, a second partial lockdown was imposed from mid-October. The measures have been progressively tightened in the following months. The imposition of a curfew in January led to unprecedented violent protests and pillaging in many places in the country.

GROWTH AND INFLATION

The economic impact of the second lockdown is likely to be much more limited than in March-May 2020. In Q4 2020, GDP contracted by 0.1%, largely due to a fall in household consumption (-1.4%). A further contraction (-0.5%) is expected in Q1 2021. By comparison, in Q2 2020, GDP contracted by 9%. The reason is partly due to the effectiveness of the policy responses to the crisis.

Thanks to the furlough schemes, the unemployment rate declined to 3.6% in February after having peaked at 4.6% last August. In the same month, the number of bankruptcies was even at its lowest level for 30 years. Moreover, as household savings have increased to historically high levels due to limited consumption possibilities, house prices have been rising sharply. As elsewhere in Europe, the business climate improved in March, on the back of rising world trade. However, consumer confidence moved sideways.

Uncertainty concerning government formation

In March, the conservative liberals VVD led by prime minister Mark Rutte remained the largest party at the general election. The social liberals (D66) came surprisingly second. Technically, it would be possible to continue the outgoing centre-right coalition with the Christian Democrats (CDA and CU), despite heavy losses of the CDA.

However, the chaotic first phase of the formation process suggests that it can take some time before a new government is in place. After losing 5 seats and plagued by inner divisions, the CDA might be reluctant to join a new coalition. The social democrats (PvdA) and Green/Left are keen to join a new government, but this would imply a change in policy. Moreover, severely criticised by his former coalition parties during a parliamentary debate on the formation, Mr Rutte runs the risk of becoming an obstacle in the formation process. In general, the forming of a new government takes several months. The longest formation - that of the outgoing government - lasted 225 days. Speed is called for, as the country needs a new government to put a recovery programme on the rails.

Whatever the outcome of the formation process, the new government will continue its prudent budgetary policy. Thanks to the country’s healthy financial position at the outset of the crisis, the government was able to support the economy better than the surrounding countries. Despite the important gains of the pro-EU party D66, the government will remain circumspect about deepening the European integration given the progress of the anti-EU parties in parliament.

Lifting support measures may provoke bankruptcies

In the coming months, as Covid-19 cases are expected to come down, lockdown restrictions could be lifted gradually. Household demand is likely to be one of the major engines for growth in the coming quarters as savings rates will return to pre-crisis levels. In the course of 2022, the economy could be back at pre-crisis level.

At the same time, the government is likely to withdraw gradually. This could cause problems for some enterprises that have been kept alive by transfers, loan guarantees and furlough schemes. Bankruptcies are expected to rise, in particular among companies that were already weak before the health crisis. For this reason, employment conditions could again deteriorate and unemployment may even rise to 5% of the labour force by the end of the year. As a result, collectively agreed wage increases could slow to 1.5%.

THE EXPERT ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
Growing certainty that there will be less uncertainty

Growing certainty that there will be less uncertainty

In many countries the number of new Covid-19 cases has begun rising again, forcing governments to maintain or tighten health restrictions [...]

Read the article
United States
As the epidemic wanes, the economy soars

As the epidemic wanes, the economy soars

The US economy has taken off. Bolstered by the easing of the Covid-19 pandemic as much as by unprecedented fiscal support, GDP will soar by at least 6% in 2021, surpassing the pre-crisis level of 2019 [...]

Read the article
China
Shifting towards a medium-term perspective

Shifting towards a medium-term perspective

At the end of the annual “Two Sessions”, China’s major political event, Beijing announced its economic targets for 2021 as well as the priorities of its new five-year plan [...]

Read the article
Japan
Confidence needs to be restored to accelerate the recovery

Confidence needs to be restored to accelerate the recovery

As in other countries the world round, Japan reported a record-breaking recession in 2020 and the lack of consumer confidence, stifling domestic demand, could slow the dynamics of its economic recovery [...]

Read the article
Eurozone
A stronger than expected economic recovery?

A stronger than expected economic recovery?

The pandemic continues to spread rapidly within the Eurozone member states, and many uncertainties remain. Yet the most recent economic data are encouraging [...]

Read the article
Germany
Strong recovery from mid-2021

Strong recovery from mid-2021

After a difficult start of the year, business cycle indicators improved markedly in March on the hope that the worst of the Covid-19 crisis is behind us. GDP is projected to reach the pre-Covid-19 level by the end of 2022 [...]

Read the article
France
An accordion-like exit from the crisis

An accordion-like exit from the crisis

Contrary to what we were led to expect in late 2020, the discovery of vaccines did not end the stop-and-go nature of the recovery [...]

Read the article
Italy
The way to recovery gets longer

The way to recovery gets longer

In 2020, real GDP fell by 8.9%, with almost 2.5 million of full-time equivalent jobs lost. The decline in consumption was the main driver of the recession, accounting for three fourths of the economic downturn [...]

Read the article
Spain
A recovery slow in the making

A recovery slow in the making

Economic growth remains extremely fragile in early 2021 [...]

Read the article
Belgium
Light at the end of the tunnel but beware of the challenges ahead

Light at the end of the tunnel but beware of the challenges ahead

The Belgian economy shrunk by 6.3% in 2020. This amounts to the biggest post-war decline on record [...]

Read the article
Portugal
The worst is over

The worst is over

Portugal was one of the European countries hit hardest by the third wave of the coronavirus pandemic this winter. The government reinstated a “strict” lockdown that drastically reduced the spread of the virus [...]

Read the article
United Kingdom
The British lead the way in vaccination

The British lead the way in vaccination

Gambling has risks, but sometimes you win big [...]

Read the article
Sweden
The health situation is still fragile

The health situation is still fragile

After a second, particularly long and severe wave of Covid 19 in late 2020, Sweden has been dealing with a third wave of the pandemic since mid-February [...]

Read the article
Denmark
An altogether enviable situation

An altogether enviable situation

With relatively few deaths and only a mild decline in GDP in 2020, Denmark has been fairly resilient in the face of the Covid-19 pandemic [...]

Read the article