Country Report Netherlands January 2009

Outlook for 2009-10

• The governing coalition is showing surefootedness and competence in addressing the financial crisis and economic slowdown, in contrast with an earlier lack of cohesion, and should stay in office over the forecast period.
• Two right-wing parties, the Freedom Party and Proud of the Netherlands, will continue to put the government on the defensive on immigration.
• A rise in value-added tax, which was to pay for a cut in unemployment benefit contributions in 2009, has been postponed, and the Economist Intelligence Unit expects the budget to move into deficit in both 2009 and 2010.
• Consumer and producer confidence are particularly low, and the economic slowdown in 2009 is expected to be severe. Most GDP components are expected to see a contraction in 2009, with only a slow recovery in 2010.
• GDP growth is estimated to have decelerated to 1.9% in 2008 and is forecast to contract by 1.8% in 2009, before recovering to growth of just 0.1% in 2010. Export demand will be weak, but domestic demand will not be much better.
• Inflation (national measure) is estimated at 2.5% in 2008, but should drop considerably, to 0.8% in 2009 and 1.3% in 2010, as price pressures fall sharply.

Monthly review

• The issue of establishing an inquiry into how and why the Netherlands supported the Iraq war in 2003 has returned to the agenda. The PvdA will continue to push for such an inquiry, while the CDA is strongly opposed.
• A respected report on racism and extremism has concluded that Islamophobia remains on the rise in the Netherlands, a particularly sensitive topic.
• The Dutch government is extending a scheme to reduce working hours, which allows firms to access unemployment benefit funds instead of laying off workers, to allow longer access to the programme.
• The Dutch government is mulling an adjustment of tax treatment for corporate entities that would make it less attractive to finance corporate takeovers solely through debt. This could result in higher tax-free allowances.
• The manufacturing sector is experiencing a severe slowdown. October data only capture the beginning of a weakening, but new-orders data project a deceleration that tallies with anecdotal reports of layoffs and low demand.
• Inflation is now falling solidly, dropping from 2.8% in October to 2.3% in November. The inflation gap with the euro area has narrowed recently.
• Employment growth is slowing, from 2.2% in the first quarter to 1.5% in the third quarter of 2008. Recent data and press reports suggest a drop in employment in the fourth quarter, in line with weak industrial demand.