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Downside Risks Linger in Dutch Recovery


In an attempt to conduct a foreign exchange rate analysis of the Euro currency, Barclays took time to go down deeper into the downside risks that limits the recovery of the Dutch economy. The Dutch government has struck some deals with partners in the society namely those who have interests in the labour market, pension and energy reforms. The reforms mentioned are structural in nature and have yet to get Parliamentary approval, which may not be direct, given the Dutch government’s weaker majority in the upper house. Sure the housing sector correction may be stabilising. Even then, some foreign exchange rate analysts think that house prices in Netherlands will drop for more quarters ahead. Recent changes in housing market regulation make it harder to read through the data.

Budget Deficit

The Dutch government unveiled €6B worth of fiscal consolidation measures on 17 September, on top of the €7B already planned. The foreign exchange rates analysts had estimated that the planned 2014 austerity package is biased toward expenditure of some 56%. It aims to achieve the budget deficit cut to 3% of GDP in 2014 as promised to the European Union institutions.

Following an estimated 1.4 percentage point structural effort in 2013, Barclays foreign exchange rate analysts estimated that Netherlands will take effect a 0.6 percentage point in the budget balance. They do not think that Netherlands will encounter any disciplinary sanctions, given than the cyclically adjusted effort will be above the 0.5% threshold. Consequently, additional fiscal measures to be formulated in case the execution of the policies proved to be disappointing, especially if it will come to a point of lower-than-expected growth.

Dutch Optimism

Nonetheless, Barclays remain cautiously optimistic about the Dutch economic outlook, given that:

(1) Business confidence normalisation has shifted up gear, catching up with the rest of the euro area, potentially signalling a return to growth in second half of 2013;

(2) Declining pace of house price falls may have reached a bottom and should moderate further; and

(3) Fundamentals of the Dutch banking sector remain strong, with well capitalised institutions and a low, albeit increasing, level of NPLs. Asset quality indicators are
worth monitoring, as an acceleration in the accumulation of problem loans could warn of troubles for the sector.

Conversely, a partial privatisation of ABN Amro and further repayment of ING’s government capital would be positive because it would indicate that investor confidence is returning to the sector.

GDP Outlook

Foreign exchange rate analysts now predict Dutch GDP to fall 1.1% this year, which is a minus 0.1 percentage point revision, similar to 2012. Barclays have revised down its expectations for 2014 by 0.5 percentage point, to 0.4%, to reflect a likely slower recovery in domestic demand across the board and more fiscal measures weighing on public and private consumption, combined with the long-standing growth impediments, such as housing correction and household deleveraging.


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