Weak Growth In The Netherlands

The Netherlands is one of the 'core' countries of the euro area, but for the past two years domestic growth has been weak and outlook is quite fragile. Confidence is low, euro area exports will be weak, fiscal headwinds will remain and house prices will decline.

Despite the weak economic outlook, the Dutch economy will not turn into a 'periphery' country: structural reforms are not urgent, the political commitment seems to be in place and the debt ratio is below euro area average.

Nevertheless, the Dutch housing market is a significant risk factor. House prices have declined nearly 20% since 2008 and based on indicators for construction activity and house price valuations, we expect further downward movements in house prices.

Across the euro area, declining house prices have resulted in major bank losses. Such a situation could result in a downward spiral as it would have a negative impact on growth, fiscal sustainability and investor confidence.

However, banks' vulnerability to declining prices has so far been limited and write-downs on mortgage debt only amount to 0.09% of the domestic banking operations.

Additionally, domestic pension funds and insurers' reserves, which were close to 200% of GDP in 2011, could be a buffer to loss of confidence.

Our sensitivity analysis shows that small changes in the growth and deficit assumptions will put debt on an increasing trajectory. Nevertheless, debt will stay close to the current euro area average even if investors start to lose confidence.

Despite the risk to the declining housing market, we believe investors will remain confident on the Netherlands. However, outlook is weak compared with the other cores and for investors. Finland is an interesting alternative to the Netherlands.

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