Wednesday, 28 November 2012

Netherlands: mired in balance sheet recession...?

With all the ruckus regarding sovereign debt and the Euro-Area periphery, the economic malaise that is present in part of the “core” flies unnoticed under the radar. Like we say in Greece “in the kingdom of the blind the one-eyed man reigns”…

What’s more, with sovereign debt taking center stage, other kinds of debt are largely ignored. I’ve written about this again awhile back.

I would like to take a look at Netherlands that surely are relevant with my little prologue above.  

After the base effect, induced from the GDP collapse in 2009, gradually wore off (along with export growth) so did recovery in the Netherlands. 

source: Eurostat

Recession is technically defined as two consecutive Quarter over Quarter declines in GDP. If one uses this definition then Netherlands are not in recession. Year over Year growth (which I generally prefer) though paints a different picture with GDP declining since Q4 2011 and the decline appearing to accelerate (?) in Q3 2012.

Since I am not able to find a dissection of growth for Netherlands I have to resort to my usual facile method. Here’s the chart.

source: Eurostat, own calculations

Private final consumption has barely grown since 2008 (bar a brief interlude in 2010) with exports being the sole actual growth driver. With export growth being anemic lately the Dutch economy finds itself struggling.

Here’s private final consumption’s evolution compared with that of the Euro Area 12. The underperformance is striking and it’s not that Euro Area 12 is a particularly fast grower in that respect. 

source: Eurostat

A good question is why is that the case? If one looks back at the beginning of the post he/she could get an inkling of where I’m heading. That’s right, the reason in my humble opinion is household sector’s over-indebtness.

source: Eurostat

Household debt is close to the whopping level of 130% of GDP, the second highest household debt load in the Euro Area 17. 

source: Eurostat

With the state that their balance sheets are in, it is no wonder that households are trying to deleverage, not exactly the easiest thing to do in such an environment though. Moreover, the majority of mortgage debt in Netherlands is of the fixed rate variety meaning that current low rates do not help households much. Household investment has plummeted to about 10% of disposable income from almost 15% and gross saving has posted the sharpest increase in over a decade.

(Gross household saving rate and gross household investment are expressed as a % of gross disposable income and net lending/borrowing as a % of GDP)

source: Eurostat

All that said, isn’t what Netherlands are finding themselves in, a textbook case of a balance-sheet recession?

Of course, a debt load of this magnitude and in this economic background is not going to go away anytime soon, so Netherlands will probably keep relying on export growth for the foreseeable future..

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