November 15, 2012 6:57 pm

Nervous consumer drags down Dutch economy

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They had expected it to shrink by perhaps half a per cent. But the severity of the third quarter contraction of the Dutch economy took economists by surprise.

“It’s a bit of a shock,” said Maarten Leen, head of macroeconomic analysis at ING. “It is almost certain now that the Dutch economy will again experience a recession, the third in four years.”

The Netherlands’ economy shrank an ominous 1.1 per cent, after growing 0.1 per cent in the second quarter.

The contraction, the latest example of economic distress spreading from Europe’s periphery to its prosperous core, comes as unwelcome news for the two-week-old coalition of Mark Rutte, prime minister, which has already been forced to revise its programme by popular anger over austerity measures.

Among the weakest sectors were the construction industry, down 8 per cent year on year, and household spending, which is down 1.8 per cent and shrank for the sixth consecutive quarter.

Consumer spending weakness contrasts with the Netherlands’ neighbours Germany and Belgium. Economists say consumers’ anxiety in the Netherlands is driven by its housing market, which experienced a bubble in the decade before the financial crisis and is now seeing anaemic sales and falling prices.

Consumer sentiment has been worsened by uncertainty over tax measures introduced by the new coalition government. These include a limit on the deductibility of mortgage interest, a rise in value added tax from 19 to 21 per cent, and other tax increases intended to lower the budget deficit while reducing income inequality.

The government, a coalition between Mr Rutte’s centre-right Liberal party and the centre-left Labour party of Diederik Samsom, had hoped to introduce reforms that would give consumers and business long-term confidence. Instead, it was plunged into disarray just after taking office two weeks ago over an abortive plan to tie health insurance payments to income. Liberal voters were furious over the plan, and the government retracted it on Monday in favour of tax increases.

The poor economic figures threaten to place the governing accord under further pressure.

On Thursday, the head of the top labour union met with Lodewijk Asscher, the Labour vice prime minister, and warned of “chilly economic times” if the cabinet’s labour-market policies are carried out. Unions are grumbling over government moves to cut unemployment benefits from three years to two.

Projections by the Netherlands’ Central Planning Bureau show the income-redistribution measures demanded by Labour in the governing accord will lead to higher unemployment rates.

Emile Roemer, leader of the opposition Socialist party, attacked the government for “making the euro crisis even worse” and called for economic stimulus in place of budget cuts.

Conservative politicians, meanwhile, are worried that the worsening economy could lead the government to miss its target of keeping the budget deficit below the EU’s limit of 3 per cent of gross domestic product in 2013. That would mean an unenviable choice for the government between selling the Dutch public on yet more austerity measures on top of the €30bn already scheduled over the next five years – or a confrontation with Brussels.

“In the coalition accord, they agreed that if revenues disappoint, they wouldn’t immediately go for more cuts, but at the same time they said we’re going to obey Brussels’ rules,” said Mr Leen. “We will get a very interesting discussion again.”

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