Biweekly Review Dutch Economy
Biweekly Review Dutch Economy
Bond markets have shown a spectacular rise in yields during the last two weeks. Initially long term yields seemed to resume their downward path. Dutch ten year bond yield fell bit by bit to an interim low of 6.25% (4/3). The huge U.S. jobs gain figure over February released on March 8 however dampened hopes that the Fed would lower interest rates at this month’s meeting of its FOMC.
The rise in employment triggered a severe fall in U.S. bond prices. The German and the Dutch bond markets followed the U.S. market and showed huge losses. It was the first time in nearly half a year, that the Dutch long bond yield has held above 6.5% (6,52% on 14/3).
Dutch bonds fell in the wake of falling Treasuries, but also suffered from uncertainty about the strength of the German economy. Despite the release of data showing weak economic activity in Germany at the end of last year and suggesting further weakness in 1996, this week some less pessimistic forecasts on the economic growth were published in Germany. Confidence in further German rate cuts seems to be gradually declining.
We expect the bond market to recover some ground in the next couple of weeks, redressing the exceptional underperformance of last week. But we do expect further rises in bond yields over the course of the year, leading to a level of 6¾% for the benchmark 10-year Dutch government bond.
In contrast to the turbulence on the bond market, the Dutch money market hardly stirred. Threemonth AIBOR rose by two basispoints to 3.18% (13/3).
Many analysts, however, remain pessimistic on the German economy, feeling there is scope for further German rate cuts due to the high and rising unemployment. We ourselves do not believe in a lowering of the German dicount rate. In view of an expected acceleration of economic growth and inflation in the second part of the year, we believe that the Bundesbank will conduct a neutral monetary policy in the coming months.
We expect short term rates to remain stable in the next couple of weeks, while moving up in the longer run towards 4.5% at the end of the year.
The spread between German and Dutch money market rates has been retreating gradually to 17 basis points (14/3). As the bottom of the interest cycle may have been reached, chances are DNB will bring its official tariffs in line with those of the Bundesbank. The past shows that DNB is well capable to bring its rates below those of the Bundesbank in times of interest rate cuts, depending of course on the strength of the guilder against the German mark. In times of rate increases however, DNB will want to prove its credibility by raising interest rates. Since we expect short term interest rates to go up this year, we also expect the spread with Germany to eventually vanish.
The Agent of Finance reopened on March 29 a 10-year Duch state loan, which is allowed to be stripped (i.e. detaching of coupons).
About a quarter of the State’s total financing need for 1996 of DFL 39.1 billion is now covered.
Before the end of this year, EU-member states have to report about their progress in meeting the criteria for participating in the Economic and Monetary Union (EMU). One of the requirements considers inflation - which has to be kept within a range of 1.5%-point from the average of the three countries with lowest inflation rates. To achieve an equal basis for comparison, Eurostat (bureau for European Union statistics) has recently introduced a harmonised inflation measure, named Interim Indices for Consumer Prices (IICP). IICP’s are not meant to replace national statistics, but as their impact might grow with EMU judgement days coming closer, it is useful to follow the Dutch achievements on this figure.
Conform Eurostat’s standards last January the Netherlands were comfortably positioned among the three best performing countries in the EU, with an year-on-year IICP rise of 1.3%. Greece, Spain, Italy and Great-Britain showed inflation rates that were over 1.5% higher than the 1% average of Finland, Luxembourg and the Netherlands.
The Central Bureau for Statistics (CBS) recently announced that Dutch inflation went down from 1.9% in January to 1.8% in February (national measurement). The traditional after sales price rises in clothing and shoes were this year less pronounced than last year. We expect inflation to rise to 2½% at the end of 1996, bringing the year’s average to a level of 2¼%.
Despite weak price developments, retail sales volume is still growing very slowly. Last January real retail sales were 2.8% larger than a year earlier, but this increase can almost completely be ascribed to an extra shopping day when compared to 1995. However, considering high employment growth and strong consumer willingness to buy, we remain optimistic about retail sales development this year.
Manufacturing sales growth is still on its way down. In January total manufacturing sales were only 1% higher than a year earlier. This was a better achievement than in December (-1%), but far below the 4% increase in last year’s final quarter. While domestic sales are growing steadily, exports of manufactured products are currently under pressure. From January 1995 to January 1996 manufacturing export prices fell by 1.5%-point. A 1% rise in domestic prices bounded the total price fall to ‘only’ 0.4%. For comparison: in the first quarter of 1995 manufacturing prices were still over 4% higher than a year earlier.
Considering the expected decreasing growth of investment activity in business equipment, we foresee a further decline of manufacturing sales in the forthcoming months. However, a renewed economic upswing at our most prominent trading partners is expected to stimulate Dutch manufacturing export sales in the second half of this year.
Rikkert Scholten (31-302164714)
