A Major Change in the Conjunctural Situation

The macroeconomic performance of the Dutch economy has deteriorated markedly over the past few quarters. Real GDP growth, which had already decelerated sharply before the September attacks, is expected to fall to 1.4 per cent in 2001 – compared with an annual average of nearly 4 per cent in 1997-2000. At the same time, HICP inflation has accelerated strongly, owing to external and oneoff factors, but also to labour costs increases. While inflation seems to have passed its peak according to this measure, it remains the highest in the euro area, and core inflation – i.e. excluding food, energy, government levies and indirect taxes – has also increased significantly. Moreover, reflecting a long period of very tight labour market conditions, wages and labour costs have surged and the competitive position of the Netherlands vis-à-vis the euro area and its partner countries as a whole is expected to deteriorate markedly in 2001. The outlook is highly uncertain and rather gloomy at the moment. A plausible central scenario would seem to entail a period of a few quarters of slow growth with relatively high wageprice inflation and rising unemployment, followed by no more than a weak recovery beginning in the second half of 2002. The key domestic risk is that labour costs increases may remain too high.