Dutch economy to shrink 6%; Second wave could send unemployment to 10%

The intelligent lockdown and social distancing measures triggered by the coronavirus pandemic will result in the Dutch economy shrinking by 6 percent this year. Unemployment will double to 7 percent next year. And the public finances will take a major hit, but remain out of the danger zone, according to the basic estimate by central planning office CPB.

According to the CPB, the coronavirus lockdown resulted in an "exceptional decline" in economic activities of around 10 to 15 percent in the Netherlands. As a result, the gross domestic product (GDP) will go from last year's 1.8 percent growth to a 6 percent decline this year, and a partial recovery of 3 percent next year.

Unemployment will increase from 3.4 percent in 2019 to 5 percent this year to 7 percent next year. And the government's budget will go from a surplus of 1.7 percent last year, to a deficit of 8 percent this year and a deficit of 5 percent next year. Public debts will increase from 48.7 percent of GDP last year, to 62 percent in 2020 and then stabilize at 61 percent in 2021, the CPB expects.

That is in an average scenario, in which the CPB assumes moderate recovery. If a second wave of coronavirus infections results in another lockdown, things look more dire. Companies will face additional production problems and face a further decline in demand for their products and services, while many already ate into their buffers during the first lockdown. In such a scenario, the GDP will also shrink in 2021, unemployment will climb to 10 percent, and government debt will increase to over 75 percent of GDP.

The recovery of the Dutch economy may also be hindered by major economic problems with its trading partners. If recovery lags internationally, banks in the Netherlands and abroad may run into problems, which will stunt recovery through lending. In this scenario, there will be no GDP growth in 2021, unemployment will rise to above 10 percent, and government debt will increase to over 75 percent of GDP, the planning office said.

"The current uncertainty poses major dilemmas for the government," CPB director Pieter Hasekamp said. "During the recovery phase, a controlled reduction of the aid policy is desirable, but the extent to which the government can withdraw aid depends on the recovery rate of the economy." According to Hasekamp, the government can accelerate recovery by international coordination in tackling this crisis.

On the bright side, recovery could happen more quickly if the lifting of social distancing measures leads to optimism among consumers. The rise in unemployment could be limited if household spending and business investments increase to take advantage of new opportunities. If this happens, the GDP may recover to above the level of end 2019 during the course of next year.