III. ECONOMIC TRENDS AND OUTLOOK The Netherlands is starting a slow economic recovery in the shadow of some major structural worries. Real Gross Domestic Product is forecast to grow by 1.5 and 2.5 percent in 1994 and 1995, the international competitiveness of Dutch firms is likely to improve, exports are anticipated to increase by 3.5 and 5.5 percent, and inflation is expected to be moderate at just under 3 percent. However, unemployment is still rising, deficits are not falling quickly enough, public debt keeps growing, tough choices on slimming down the welfare state have not been made, purchasing power is static and consumers cautious, and corporate investment is forecast to stall or continue to fall until 1995. In addition, Dutch exporters face stiff competition from Central and Eastern Europe. All of these balls must be juggled by a new, possibly three-party government. GDP Growth Dutch GDP grew an anemic 0.2 percent in 1993. Official and private-sector forecasts agree that real GDP is expected to grow about 1.5 percent in 1994 and 2.6 percent in 1995, mainly due to revived Dutch exports. Wage restraint and consumer caution are likely to limit private consumption growth to just 1.4 percent in 1994 and 1.2 percent in 1995. Trade The Netherlands, which derives almost two-thirds of its GDP from trade, continues to have a positive balance of payments. A large surplus in merchandise trade was the main contributor to a 1993 current account surplus of 17.5 billion guilders ($9.5 billion), or 3 percent of GDP. That is forecast to grow to 18.5 billion guilders (3.1 percent of GDP) in 1994. Nonetheless, the US runs a surplus of nearly $7 billion with the Netherlands. There are no significant trade or investment barriers in the Netherlands. Inflation The outlook is for moderate, gradually-falling inflation in 1994 and 1995. February year-on-year consumer price inflation was 3 percent (new statistical method used). Average 1993 inflation on the new basis was 2.6 percent, 1994's is now projected at 2.8 percent, and that for 1995 at 2.7 percent. Labor Costs Labor costs are being brought under control. Collective wage agreements for 1994 contain lower pay rises than in 1993, and some call for no nominal increase. Negotiated wage rates in 1994 will increase an average of 2 percent, and 1 percent in 1995. The government has pitched in, cutting the tax and social security burden by 5 billion guilders ($2-3 billion) in 1994-5, contributing 1.4 billion guilders ($780 million) to the unemployment fund, reducing the lowest-bracket income tax rate 0.25 percent, and cutting corporation tax by 175 million guilders ($97 million) for small- and medium-sized businesses. Unresolved Problems Deficits and Debt: The deficit is forecast to grow to 3.6 percent of GDP in 1994, well above the target agreed when this cabinet took office, and the Maastricht/European Monetary Union (EMU) deficit target. The government's Social Economic Advisory Council (SER) recommends a deficit of no more than 1.75 percent of GDP, while the Central Bank wants it cut to 1.25 percent of GDP. There is growing consensus that the next cabinet will have to cut spending further in order to finance employment growth and cut the deficit. The SER recommends pruning spending by 22 billion guilders ($11-12 billion) during its four-year term. Trade union SER members dissented from the proposed cuts. Public debt is also high: 80.6 percent of GDP in 1993, well above the EMU convergence criterion of no more than 60 percent of GDP. Unemployment: Unemployment is expected to rise to 9.25 percent in 1994, and fall only slightly to 9 percent in 1995, despite economic growth. The current government has given precedence to job creation, as we assume the new government will. Nonetheless unemployment is a major factor pushing up the ratio of economically non-active to active persons to nearly 86 percent in 1994 (i.e., 86 people supported by every 100 working people), slowing deficit cutting. The Welfare State: There is consensus among policy makers that the Dutch welfare state must be scaled back in order to cut deficits, reduce the tax and social security burden, encourage job seeking among un- and low-skilled workers, and increase competitiveness. However, consensus often fractures when specific cuts are suggested. The main areas for cutting are state pensions, disability benefits (currently over 900,000 recipients), and unemployment payments. There has been a tightening of the rules on disability benefits, but these took effect at the beginning of 1994 so their effect remains to be seen. There is wide agreement on the need to widen the gap between take-home pay for lower-paid workers and the unemployment benefit, but less agreement on how to do this. Some advocate a straight cut in the benefit, while others champion tax cuts for lower-paid workers. Spending on Infrastructure The Government plans to boost growth, employment, and competitiveness through public infrastructure spending of more than 8 billion guilders ($4 billion) a year between 1994 and the end of 1998 -- a total of 40 billion guilders -- paid for largely by one-off proceeds of sales of state holdings (eg, the Dutch PTT) and one-time windfall revenues from the natural gas sales. Total infrastructure outlays over the next five years may be higher if, as planned, the Government can attract private investment and contributions from the EU Structural Fund. Because European Union rules have opened public procurement to foreign firms, there may be attractive opportunities for U.S. firms to participate in the renewal of Dutch physical infrastructure. The most significant investment projects planned are: * A new all-freight rail line between Rotterdam and Germany (The "Betuwelijn"); * A high speed passenger rail line to Germany and France using the French TGV; * A project to upgrade and expand the Port of Rotterdam ("Havenplan 2010"); and * Amsterdam Schiphol International Airport "Masterplan 2003".