Dutch elections in a time of recession, climate displacement and corporate earnings – calm before the storm?

Allianz Research Weekly |  17 November 2023

Executive summary

This week, we analyzed three important issues:

  • First, the Netherlands holds elections in a time of recession – The former government led by long-serving Prime Minister Mark Rutte collapsed in early July when the four parties of the ruling coalition clashed over an immigration bill. Ahead of the vote on 22 November, migration, housing, climate policy and inflation have emerged as the key themes. While polls suggest the New Social Contract party is leading the race (19%), no party is likely to win more than 30 seats, so forming the next government will take months of negotiations. Meanwhile, the economy recorded its third consecutive quarter of contraction in Q3. We expect activity to only gradually recover from Q2 2024, with overall GDP growth at +0.7% in 2024.
  • Second, a recent agreement between Australia and Tuvalu addresses the increasingly urgent issue of climate displacement – Australia has agreed to welcome up to 280 migrants per year from the small Pacific island, in addition to providing funds for land reclamation around the island’s capital and military aid. The agreement is a relatively small-scale example of the legal issues that will come with the massive human displacement caused by climate change. In our upcoming Climate Literacy Survey, respondents with higher climate literacy were more likely to believe that advanced economies should be responsible for the material damages caused by climate change. But it is sobering that 18% of our sample – and 31% of those that had below-average climate knowledge – chose to have no opinion over a phenomenon that will affect 1.2bn people in the next 30 years. 
  •  Third, is the Q3 earnings season the calm before the storm? Easing input costs boosted companies' profitability in Q3, even as revenues entered a technical recession. But the positive earnings surprise is not clearing the clouds over the outlook for 2024-2025, when 20% of debt will need to be refinanced at higher rates. We calculate that US and Eurozone companies will see their interest coverage ratios drop by 1.5pps and 2.7pps, respectively, in aggregated terms. With the continued decline in earnings growth, this poses a dual threat to both debt-repayment capacity in 2024 and, more importantly, to medium-term debt sustainability. For now, we maintain our 2024 and 2025 equity return forecasts of 9% and 11% for the US, and 7% and 8% for the Eurozone, but remain very cautious with regard to the current market situation.

Ludovic Subran

Allianz SE

Maddalena Martini

Allianz SE

Pablo Espinosa-Uriel

Allianz SE

Patricia Pelayo-Romero

Allianz SE

Maria Latorre

Allianz Trade