OECD Economic Outlook, Volume 2018 Issue 1

Netherlands

GDP growth is projected to remain robust at 3.3% in 2018 and close to 3% in 2019, supported by strong private consumption and investment. Wage growth and inflation are projected to rise as economic slack disappears. The current account surplus is set to remain at a high level.

To ensure more inclusive growth, labour market reforms should be implemented to enhance mobility and improve the employment opportunities of vulnerable groups. Housing market vulnerabilities should be reduced by lowering loan‑to‑value caps for new mortgages. Reforms to the occupational pension system should focus on improving the transparency and solidarity of the system.

Strong domestic and external demand are driving growth

Economic growth continues to be firm, driven notably by consumption growth and solid business investment, both supported by favourable financial conditions. Solid external demand, particularly from other euro area countries, underpins rapid export growth which has also benefited from recent gains in competitiveness. Growth in residential investment remains very dynamic.

The low unemployment rate and emerging labour‑market shortages are putting upward pressure on wages and leading more companies to hire workers on permanent contracts. This has limited somewhat the rise in the share of self‑employment in total employment. Tight labour and product markets are raising inflation, but from very low levels.

Policies should target long-run growth and address financial vulnerabilities

The fiscal stance is projected to ease significantly based on measures announced in the recent coalition agreement. The accommodative stance is appropriate given the healthy state of public finances and despite being mildly pro‑cyclical. The structure of tax and spending should continue to be adjusted to improve long‑run growth. Labour activation policies can be better targeted and the waiting period before newly unemployed individuals can access re‑integration services through the public employment services provider should be shortened. More direct government funding of R&D, to complement the existing tax relief for private R&D spending, would bolster the capital stock as would reducing SMEs’ barriers to access finance, in particular the relatively high cost of securing bank loans. Reforms of the second‑pillar pension system should focus on improving its clarity with regards to individual contributions and expected benefits. They should also facilitate further the transferability of pension entitlements to allow for greater labour market mobility.

Netherlands

1. Data refer to the manufacturing sector.

2. Data are seasonally adjusted and refer to the population aged between 15 and 75.

Source: Statistics Netherlands (CBS).

Statlink

Low interest rates continue to support rapid house price growth in major cities. At the same time, high levels of household debt and a high exposure to mortgage lending by domestic banks make the economy and financial system vulnerable to a sharp correction in house prices. The government should further lower the maximum loan‑to‑value ratio for new mortgages, and aim to improve the supply of housing and slow price growth in overheating markets, by easing strict regulations associated with the private rental market.

Netherlands. Demand, output and prices

Statlink

Growth will remain robust

Growth will remain elevated throughout the projection period, reflecting both strong external and domestic economic momentum. Consumption growth is projected to gain pace and business investment is set to increase rapidly. Capacity pressures will continue to contribute to price pressures, with rates of inflation projected to rise above 2%, in part reflecting a rise in the lower VAT rate, and rapid wage growth. The main downside risk to the projections is the Brexit negotiations between the United Kingdom and the European Union. Potential overheating in the housing market, related to a possible broadening of rapid price growth to all cities, or a disconnection from fundamentals like income and rental price growth, could represent a risk to financial stability. On the upside, reduced levels of uncertainty, compounded with the near‑record high levels of business and consumer confidence, could lead to stronger‑than‑expected growth.