OECD Economic Outlook, Volume 2020 Issue 1

Netherlands

The economy has been hard hit by the COVID-19 virus. Output is set to shrink by 8% in 2020 before picking up in 2021 if the current outbreak is overcome and restrictions are gradually lifted from mid‑May (the single‑hit scenario). If there is a second wave of the virus later in 2020, GDP is expected to decrease by 10% and the rebound will be considerably slower (the double-hit scenario). The fall is driven by domestic demand in both scenarios, including private consumption and investments. Pent‑up consumption demand will drive the initial pick-up, with investment lagging due to spare capacity and lingering uncertainty, but output will remain below pre-crisis levels by the end of 2021 in both scenarios. Unemployment will remain well above 2019 levels throughout 2021. Automatic stabilisers and discretionary spending are supporting businesses and households, pushing the fiscal balance into deficit.

The government has implemented timely policy measures, including cash support for up to 90% of the wage bill, tax deferrals and credit guarantees for companies and has eased access to social assistance for the self‑employed. Going forward, policies need to gradually shift focus to boosting demand while addressing structural challenges within housing and pension policies, broadening social security coverage and reducing nitrogen and greenhouse gas emissions.

Contagion has been brought to a manageable level

The first Dutch case of COVID-19 was confirmed 27 February. The number of cases increased rapidly, but the number of daily hospitalisations peaked at about 600 and deaths at below 200 in late March. The well‑funded and effective health system was put under considerable pressure, but not overwhelmed. The number of intensive care beds was rapidly increased from 925 to 2400.

Netherlands: Two scenarios of real GDP and economic sentiment

Source: OECD Economic Outlook 107 database; and Statistics Netherlands (CBS).

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Netherlands: Demand, output and prices (double-hit scenario)

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Schools, universities, bars, restaurants, sports clubs, coffee shops and other establishments where it was not possible to keep a 1.5-meter distance between people were closed in mid‑March. Public events were banned and EU‑wide travel restrictions implemented. On 23 March, the Dutch government announced an economy‑wide shutdown, with distancing rules and instructions to stay at home as much as possible. A gradual reopening started from 11 May.

The lockdown triggered a sharp economic contraction

The Netherlands has been relatively hard hit by the virus, as its industry structure, with a strong reliance on trade and professional services, makes the economy vulnerable to distancing measures. Furthermore, openness to international trade and leveraged households create particular vulnerabilities. Sectors accounting for 36% of the economy were directly affected by the lockdown, although many activities, for example construction and retail trade, could continue subject to distancing measures. Consumer confidence fell sharply in April and May, unemployment insurance claims soared, and economic sentiment plummeted to record lows in both manufacturing and services.

Netherlands: Demand, output and prices (single-hit scenario)

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Policy has been timely and supportive

The government implemented discretionary support measures amounting to 2.5% of GDP and let the automatic fiscal stabilisers operate fully. Support measures include paying up to 90% of the wage bill of affected companies at an estimated total cost of 1% of GDP, direct cash support to companies and eased access to social assistance for the self‑employed. Additional off-balance-sheet support has been provided by means of deferring taxes and social security contributions and extending credit guarantees. Financial institutions’ capital requirements have been eased, market regulations adapted, and new mechanisms implemented to support corporate restructuring and mediate bankruptcy disputes.

Output and employment will only recover gradually

Output is forecast to shrink by 10% in 2020 in the double-hit scenario, where a second wave of infection leads to renewed restrictions in the fourth quarter. In the single-hit scenario, where lockdowns are phased out gradually from mid‑May, annual growth is set to shrink by 8%. Ongoing restrictions, low confidence and the weak global environment contribute to keeping GDP below its pre‑crisis level at the end of 2021 in both scenarios. The labour market suffers, with labour market participation falling and unemployment rising considerably. Employment will recover only partially in either scenario, and weak demand will push inflation below zero for an extended period of time. The fiscal balance will move from surplus into deficit even as the economy picks up. Public debt (Maastricht definition) will increase from 48% of GDP to 65% and 72% in the respective scenarios.

Households’ inflated balance sheets, with large, illiquid pension and housing assets combined with high housing‑related debt can lead to even weaker consumption than expected, notably if the crisis results in lower house prices. Furthermore, the liquidity ratio of pension funds has fallen below regulatory requirements. If this situation persists, it could force funds to increase contributions or reduce pensions, dealing a further blow to private consumption. Increased default rates on mortgages are unlikely, but liquidity problems in the business sector turning into solvency issues could risk unsettling financial market. Furthermore, the economy is particularly sensitive to developments in global trade.

Policies should boost resilience and support demand

Current policy adequately protects businesses and people against the short‑term consequences of the COVID‑19 outbreak and the lockdown. Fiscal policy should remain supportive going forward, but needs to shift to general demand support after the end of the lockdown. Such stimulus should support necessary structural change, inclusiveness and the environment, including broadening the coverage of social security benefits, expanding renewable energy generation capacity and reducing nitrogen emissions from agriculture. Low interest rates create an opportunity to reduce further tax subsidies to home‑owners by phasing out mortgage rate deductibility. The crisis accentuates the need to reform the pension system to make it fairer for the young and more resilient to low interest rates and asset price fluctuations.