OECD Economic Outlook, Volume 2023 Issue 1

Netherlands

Economic growth is projected to moderate to 0.9% in 2023 before picking up to 1.4% in 2024. Headline inflation is expected to fall to 2.2% in 2024 on the back of declining energy prices, but core inflation will remain elevated at 3.9%. Growth is supported by private consumption, aided by energy support measures and increases in benefits since the beginning of 2023. After slowing in 2023, export growth is expected to improve in 2024 as external demand picks up. Private investment will slow due to higher uncertainty, rising interest rates and lower credit availability. The labour market will remain tight, although the unemployment rate will edge up to 4.1% by late 2024.

The fiscal stance is slightly expansionary. Annual real expenditure ceilings defined in the fiscal policy framework have been exceeded since 2020, and the government should aim to return to the fiscal rules. Continuing to tackle structural challenges should be a priority, focusing on accelerating the green transition and reducing labour market tightness.

Economic activity started to slow

GDP contracted by 0.7% in the first quarter of 2023 due to falling exports and a decline in gas inventories. Private investment contributed positively to growth and producer sentiment remained above its long-term average. While private consumption stalled, consumer confidence and the willingness to buy have improved since the beginning of 2023, albeit from historically low levels. Price pressures continue, with headline inflation remaining elevated at 6.8% in May. Rising service prices contributed to persistently high core inflation of 8.2% in May. The labour market remains tight with less than one unemployed person per vacancy. Collective labour agreement wages were up 5.7% in May over a year earlier. Housing market corrections are continuing, with the prices of owner‑occupied dwellings falling by 4.4% over the year to April and the number of sales declining by almost 20%.

Netherlands: Inflation and housing indicators

Source: CBS.

Statlink

Netherlands: Demand, output and prices

Statlink

Direct trade linkages with Russia and Ukraine are limited, but the country is exposed to disruptions to the supply of commodities and materials from this region, as well as to logistics and transport blockages. Russia’s war of aggression against Ukraine has had implications for the Dutch economy not only through high energy prices and increased uncertainty, but also through depressed world trade growth. Russia’s invasion of Ukraine led to an inflow of approximately 86 850 Ukrainian refugees in 2022 of which more than a third were employed by end-2022.

The fiscal deficit is set to improve in the short term

The fiscal deficit is expected to increase due to increased spending on energy support measures and lower gas receipts. To support households facing a high cost of living, the government introduced in 2023 several permanent measures worth about EUR 5 billion annually (about 0.6% of GDP), including a 10.2% rise in the minimum wage, rising social benefits, and a decrease in the rate of income tax payable in the first tax band. Temporary measures of about EUR 6 billion in 2023 (about 0.7% of GDP) include an energy discount for lower-income households and a continuation of the 21% reduction in the excise duty on fuel. The government debt ratio is likely to remain stable at around 50% of GDP in 2023 and 2024, as the energy price cap is expected to end December 2023. It is also expected that the government will not be able to spend some of the budgeted funds in the short term due to the tight labour market.

Economic growth is set to moderate

GDP is expected to slow to 0.9% in 2023 and to pick up to 1.4% in 2024. Growth in 2023 is supported by private consumption, aided by the purchasing power package. Slowing private residential and non-residential investments will weigh on growth over 2023-24 amidst uncertainty, rising interest rates and credit tightening. Headline inflation is expected to fall due to lower energy prices, but core inflation is likely to remain elevated until 2024. Wages react to inflation with a lag and are projected to rise by 5.3% in 2023 and by 4.9% in 2024. The unemployment rate will gradually rise to 4.1% by the second half of 2024. Export growth in 2023 is expected to weaken due to a slowdown in GDP growth in main trading partners, before improving again in 2024. Several risks surround the outlook, including severe weather next winter with higher-than-expected energy prices, and increasing macro-financial vulnerabilities, as rapidly rising interest rates could increase the risk of financial contagion through the global financial system. A faster-than-expected return of inflation to target in the major economies could allow central banks to loosen monetary policy, stimulating demand.

Reducing energy dependence and increasing labour supply should be a priority

Fiscal support to households and energy-intensive small and medium-sized enterprises was needed amidst rapidly rising energy costs, but the welcome quick implementation meant that measures could not be targeted to households most in need. To improve targeting of future support measures, the government should accelerate the development of data and IT infrastructure to identify vulnerable households. Accelerating the green transition to ensure energy security and reduce fossil fuel dependence should remain a priority. The labour market is very tight despite high employment, due to skill mismatches and low hours worked – particularly by women. In addition to current plans to expand free child-care, streamlining existing income-dependent benefits into a system of fewer allowances and tax credits could help to increase working hours, as the net benefits of an additional hour worked would be more transparent. Shifting the composition of active labour market policies towards training, especially green and digital skills, could help both with skill mismatch and the acceleration of the green transition.