OECD Economic Outlook, Volume 2024 Issue 1

Netherlands

Growth is projected to improve from 0.7% in 2024 to 1.3% in 2025, supported by private consumption as purchasing power increases. Annual headline inflation is set to fall from 2.8% in 2024 to 2.3% in 2025. Core inflation will slow to 2.3% in 2025, as some upside pressures from a tight labour market persist. Wages will rise by 5.2% in 2024 before slowing to 3.8% in 2025. Unemployment is expected to increase marginally from 3.7% in 2024 to 4% by the end of 2025.

The fiscal stance is projected to be broadly neutral over the projection period. Following underinvestment in budgeted funds in 2023, government expenditure on debt interest, climate policy, social and health care and defence is set to increase. While prudent fiscal policy is still required, the government should continue to tackle structural challenges, focusing on investment in the green transition and reducing labour shortages.

The economy shows moderate signs of improvement

After three quarters of contraction, output picked up by 0.3% in the fourth quarter of 2023. Following a gradual decline, headline inflation has picked up slightly in the first quarter of 2024, reaching 3.1% in March. Core inflation remains persistent at 3.1% in March as a tight labour market continues to exert upward pressure. Collective labour agreement wage rates rose by 6.5% in March compared to a year earlier and vacancies per unemployed person remain well above pre-pandemic levels. Consumer confidence improved in early 2024, but business sentiment remains subdued amidst persisting labour shortages. The number of bankruptcies has been rising since May 2022, but is only slowly catching up with its pre-pandemic level.

The Dutch economy is sensitive to global trade developments and depressed global trade growth has weighed on exports and output. The trade balance has been affected particularly by reduced demand from key EU trading partners.

Netherlands: Economic growth and inflation indicators

Source: OECD Economic Outlook 115 database; and Statistics Netherlands (CBS).

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Netherlands: Demand, output and prices

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Fiscal policy is set to be broadly neutral

The fiscal deficit is set to widen in 2024 before gradually improving in 2025. Following public underinvestment due to staff shortages in 2023, government spending on infrastructure, nitrogen and climate policy, and defence is set to increase. Higher interest expenditure resulting from monetary tightening will further weigh on public finances. Since the beginning of 2024, increased benefits and selected tax credits for low-income households have been introduced, largely funded by a below inflation increase in the income tax threshold for the top income tax band, and increased excise duties on alcohol and tobacco. The Netherlands is governed by a caretaker government and in the absence of a clear budget plan, the forecast assumes moderate fiscal consolidation for 2025, supported by an increase in revenues from higher wages and a rate increase in the first tax bracket. Overall, the debt ratio is expected to be broadly stable at around 46% of GDP in 2024 and 2025.

The economy is set to return to moderate growth

GDP is set to grow by 0.7% in 2024 and 1.3% in 2025. Private consumption will be a key driver, boosted by rising real incomes. Annual headline inflation is set to slow to 2.8% in 2024 and 2.3% in 2025 helped by lower energy prices and core inflation slowing to 2.3% in 2025 as businesses have now passed on higher energy costs. Wage growth is projected to moderate from 5.2% in 2024 to 3.8% in 2025 and unemployment is expected to increase from 3.7% in 2024 to 3.9% in 2025, as the rate of bankruptcies continues to normalise. Investment will recover only slowly supported by gradually declining interest rates. External demand is expected to slowly improve as economic growth in key EU trading partners recovers. The outlook is surrounded by significant risks. Heightened geopolitical tensions could hit external demand and weigh on export growth. A tighter labour market than in the rest of the European Union could increase domestic inflationary pressures as euro area policy rates are lowered, weighing on purchasing power and household consumption. On the upside, higher income households could also support growth by spending a greater share of their excess savings.

Policy efforts are needed to tackle a tight labour market

The Netherlands is in a comfortable fiscal position, but spending pressures are looming in the medium term from an ageing population and investment needs for advancing the green transition. To increase the share of renewables in the energy mix, the government should support green technology, particularly at early stages of development, and lower the administrative burden for firms in accessing funds. The incoming government should also address long-standing structural challenges, focussing on easing labour market pressures. Simplifying the tax system and removing distortions towards certain types of investment and labour supply could strengthen government revenues and ease tensions in the labour market. Moving to a system with fewer allowances and tax credits could offer greater transparency for the net benefits from an additional hour worked and thereby increase working hours. Continuing to align tax rates and social security contributions between contract types for workers doing similar jobs could ease the transition into regular employment and thereby increase productivity through better upskilling opportunities.