The Dutch economy experienced a severe contraction in 2020, reversing six years of strong growth. The spring COVID-19 outbreak was brought under control while still allowing for most economic activity to continue subject to social distancing and hygiene measures. This led to a less pronounced contraction than in other countries (Figure 1). Effective support policies and a high degree of digitalisation and teleworking already before the pandemic further dampened the blow. Resurgence of the virus in the autumn led to stricter measures but the economic downturn was limited as businesses and workers were able to adapt.
OECD Economic Surveys: Netherlands 2021
OECD Economic Surveys: Netherlands
Executive summary
The COVID-19 pandemic drags down the economy
Figure 1. The economy contracted less than elsewhere
Real GDP, Index Q1 2015=100
Source: OECD Economic Outlook: Statistics and Projections (database).
Unemployment increased only slightly, aided by quickly implemented policy support measures for firms. The measures included wage subsidies and the coverage of fixed costs, loan guarantees and deferred tax payments. These measures have so far prevented a wave of bankruptcies, but can hinder necessary structural change if kept in place too long.
The recovery will be gradual and subject to risks
Output is projected to gradually improve in 2021 and 2022 (Table 1), although it remains contingent on developments of the health situation and the distribution of vaccines. Following high saving in 2020, pent-up demand will drive the initial pick-up. However, increased pension premiums and rising unemployment as support measures are phased out, will hold back private consumption growth. Business investment will improve, but continues to be held back by reflecting lingering uncertainty. Increased leverage over the crisis is a further risk to private investment.
Table 1. The economy will slowly recover
(Annual growth rates, % unless specified)
Source: OECD Economic Outlook: Statistics and Projections (database).
Fiscal prudence up to the crisis provided room for a strong government response. Automatic stabilisers were allowed to operate and generous discretionary support measures were swiftly introduced, resulting in a hike in public debt (Figure 2). There is room to maintain accommodative fiscal policy until the recovery is self-sustained, but ageing pressures call for structural reform and consolidation in the long run.
The financial sector has shown few signs of stress so far and banks have continued to provide credit throughout the pandemic. Pension funds funding ratios have long been under pressure from persistently low interest rates. High household debt is a source of macroeconomic vulnerability. Both first-time buyers and existing homeowners are borrowing more relative to their income than before as house prices have continued to increase, but the share of non-performing loans has remained low. Macroprudential regulations and a mortgage guarantee fund have reduced housing-related financial risks, but a loan to value limit of 100% remains high in international comparison.
Figure 2. The budget deficit and public debt have increased substantially
% of GDP
Source: OECD Economic Outlook: Statistics and Projections.
Investments are needed for sustainable growth
More could be done to improve the business climate. Regulations are in general lean, and insolvency proceedings have recently been reformed. Increased teleworking and the Internet of Things require increased bandwidth both in fixed and mobile connections.
Policies support demand for social and owner-occupied housing but supply constraints result in rising prices and rationing. Most public and private rental housing is subject to rent controls and rationing. Around half of the population is eligible for social housing, which is mostly supplied by housing corporations on state guarantees. Owner-occupied housing enjoys favourable tax treatment driving up prices. As a result, low- and middle-income households, notably single persons, that do not qualify for social housing and at the same time cannot access sufficient mortgage and equity to buy, are left with few housing options. Proposed legislation to allow municipalities to ban buy-to-let investments is counterproductive.
The Netherlands is set to fall short of its national target to reduce greenhouse gas emissions (Figure 3). A High Court ruling (the Urgenda ruling) mandated a 25% reduction of greenhouse gas emissions compared to 1990 levels by the end of 2020. This target was just met, owing to the COVID-19-related economic crisis, the reduction of coal power capacity and other measures. For sectors not covered by the EU emission trading system, CO2 prices vary by emission sources and fuels.
Figure 3. Emission reduction targets call for additional policies
Megatons of CO² equivalent
Note: The targets are percentage cuts compared to 1990 values.
Source: PBL Netherlands and RIVM.
Excessive nitrogen deposits in natural preservation areas limit the available nitrogen space for new developments, slowing down new investment projects. Another High Court ruling in 2019 resulted in the re-evaluation of permits for a range of nitrogen emitting activities, notably for construction and agriculture projects near natural preservation areas. To allow important infrastructure projects to resume, short-term measures such as reducing speed limits and paying farmers to reduce livestock were introduced. Multiple instruments are being put in place, and transfer of emission permits is allowed.
The dual labour market and skill needs should be addressed
Self-employed and other flexible workers have been particularly affected by the COVID-19 crisis. These workers tend to earn less, save less, have less social protection, are less likely to engage in training and to own a house. Self-employed pay lower rates of income tax and social security, while permanent employees enjoy among the highest employment protection in the OECD. Temporary contracts are used more in sectors affected by the COVID-19 crisis, in lower skilled occupations and by young workers.
Women’s labour participation is high, but nearly 60% of women work part-time. This is roughly three times the rate for men (Figure 4). This represents an inefficient use of human capital and leads to large gender gaps in earnings, wealth and pensions. A relatively short parental leave period for partners and a relatively high out-of-pocket price of centre-based childcare likely play a role.
Figure 4. Women spend less time in paid work than men
Gap between women’s and men’s working hours
Note: Average usual weekly hours worked on the main job.
Source: OECD Labour Force Statistics (database).
Continuing structural change may increase skill mismatches and thus reduce the value of some workers’ skills. The COVID-19 crisis has likely accelerated this development, notably in some hard-hit sectors (Figure 5).
Digitalisation can boost productivity
The Netherlands has a strong ICT infrastructure and well-educated workforce, which put it in a good position to adopt digital technologies. Digitalisation is essential to boost productivity and support the recovery from the COVID-19 crisis. For this to happen, digital tools will need to be taken up more broadly.
Small- and medium-sized enterprises (SMEs) lag behind in digital adoption (Figure 6), while they account for a relatively large share of employment and value added. A lack of awareness and the fixed cost nature of investment in digital technologies weigh on the digitalisation process. A lack of finance is a further barrier to growth, and R&D expenditure is low.
Figure 5. Employment in some hard-hit sectors is vulnerable to automation
Note: Data on hours worked refer to the percentage change between 2019Q2 and 2020Q2.
Source: Author's calculations based on Nedelkoska and Quintini (2018) and Eurostat (2021), Short-term business statistics.
Shortages of ICT professionals put a brake on digitalisation. A considerable share of students, especially those in vocational training, lack essential digital skills. Declining performance and increasing between-school differences in the latest PISA vintages are concerns.
Figure 6. Small firms lag behind in adopting digital technologies
% of adopting firms
Note: ERP = Enterprise Resource Planning software, CRM = Customer Relationship Management software. Small: 10-49 employees, Medium: 50-249, Large: 250 or more.
Source: OECD (2021), ICT Access and Usage (database).