The Netherlands: Waiting for the elections

The Israel-Hamas war currently dominates the news, including in the Netherlands. The economic implications for the Netherlands are very small at the moment and limited to companies that deal directly with this region, for instance, travel agencies. It is hard to forecast how the war will develop, but if there is further escalation leading one of these scenarios, the impact for the Dutch economy could be larger.

Amid these geopolitical events, the Netherlands will vote for a new government on November 22. This means that political parties are sharing their plans and participating in various broadcast debates to convince people to go vote for them. An economic topic that is widely discussed is the minimum standard of living. This is a broad topic that ranges from whether or not the minimum wage should be increased to how the housing market dysfunction can be solved. It is not a new issue, but it gained renewed importance as inflation rose to record levels in 2022.

Although the official Dutch inflation rate (HICP) was only -1% YOY in October (see figure 1), the official statistic does not currently match how consumers perceive the increase in prices. In short, this is due to Statistic Netherlands (CBS) changing how they calculate energy price inflation. For various reasons, historical data has not been updated using this new method. This means official statistics now underestimate perceived inflation, when comparing the figures year-on-year. Over the course of the coming year, this issue will automatically be solved. If the new methodology were applied to the historical HICP, the inflation rate in October would have been 6.4%.

Knowing that the official inflation statistic currently underestimates perceived inflation helps explain why household consumption declined by 1.6% QOQ in the second quarter of this year, despite the lower inflation figures. It also explains why consumer sentiment is still very negative despite wages increasing by 6.1% YOY in September (see figure 2). Consumer confidence did slightly increase in October to -38, up from -39 in September, but it remains far below the long-term average. Nonetheless, we do expect household consumption to remain stable for the upcoming quarters as most consumers are still secured of a job, considering the tight labor market.

Even though the labour market remains tight and the unemployment rate is still at a low level, unemployment increased slightly to 3.7% in September (see figure 3). For the coming period we expect that unemployment will continue to rise slightly.

Contributing to the mild increase in unemployment is the increase in bankruptcies (see figure 4). The number of bankruptcies in recent years was very low. Maybe artificially low, as the government supported companies through the Covid period. But now, increasing input prices and higher interest rates are leading to higher costs for companies, in turn, causing more bankruptcies. Additionally, in July this year, the Dutch tax authority started to call in at once debts from taxes that were deferred during the Covid period for companies that had not yet started to repay these debts or made any repayment agreement. This is the case for a small group of companies. Although this might lead to some additional bankruptcies, we think the overall effect will be limited. The increase of both the unemployment rate and the number of bankruptcies reflects that the overheated Dutch economy is slowly starting to cool down.

While the Dutch economy is starting to cool down more generally, there are some differences between sectors. For instance, for the manufacturing sector, we expect that we have already seen the biggest production decline. Manufacturing production increased quite a bit in the beginning of 2021 and reached its highest point in April 2022, which was about 16% higher than the average of 2019. After months of declining since then, manufacturing production has stabilized and remains slightly above pre-Covid levels. In August 2023, production was about 3% above the 2019 average. Producer sentiment, however, has been slightly negative since August, but increased from -2.2 in August and September to -1.8 in October.