Update

Dutch economy expected to grow moderately in 2024 and 2025, but this does not fully translate into broader well-being

20 December 2023 10:00 RaboResearch

We expect 0.5% and 1.0% economic growth the next two years, partly due to a recovery in purchasing power. Economic developments do not fully translate into broader well-being over the next two years.

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An unusually low unemployment rate, unprecedented interest rate hikes and a relentless spike in inflation: It was no surprise that the overheated Dutch economy cooled down in 2023, with three quarters of economic contraction. Consumers – whether forced by high inflation or not – kept their hand on their purse strings. Businesses sold fewer products and services to foreign markets, which were also plagued by inflation. And housing investments began to decline in the wake of lower house prices and home sales.

Still, we expect economic growth to pick up slightly in the final months of the year. For 2023 as a whole, the economy is expected to have grown by 0.1% compared to 2022. We also foresee modest growth for 2024 and 2025: 0.5% in 2024, followed by a further increase in economic growth to 1.0% in 2025 (see figure 2). This quarter, we also provided estimates for five sub-indicators of the Broad Well-being Indicator that are related to economic developments, including unemployment and income. Combined, we expect these five indicators to make a small positive contribution to the development of the Dutch population's broad well-being in the coming years. For 2023, we estimate a growth contribution of 0.2 percentage points followed by 0.0 percentage points in 2024 and 0.2 percentage points in 2025. This demonstrates that short-term economic growth does not translate directly into greater broad well-being. That's because broad well-being is about more than economics, and because positive developments, such as the expected recovery in purchasing power, are partly offset by negative developments, such as rising unemployment.

Table 1: Key economic data for the Netherlands

Table 1: Key economic data for the Netherlands
Source: RaboResearch 2023

Figure 1: Dutch economy contracts after strong growth

Figure 1: Dutch economy contracts after
Source: OECD, edited by RaboResearch 2023

Figure 2: Economic growth driven by higher government spending and private consumption

Figure 2: Economic growth driven by higher government spending and
Source: Statistics Netherlands, RaboResearch 2023

Recovery in purchasing power boosts consumption

High inflation has eroded the purchasing power of households in recent years, leading to significantly lower spending in the first half of the year. Given the share of private consumption in the gross domestic product (see figure 5), this was a major driver of the overall economic contraction in the first half of 2023. However, the inflationary shock is slowly ebbing away, while wages are catching up. For example, in recent months, collectively agreed wages rose faster than consumer prices for the first time since 2021 (see figure 3). This trend is expected to continue in 2024 and 2025.

The recovery in purchasing power is further supported by the fact that employed people, especially the self-employed, are expected to work more hours in the coming years. While this does not improve the work-life balance of people in the Netherland (see "The economy has an impact on broad well-being of the Dutch population" later in this publication), it does give households more financial leeway to spend. We therefore expect private consumption to grow by 1.1% in 2024, followed by a further growth of 2.0% in 2025. As a result, household spending is expected to be a major contributor to economic growth in both years (see figure 2). We expect unemployment to rise modestly in the coming years, from 3.5% this year to 4.5% in 2025. This is likely to dampen household spending to some extent, but only slightly, as unemployment is expected to remain low by historical standards (see figure 4).

Figure 3: Wages growing rapidly; consumer prices increasing less sharply

Figure 3: Wages growing rapidly; consumer prices increasing less sharply
Source: Statistics Netherlands, edited by RaboResearch 2023

Figure 4: Unemployment rising but remains low

Figure 4: Unemployment rising but remains low
Source: Statistics Netherlands, RaboResearch 2023

Business investments down due to higher interest rates

Business investments, typically accounting for about 12% of the expenditure side of the economy (see figure 6), was still growing strongly in the first half of this year. But it contracted in the third quarter of this year. This decline is expected to continue in the coming quarters. By 2024, total business investments are estimated to be 3.1% lower than this year, becoming a major drag on economic growth next year.

The main reason behind these lower investments is the increased interest rates, which make investments more expensive. Additionally, a growing number of companies are finding that they are spending more on interest as they roll over existing loans, putting further pressure on their investment capacity. Our forecast for 2025 is for a slight recovery in business investment (+0.6% YOY), which will account for a modest contribution to economic growth that year. This is partly because capital market interest rates are expected to drop again from next year, making investments cheaper. The global economy is also expected to pick up, making investment more attractive.

Figure 5: Breakdown of the expenditure side of the Dutch economy

Figure 5: Breakdown of the expenditure side of the Dutch economy
Note: Concerns value added in constant prices. Source: Statistics Netherlands, edited by RaboResearch 2023

Expected slump in housebuilding puts the brakes on the economy

Housing investments, which includes new construction and home renovations, rose to record highs in 2022. In that year, many new homes were built and a relatively high number of existing properties were sold, which typically leads to more renovations. Sustainable home remodeling was also very popular due to the energy crisis. Residential construction and remodeling therefore contributed to the strong economic growth of last year. But after a small contraction this year, housing investment is expected to decline sharply in 2024, by 7.6% YOY, becoming a strong drag on economic growth (see figure 2).

This is mostly due to the anticipated dip in new construction. Demand for new-build homes declined over the past two years due to increased interest rates and falling prices of existing homes. Partly because of this, in the 12 months through September, only 56,000 building permits were issued, 20,000 fewer than during the peak in late 2021. That decline will manifest itself some one to two years later, in 2024, when far fewer new homes will be completed (see figure 6). That weighs heavily on housing investment. For renovations the picture doesn’t look too bright either: this year, for example, newspapers report reduced demand for solar panels due to falling energy prices and uncertainty about the net metering scheme. And because fewer existing houses are expected to be sold next year, we also expect fewer home renovations.

From mid-2025, we expect a slight rebound in housing investments. As house prices begin to rise again, demand for new-build homes should pick up. Moreover, since it is often existing home owners who buy new homes, this will also lead to more sales and therefore renovations of existing owner-occupied homes. Due to strong negative carry-over, the average level of housing investment in 2025 is still expected to be 2.9% lower than in 2024.

Figure 6: Decline in housing construction on the horizon

Figure 6: Decline in housing construction on the horizon
Source: Statistics Netherlands, edited by RaboResearch 2023

Government wants to expand, but exact plans depend on new government

Government investment and spending, together accounting for about 28% of GDP, are expected to continue to grow strongly in the coming years. The number of vacancies in the public sector, for example, remains high (see figure 7). As a result, government consumption, which largely consists of the salaries of civil servants, and staff of education and health care, is expected to grow by 2.6% in 2024. In 2025, government consumption is expected to increase further, by 1.1%. Public investments, such as (energy) infrastructure projects, are expected to grow by 4.6% in 2024, followed by 5.4% in 2025. These investments will be driven in part by the various funds set up by previous governments, including the National Growth Fund. This means that the government is expected to be an important factor in economic growth over the next two years. It’s also an uncertain factor due to the recent elections and the uncertainties surrounding the new government.

Figure 7: Decline corporate job openings; stagnation public sector job openings

Figure 7: Decline corporate job openings; stagnation public sector job openings
Note: The public sector consists of public administration and government services, education, and health. Source: Statistics Netherlands, edited by RaboResearch 2023

Importance of net trade to decline further in 2024 and 2025

The contribution of international trade to the Dutch economy, which accounted for nearly 12% of GDP in 2022, declined in recent quarters as Dutch exports of goods and services dropped faster than imports from abroad. In the coming years, the importance of trade with other countries is expected to continue to decline. For 2024, exports are expected to fall by 0.6% and imports by 0.1%. Moreover, in 2025, exports will increase less rapidly than imports: 2.1% versus 2.7%.

While Dutch households in particular will be spending more in the near future, which will also increase imports from abroad, we expect less demand from foreign consumers and companies for Dutch goods and services. In the coming quarters, we expect periods of stagnation or contraction in household consumption and/or business investment in major trading partners such as the United States, Germany, the UK, and France. From mid-2024 and into 2025, the economy of these trading partners will pick up again, which will also lead to an increase in Dutch exports.

Figure 8: This is where Dutch products and services go

Figure 8: This is where Dutch products and services go
Note: Refers to the added value of Dutch products and services in foreign final demand. Source: OECD (TiVA), edited by RaboResearch 2023

The economy has an impact on the broad well-being of the Dutch population

Although broad well-being consists of more than just economic factors, developments in the economy are indeed related to the broad well-being of the Dutch population. For example, part of the Broad Well-being Indicator (BWI) that RaboResearch has developed with Utrecht University consists of dimensions and sub-indicators that are related to our macroeconomic estimates.

We have made forecasts for 2023, 2024 and 2025 for five sub-indicators. In this way, we can indicate how our macroeconomic estimates contribute to the development of broad well-being in the coming years (see box 1 for an explanation of the methodology). The five sub-indicators are:

    Unemployment. Number of hours worked per worker. Real household disposable income per capita. Percentage of the Dutch population completing intermediate and higher education. Life expectancy.

Together, these five indicators account for 38% of the total score of the BWI (see figure 10). We cannot make a prediction for the remaining 62%, which includes indicators such as safety and civic engagement.

The five indicators we currently predict are expected to make a small positive contribution of 0.2 percentage points to BWI growth in 2023. In 2024, we expect the contribution of the five indicators to add up to 0.0 percentage point, and in 2025, 0.2 percentage points (see figure 11).

Figure 9: Forecast BWI sub-indicators by share

Figure 9: Forecast BWI sub-indicators by share
Note: The weight of the indicators is based on the weighting scheme of the OECD Better Life Index. Source: RaboResearch 2023

The expected increase in unemployment will have a negative impact on the development of broad well-being in the coming years. Loss of employment not only has a negative impact on household finances, but can also have negative consequences for well-being in a broader sense, for example through subjective well-being (see, for example, Clark, 2018).

The number of hours worked is also expected to contribute negatively to the development of broad well-being. In fact, the number of hours worked, especially by the self-employed, is expected to increase in the coming years, after falling during the Covid-19 pandemic. While longer working weeks can be a positive boost to household income, they have a negative impact on the work-life balance. Therefore, an increase in the number of hours worked via the work-life balance dimension contributes negatively to the development of broad well-being In the Broad Well-being Indicator.

Although the expected increase in unemployment and the number of hours worked will play a role in the development of household income, inflation and wage growth will be particularly important in the coming years. In 2023, real income is likely to decline as inflation outpaces wage growth. However, we believe that this trend will reverse in 2024 and 2025, and we therefore expect income development to make a positive contribution to the development of broad well-being in those years.

We also expect the proportion of the population with at least an intermediate education to continue to increase in the coming years. This contributes positively to broad well-being, in part because a starter qualification increases people's job security (see, for example, this 2017 CPB study, in Dutch). Finally, Statistics Netherlands expects the life expectancy of the Dutch population to increase in 2023, 2024 and 2025, which will also contribute to the development of broad well-being.

Figure 10: Growth contribution of economic aspects to the Broad Well-being Indicator

Figure 10: Growth contribution of economic aspects to the Broad Well-being Indicator
Source: RaboResearch 2023

Brief explanation of how we have estimated the five sub-indicators of the BWI

The Broad Well-being Indicator (BWI) developed by RaboResearch in collaboration with Utrecht University aims to monitor (in Dutch) the well-being of the Dutch population in a broad sense. The indicator consists of eleven dimensions: income, job security, personal development, health, work-life balance, social connections, civic engagement, subjective well-being, housing, safety, and environment. Each of these dimensions has one or more sub-indicators. There are seventeen sub-indicators in total. RaboResearch can make an estimate for five of these sub-indicators, which together account for 38% of the total BWI score. We cannot make a prediction for the remaining 62% of the BWI.

Below we describe the five sub-indicators for which we make a forecast, along with an explanation of how the forecast was made.

    Real household disposable income per capita.
    The development of the real household disposable income is part of our macroeconomic estimate. To convert this estimate into an estimate for the Broad Well-being Indicator, we correct for the expected development of the population based on projections of Statistics Netherlands.
    Unemployment
    Unemployment is part of our macroeconomic estimate.
    Number of hours worked
    The number of hours worked is also part of our macroeconomic estimate. This refers to the number of hours a worker works in an average workweek. For this forecast, we estimate working hours by age group based on the share of people who want to work more, the vacancy rate, and GDP per capita. We also use this forecast to estimate trends in the number hours worked by the self-employed.
    Level of education
    We determine the level of education by the percentage of the population aged 15 to 75 who have completed secondary and higher education (as defined by Statistics Netherlands, in Dutch). We predict this on the basis of the Human Capital Index (Barro and Lee, 2021), which in turn is derived from the development of educational capital. The amount of educational capital is calculated by applying a deflator to educational expenditures and then calculating an initial capital. We then add the annual educational expenditures to the initial capital, applying a fixed depreciation rate to the already existing amount of educational capital (see Boonstra et al., 2022, in Dutch).
    Life expectancy
    For life expectancy, we use historical Statistics Netherlands’ data on life expectancy (in Dutch) and Statistics Netherlands’ population projections (in Dutch).

Uncertainties

Of course, our economic estimates are subject to uncertainty. There are risks that we cannot predict, such as a future war or pandemic, and risks we are aware of. An example of the latter category is the formation of a new Dutch cabinet. A new government may decide to invest and spend more or less than currently anticipated. Issues such as grid congestion, sustainability, and the nitrogen crisis may also be addressed more quickly or more slowly than anticipated by a new government, which may affect business and housing investment, among other things.

Another uncertain factor is the number of (forced) business closures. Currently, this number is still low: in the third quarter, 1.3% of Dutch companies went out of business, compared to an average of 1.6% per quarter in the five years before the pandemic. We expect the number of business closures to normalize further in the coming years. However, if many more companies go out of business than currently anticipated, business investments will likely be affected. A sharp increase in the number of business closures will also affect unemployment, household finances, and thus consumer spending. Finally, the war in Ukraine and the war between Israel and Hamas are uncertain factors, with potentially far-reaching consequences - also for the Dutch economy (in Dutch).