Update

Dutch economy grows this and next year mainly due to household and government spending

13 March 2024 16:30 RaboResearch

After three quarters of contraction, the Dutch economy grew again in the fourth quarter of 2023. We expect the economy to continue growing steadily over the next two years, estimating an increase of 0.7% for 2024 and 1.2% for 2025.

A canal in Utrecht

Economy grows steadily in next two years

After three quarters of contraction, the Dutch economy grew again in the fourth quarter of 2023. We expect this growth to continue over the next two years, estimating an increase in gross domestic product (GDP) of 0.7 percent for 2024 and 1.2 percent for 2025 (see Table 1). These growth rates are slightly lower than how fast the Dutch economy could potentially grow based on the use of the factors of production of labor, capital and labor productivity (also known as potential growth. This is mainly because demand in the economy is lower than the economy's potential output. After all, businesses are still struggling with high interest rates that inhibit investment, housing investment is under pressure due to the slump in building permits issued, and demand from abroad is picking up only slightly. On the other hand, household purchasing power is recovering sharply over the next two years, and the government plans to continue spending. Both households and government are therefore expected to make strong contributions to economic demand (see Figure 1). But on balance, the economy is cooling a bit further.

Table 1: Key economic data Netherlands

Table 1: Key economic data Netherlands
Source: Statistics Netherlands (CBS), estimate by RaboResearch

Because of this cooling and because wages continue to rise sharply in the coming period, we expect the unemployment rate to rise slightly, to 3.8 percent in 2024 and 4.1 percent in 2025. In historical perspective, this is still very low (see Figure 2). Companies are therefore likely to continue to struggle to fill vacancies. With the cooling economy, inflation also continues to decline over the next two years and is expected to reach 2.6 percent in 2024 and 2.0 percent in 2025.

After years of short-term crisis management due to the corona pandemic and the energy crisis, the calmer economic waters and purchasing power recovery will hopefully provide room to shift attention to major challenges that require medium- to long-term vision, such as the housing shortage, energy transition, the aging population and lagging productivity growth. Of course, much hinges on policy from a new administration, about which a lot is currently uncertain.

Figure 1: Households and government drivers of economic growth

Figure 1: Households and government drivers of economic growth
Source: Statistics Netherlands (CBS), edit and forecast by RaboResearch

Figure 2: Unemployment rises slightly

Figure 2: Unemployment rises slightly
Source: Statistics Netherlands (CBS), edit and estimate RaboResearch

Consumption growing fast following purchasing power recovery

For household consumption, we foresee strong growth of 2.2 percent in 2024 and 2.4 percent in 2025. These robust growth rates in private consumption are mainly due to a strong recovery in purchasing power (see Figure 3). That recovery is largely due to strong wage growth. For example, collective bargaining wages are expected to rise 6.0 percent this year and 4.4 percent next year. That is well above expected inflation. On the contrary, the government's income policy is likely to make a negative contribution to the spending space of all households combined, despite increases in the child allowance and the rent allowance. Indeed, a number of temporary measures will expire, such as increases in the healthcare allowance and the energy allowance. In addition, there are tax increases in Box 2 and 3 of the income tax. Total employment increases, which has a positive effect on household income. But at the same time, unemployment is rising because the demand for labor is not growing as fast as its supply, which lowers the income of people who lose their jobs.

Figure 3: Purchasing power recovery in next two years

Figure 3: Purchasing power recovery in next two years
Source: Statistics Netherlands (CBS), CPB, estimate by RaboResearch

Business investment recovers slowly from end of this year

Since the second half of last year, business investment has been declining mainly due to sharply higher interest rates in 2022. We expect business investment to decline somewhat further at the beginning of 2024 and to recover slowly from the end of this year. That still leaves us with an average contraction of 4.2 percent in business investment for 2024 - largely due to negative carry-overs from last year. For 2025, we anticipate an increase of 1.0 percent. Interest rates, meanwhile, have fallen again somewhat, and we expect them to fall slightly further. This makes new investments slightly cheaper than in the past year.

Figure 4: Demand for business loans improves slightly

Figure 4: Demand for business loans improves slightly
Source: DNB

Housing investment sharply down due to new construction dip

Housing investment – the sum of new construction and remodelling, among other things – is expected to decline further over the one and a half year. We anticipate a 6.3 percent decline for 2024 and a 4.1 percent decline for 2025. A major reason for this is the anticipated dip in construction. Indeed, the number of building permits issued has fallen sharply, and is about 28 percent lower than during the peak in late 2021 (see Figure 5). Since there is usually a delay between the granting of a permit and the start of construction, this has presumably contributed to a decline in housing investment from spring 2023 onwards. For this year and next, we anticipate a further decline as fewer homes are built. Starting in late 2025, we expect housing investment to slowly recover. With interest rates no longer rising, and house prices no longer falling, housing construction is expected to pick up slightly over time. Moreover, new-build homes are often bought by subsequent-time buyers, leading to more supply of existing homes for sale. This presumably drives demand for home renovations, since homes often undergo renovations when changing owners.

Figure 5: Lowest number of building permits issued since 2016

Figure 5: Lowest number of building permits issued since 2016
Source: Statistics Netherlands (CBS), edit by RaboResearch

Government consumption and investment are expected to continue to grow strongly over the next two years. For government consumption, we estimate an increase of 2.2 percent in 2024 and 1.7 percent in 2025. Government investment is expected to grow 4.6 percent in 2024 and 5.4 percent in 2025. For example, government spending on healthcare is expected to increase further due to the continued aging of the Dutch population. The government also plans to spend more on defence to get closer to NATO's two percent standard, which requires countries to allocate 2 percent of their gross domestic product for defence spending. Furthermore, a lot of money has been set aside for energy transition, maintenance of existing infrastructure and future-proofing the economy. In recent years, however, the government has not succeeded in implementing all the plans made, in part due to staff shortages. We already take this into account in our estimate. Furthermore, there has been uncertainty about a new government since the Lower House elections in 2023. This leads to uncertainty about future government plans and spending (see also the heading 'Uncertainties' at the bottom of this publication).

Imports grow faster than exports

We expect the development of international trade to make a negative contribution to Dutch GDP in both 2024 and 2025 (see Figure 1). This is because exports are expected to grow less rapidly than imports: we assume 0.2 percent export growth in 2024 versus 0.8 percent import growth. For 2025, we expect exports to grow by 2.1 percent but imports by 3.1 percent. A negative carry-over from 2023 skews the 2024 annual figures for both exports and imports downward.

Because many products and services that Dutch households and businesses spend money on come from abroad, imports are expected to pick up in 2024 due to the strong recovery in household consumption. From the end of 2024, business investment growth will be added to this. Also in major trading partners, such as Germany, France, the UK, Spain, Italy and the US, we expect household and business spending to increase over the next two years (see Figure 6). As a result, our exports are growing again.

Figure 6: Growth of household consumption and business investment in major trading partners

Figure 6: Growth of household consumption and business investment in major trading partners
Source: RaboResearch

Uncertainties

As always, our economic estimates are surrounded by uncertainties. There are risks we do not know about, such as a future war or pandemic, and risks we do know about. An example of the latter category is the changing government in The Netherlands. A new administration may decide to invest and spend more or less than currently anticipated. Furthermore, lowering the state pension age has been part of the election campaign, which may have (major) short-term consequences for the tight labor market and the government budget. Also, a new administration may address dossiers such as grid congestion, sustainability and the nitrogen issue faster or slower than anticipated. This could affect business and housing investment, among other things. Finally, the war in Ukraine and that between Israel and Hamas are uncertain factors, with potentially far-reaching consequences – including for the Dutch economy.