Update

Dutch economy: Modest growth in 2024, acceleration in 2025

14 June 2024 16:00 RaboResearch

Because of the unexpected economic contraction in the first quarter of 2024, we have revised downward our estimate for 2024 – we expect the economy to grow by 0.4 percent in 2024, as opposed to the previously expected 0.7 percent. The measures outlined by the forming political parties do not yet have an impact on economic growth in 2024 but provide slightly higher growth (+0.1 percent) in 2025.

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Co-author: Willem Vincent, Global Trainee

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In brief: Modest growth in 2024, further recovery in 2025

Because of the unexpected economic contraction in the first quarter of 2024, we have revised downward our estimate for 2024 – we expect the economy to grow by 0.4 percent in 2024, as opposed to the previously expected 0.7 percent (see Table 1). For 2025, we foresee further recovery, with gross domestic product (GDP) growth of 1.3 percent. We expect this growth to be driven primarily by public and household expenditure, particularly by high healthcare spending, defense investment, and the energy transition. Business investment is expected to remain weak due to continued high interest rates that make credit significantly more expensive. Net trade is expected to shrink as demand for Dutch products and services will grow less than domestic demand for foreign goods and services. The measures contained in the outline agreement concluded by the forming parties do not yet have an impact on economic growth in 2024, and, according to calculations by the Netherlands Bureau for Economic Policy Analysis (CPB), provide slightly higher growth (+0.1 percent) in 2025.

Table 1: Expectations for the Dutch economy

Expectations for the Dutch economy
Source: CBS, RaboResearch forecast 2024

Figure 1: Households and government provide largest contribution to growth

Households and government provide largest contribution to growth
Source: CBS, RaboResearch, Macrobond 2024

Household consumption drives economic growth

We expect stronger growth in household consumption in 2024 than previously forecast: 2.7 percent (was 2.2 percent). This adjustment is based on the higher-than-expected consumption rate in the first quarter of 2024. For 2025, we expect growth of 2.2 percent. The growth in household consumption is mainly due to rising purchasing power, which in turn is due to rising wages and high employment.

Because the labor market is expected to remain tight, we anticipate that wages will continue to rise (see also our publication on the labor market). CLA wages have been catching up sharply with inflation since 2023 (see Figure 2). This has largely made up for part of the real wage gap – it reached nearly 13 percent at the height of the energy crisis in the fall of 2022. Nevertheless, real wage levels are still roughly 4 percent below pre-energy crisis price levels. We expect collective wage growth of 6 percent this year and 4.6 percent next year, fully catching up with the real wage lag following the inflation shock of recent years.

Figure 2: Wages have caught up considerably

Wages have caught up considerably
Source: CBS, RaboResearch forecast, 2024

Despite a slight increase in unemployment over the coming period (3.8 percent in 2024 and 4.1 percent in 2025), it remains low in historical and international perspective. Remarkably, unemployment lags behind the increased number of bankruptcies in recent times (see Figure 3).

This is because the inflow into unemployment is low, while the outflow from unemployment to work is high: the proportion of unemployed people who exit unemployment within three months to work has been well above the long-term average since 2022 (Figure 4).

Figure 3: Rise in bankruptcies hardly led to higher number of unemployed

Rise in bankruptcies hardly led to higher number of unemployed
Source: CBS 2024

Figure 4: Inflow and outflow unemployment over the past three months

Inflow and outflow unemployment over the past three months
Source: CBS 2024

Inflation expectations

Looking further ahead, we have revised our inflation expectations for 2025 and 2026 upward to 2.2 percent (was 2.0 percent) and 2.5 percent (was 2.1 percent), respectively. This revision is based on increased risks of global trade tensions if Donald Trump wins the US election and introduces import tariffs on goods originating from China and the EU (see box). In addition, the VAT increase (from 9 to 21 percent) on cultural goods and services proposed in the outline agreement will increase inflation by 0.4 percentage points in 2026. However, because of the likelihood of a political compromise, we have factored in 0.2 percentage point.

Reversing the reduction in excise taxes on gasoline and diesel could add 0.3 percentage points to inflation in 2026. Because it is currently highly uncertain whether a new administration will reverse the lower gasoline and diesel excise taxes in 2026, we have not included this potential effect on inflation in our inflation estimate at this time.

Overall, international geopolitical developments pose upside inflation risks that could negatively affect private consumption, while on balance the measures in the outline agreement provide a small increase in purchasing power.

Slight decline in business investment and sharp contraction in residential investment

An important component of private investment is business investment. For this, we have revised our expectations for 2024 upward from the previous forecasts. This smaller-than-expected contraction is partly due to the better-than-expected realized business investment in the first quarter of 2024. In addition, we foresee a small spike in the fourth quarter of 2024 due to the adjustment of the bpm (tax) rules for vans. This temporary spike is caused by companies bringing forward their investments to take advantage of the more favorable rules before they change. As a result, we expect some business investment to end up in 2024 when it might otherwise have been made in 2025.

However, a survey of Dutch banks by the European Central Bank (ECB) does show that, at present, the majority of banks still see a decline in demand for corporate credit (Figure 5). This is an indication that companies have less willingness to invest. For 2024, we expect a contraction in business investment of 1.3 percent and in 2025 we foresee growth of 0.1 percent.

Figure 5: Majority of Dutch banks still see decline in demand for corporate loans

Majority of Dutch banks still see decline in demand for corporate loans
Source: DNB 2024

Housing investment is also an important component of private investment. It includes investment in new housing construction, conversion of existing housing, and transaction costs. We expect these housing investments to decline significantly this year and next, by 6.5 percent in 2024 and 4.1 percent in 2025, respectively. This expected decline comes from a combination of increased interest rates, high house prices and a low number of building permits issued for new construction (see also our Housing Market Quarterly Report). Policy measures in the outline agreement intended to stimulate new construction are not expected to have positive effects until later.

Government contributes positively to economic growth in 2024 and 2025

Government spending is contributing positively to economic growth this year and next. However, the outline agreement of the coalition parties has a limited impact on government spending and investment in the short term (see outline agreement section for more information).

For 2024 and 2025, we expect growth in government consumption of 2.5 percent and 1.6 percent, respectively. This is mainly due to additional spending on healthcare and defense. For public investment, we expect growth of 3.6 percent for 2024 and 5.4 percent for 2025. A lot of money has been set aside for energy transition, maintenance of existing infrastructure and future-proofing the economy.

Furthermore, it is important to look at government consumption and investment in light of the tight labor market. According to the Court of Audit, the government could not spend EUR 7.2bn of the public budget in 2023 due to underutilization in several ministries. The depressing effect this "underutilization" could have on government spending has been factored into our estimates.

International trade

Interestingly, exports shrank for the fifth consecutive quarter in the first quarter of 2024. We expect exports to contract by 0.7 percent over all of 2024. This export contraction is related to lower industrial production, as described in our Sector Forecasts.

In contrast, imports grew by 0.3 percent, reducing net trade (exports minus imports). Because exports still exceed imports in absolute terms (Figure 6), net trade also contributes positively to GDP levels this year, albeit less than last year. The contribution to growth is therefore negative (see Figure 2). In 2025, we expect Dutch exports to rise again, thanks to recovering economic growth and consumption in our trading partners. However, as imports are expected to rise faster, net trade declines on balance; from EUR 84bn to EUR 80bn.

Figure 6: Decline in export volume in 2024, recovery in 2025

Decline in export volume in 2024, recovery in 2025
Source: CBS, RaboResearch forecast

Box: Import duties expected after US election

In our inflation forecasts, we take into account a possible increase in US import tariffs if Donald Trump is re-elected president of the United States. During the election, Trump announced an import tariff of 60 percent on imports from China and 10 percent on goods from the EU. We have factored a lower tariff into our economic model, assuming that a Trump administration introduces tariffs of 30 percent on goods from China and 5 percent on goods from the EU27 and other countries (excluding Canada and Australia) in the third quarter of 2025. The EU will then respond with tariffs of 1.5 percent on imports from America in the fourth quarter of 2025.

Outline agreement: Small plus in short term, risk of eroding economic growth potential further ahead

The plans in the outline agreement of PVV, VVD, NSC and BBB have no impact on the economic outlook for 2024 and, according to the calculations by the Netherlands Bureau for Economic Policy Analysis (CPB), only a limited impact on the outlook for 2025, with 0.1 percent additional GDP growth expected in that year. The outline agreement's plans for income tax adjustments provide a small plus in purchasing power for all income groups. Lower income groups benefit relatively more, in part due to higher allowances. These also help to counter an increase in the proportion of people living in poverty. So in the short term, the coalition plans deliver a (small) plus for economic growth and livelihood security. In the medium to long term, on the contrary, we see risk of greater labor shortages and reduction of economic growth potential.

Labor market tightness

The four parties presented the agreement as "the toughest on asylum and migration ever." If the coalition parties succeed in reducing the influx of migrant workers and foreign students, it will exacerbate labor shortages. After all, labor shortages are still the biggest obstacle for businesses in their operations. Much will depend on the precise design of new policies. For example, "the qualification requirements of the knowledge migrant scheme will be tightened and increased." Precisely these highly skilled migrants are of great importance to the competitive position of highly productive industries, such as mechanical engineering, telecom, financial services and pharmaceutical and electrical engineering. At the same time, the coalition seems aware of this risk, because only "labor migrants from outside the EU, with the exception of knowledge migrants, will be subject to employment permits" and there is also a focus on improving the business climate.

Whereas knowledge migrants in high-productivity industries are essential to the economy – in part because they are harder to replace by technology because of the many non-routine tasks they perform – with stricter entry requirements for (low-wage) migrants, it is likely that companies with a lot of routine work will opt for technological solutions. Thus, robots, AI and automation not only help in fulfilling labor demand, but can even increase productivity. It is then important that the new administration stimulates technological transformation and systematically invests in innovation and education.

Business climate and innovation

On the one hand, the outline agreement places additional emphasis on a healthy economy and improving the business climate. For example, there will be additional investment in InvestNL, tax relief for part of the business community, and support for energy transition. On the other hand, it contains plans to abolish the remaining part of the National Growth Fund (EUR 6.8bn) and the Science and Research Fund (EUR 1.1bn total); and to cut back on education subsidies. However, investments in education and innovation are necessary to ensure Dutch productivity in the longer term. This is necessary to reverse the negative trend in Dutch labor productivity growth in recent decades.

An earlier calculation by RaboResearch shows that innovation investments through a Growth Fund have a very high social return: each euro invested is expected to yield a GDP return of EUR 4.60 until 2035 and as much as EUR 5.80 until 2040. At the bottom line, the net cut in education and innovation thus threatens to reduce the growth potential of the economy.