Dutch economy stagnated, but modest growth expected

The latest figures on the Dutch economy published by Statistics Netherlands (CBS) show that the economy has been more or less stagnant since Q2 2022 (see figure 1). The economic slowdown has thus started earlier than previously thought. Partly this is because Statistics Netherlands has revised the quarterly figures for 2022. However, it is mainly because the economy saw a surprise contraction in Q1 2023, whereas we had anticipated an expansion.

Nevertheless, our outlook for the rest of this year and next has not changed much from our previous estimate. The economy still seems overheated and, in our view, is cooling only marginally. Although the number of bankruptcies is significantly higher than last year, it is still low by historical standards. As a result, companies are still much more likely to cite lack of staff as an obstacle to production/activity than insufficient demand. Moreover, capacity utilization rates in industry are still relatively high. And although purchasing power is under pressure due to high inflation, wages are now rising sharply, the employed labor force in the Netherlands is at an all-time high, and the government is providing income support. Consumer demand is therefore likely to be subdued but not falling. In addition, the government is stimulating demand in the economy by consuming and investing more itself – for example, by investing more in healthcare, education, defense, and infrastructure. Demand from abroad is also expected to increase, albeit moderately.

The scope for further growth will therefore be limited by constraints on the supply side of the economy over the next two years, while demand for goods and services will remain reasonably stable. As a result, we expect modest GDP growth for the rest of this year and next. However, the contraction of Q1 2023 means that the growth rate for the year as a whole is much lower. We now estimate GDP growth at 0.6%, down from 2.0% in our previous forecast. In 2024, we expect growth of 0.9%, in line with our previous estimate.

We expect inflation to average 4.8% this year and 3.6% next year. This means that price increases for consumer goods and services are significantly lower than last year, when inflation was 11.6%, but still higher than we have seen over the past two decades. In addition to increased raw material and labor costs, this high price pressure also stems from an overheated economy: Demand for goods and services remains high in our forecast, while the supply side of the economy is unable to keep up.

We expect core inflation (inflation excluding food and energy prices) to be the largest contributor to the total inflation rate this year. According to our calculations, core inflation will average 7.1% this year (see figure 2). We expect it to decrease slightly next year but to remain relatively high at 4.6%. We estimate that food price inflation will be 10.5% this year, but the contribution to the overall inflation rate is limited because food has a smaller share in the basket of goods. In our opinion, food price growth will be more or less flat next year. Energy prices are expected to be 23.2% lower this year than last year but will rise slightly next year (2.7%).

Note that these estimates refer to the old CBS method of measuring inflation. As of June 2023, Statistics Netherlands is changing the way energy prices feed into the calculation of inflation. This new method will increase the inflation rate for 2023 by an estimated 3%, reaching 7.5% to 8%. For 2024, the impact of this methodological change is expected to be limited.

The Dutch labor market is still tight. The number of job seekers per job opening was still below one in Q1 2023, and unemployment fell slightly again in the first four months of 2023. However, we expect unemployment to rise somewhat when the number of bankruptcies continues to normalize. At the moment, the number of bankruptcies is still well below historical averages. We estimate an average unemployment rate of 3.7% for this year and 4% for next year. Compared to the last twenty years, these are still very low unemployment numbers (see figure 3). Therefore, we do not expect it will be much easier for companies to find staff. Employees, on the other hand, find themselves in a good position in wage negotiations. We therefore expect collectively agreed wage growth in the near future to be higher than in recent years. We estimate an increase of 5.9% for this year and 3.8% next year.

Household consumption is expected to grow by 1.7% this year and by 1.2% next year. The high growth rate for this year is mainly due to carryover effects from last year. However, the underlying scenario is one of moderate growth in the coming quarters. High inflation eroded household purchasing power in 2022. In order to rebalance their finances, households seem most inclined to reduce their spending (see also our Dutch publication on this subject).

Other ways to rebalance household finances include saving less and using savings. Although these two options appear to be less popular, consumers are still resorting to them – perhaps out of necessity. Fewer people are reporting that they have money left over than during the Covid-19 pandemic. On the contrary, the number of people indicating that they are short of money has increased, mainly because more people say that they need to draw on their savings (see figure 5).

Expenditure can also be supported by raising income. On average, this has been the case. For example, employment has continued to grow; never before have there been so many people in paid employment. In addition, collectively agreed wages are rising much faster than before. Furthermore, the minimum wage has been increased, as have related benefit payments such as social welfare and state pensions. Income tax has also been reduced, and allowances have been (temporarily) increased to provide financial support in particular to low-income households.

Finally, the population, and therefore the number of consumers, is still growing. On balance, we expect consumption increases to be limited this year and to pick up further next year.

We have lowered our expectations for business investments. This is not immediately visible in the growth rate for 2023, which we currently expect to amount to 2.6%. A positive carryover effect from 2022 masks the contraction that we project for a number of quarters in 2023 and 2024. The 2024 figure does show this, revealing a 0.6% contraction in business investments. Higher wage growth limit the room companies have to invest. Furthermore, increased interest rates make it more expensive for companies to raise capital. Consequently, they will pay closer attention to what they will and will not invest in. Therefore, less profitable investments will no longer be made. A survey among Dutch banks by the central bank of the Netherlands (DNB) indeed shows that demand for corporate credit has fallen (see figure 6).

Nevertheless, we do not expect business investment to nose-dive. The energy transition will require large investments from companies. Although gas and electricity prices have fallen sharply recently, our energy experts expect prices to remain structurally higher than before the war in Ukraine. This will maintain the incentive for companies to invest in sustainability. Furthermore, continued staff shortages and rising labor costs may encourage companies to invest more in labor-saving measures. As a result, in addition to being a restraint on growth, labor market tightness could also be a driver of productivity growth.

Housing investment is expected to fall sharply in our estimates. Housing investments largely consist of housing construction and renovation activities. Due to carryover effects, housing investment is still expected to be slightly higher this year than last year (+2.0%), but for 2024 we expect a large decline of 7.6%. As a result, this admittedly relatively small expenditure component will become a meaningful drag on economic growth next year.

A relatively large number of new houses were completed last year, but recent months have already seen some turnaround. We expect this decline to continue at a rapid pace, as the number of building permits issued has plummeted since the beginning of last year, and the number of new dwelling market transitions was down significantly (see figure 7). At the same time, the number of existing home sales is also considerably lower and is expected to continue declining. For many homeowners, moving house is the perfect time to renovate, to incorporate sustainability, or, for example, to have a new kitchen or bathroom installed.

If there will be more investments in greenifying the housing stock than we currently assume, the decline in housing investment would be smaller. It is worth noting, however, that installing solar panels, for example, is obviously a much smaller expense than building a new house. In the longer term, government intervention to support construction may pose another upside risk. However, given recent developments, it seems almost inevitable that housing construction will slump for the rest of this year and next.

Based on our estimates, government spending will be an important pillar of economic growth this year and next. For 2023, we expect a 2.8% increase in government consumption. Government investment is expected to remain unchanged from 2022. This year’s annual figure for government investment is strongly distorted by carryovers from 2022, as quarter-on-quarter growth is actually strong in our estimates. For 2024, we project 1.6% for government consumption and 5.9% for government investment.

The government plans to spend additional money on health care, defense, education, and infrastructure, among other things. But our estimates for government spending do take into account so-called “underutilization.” That means that the government is unable to actually implement all planned expenditures. This has been going on for some time. Labor shortages play a role: It is difficult to expand health care or education if staff are not available. Since we expect unemployment to rise only slightly over the next two years, stronger underutilization than we currently foresee is a serious possibility. While that would benefit the national treasury, it would drive economic growth down. Moreover, for infrastructure and sustainability projects specifically, the lingering nitrogen dossier remains an obstacle. Finally, higher interest rates are weighing increasingly heavily on government finances, potentially leaving less room for spending and investment than the government had initially planned.

We estimate that international trade will make a negative contribution to GDP growth this year and next (see figure 8). This is because increased domestic spending in the Netherlands is driving up imports from abroad faster than exports of goods and services are growing. We estimate that exports will grow by 0.8% in 2023 and 2.8% in 2024. We expect imports to grow more strongly, at 2.0% in 2023 and 3.5% in 2024.

Weak growth in major European trading partners, such as Germany and the United Kingdom, is holding back export growth this year. Next to that, we expect a recession in the United States in the second half of this year, which will also dampen demand for Dutch products and services. Both export and import growth are expected to pick up again in 2024, when domestic spending in the Netherlands and in our trading partners will increase slightly faster.