Moderate Growth of Dutch Economy Expected, but Savings Are Under Pressure

This publication was updated on Monday, July 17, 2023.

Two weeks ago, Statistics Netherlands (CBS) published its second estimate for economic growth in the first quarter of this year and adjusted its economic growth figures for other periods in the past. These new figures show that economic activity was higher than previous estimates by Statistics Netherlands. For example, the contraction of 0.7% in the first quarter of 2023 compared to the previous quarter has been adjusted upwards to a contraction of 0.3%. Furthermore, the economy appears to have recovered more strongly from the Covid-19 pandemic than previously thought (see figure 1). The new Statistics Netherlands figures show that Dutch GDP in the first quarter of this year was 6.7% higher than in the fourth quarter of 2019 (the quarter before the Covid-19 pandemic)while it was previously estimated to be 4.9%. The recovery of the Netherlands is therewith significantly stronger than that of the major European economies.

The upwardly adjusted figures stress even more how overheated the Dutch economy has been, something that has been continuously visible on the labor market. Whilst unemployment rose from 3.4% in April to 3.5% in May, it is still well below pre-pandemic levels. The number of vacancies also remains elevated. Additionally, while headline inflation has been declining – mainly due to base effects in energy inflation calculation – underlying price increases remain high. For example, inflation excluding energy and food was 7.1% in June, substantially higher than the Eurozone average of 5.4%. And in the same month, services became 6.8% more expensive in the Netherlands, while the price increase for services was only 5.4% in the entire Eurozone.

Due to the revisions by Statistics Netherlands, our updated estimate for economic growth in 2023 is considerably higher than in our forecast based on the old CBS figures. We now expect GDP to grow by 1.1% in 2023 (was 0.6%) and by 0.9% in 2024 (see Table 1). Looking ahead, however, our view has not changed: for the rest of this year and next has we expect the economy to cool, albeit slightly. We think that the scope for further growth is limited by constraints on the supply side of the economy, while demand for goods and services is expected to remain reasonably stable. Several figures support this view. The number of bankruptcies is now significantly higher than last year but still low by historical standards. In line, the number of companies reporting insufficient demand as an obstacle for production/activity rose in Q2 (13.0%) but lack of staff was still the most cited obstacle (33.1%; see figure 2). And although households’ purchasing power is under pressure due to high inflation, wages are now rising sharply (5.7% in May), the employed labor force in the Netherlands is at an all-time high, and the government has been providing income support. Consumer demand is therefore expected to be subdued but not to fall. In addition, the government is stimulating demand in the economy by consuming and investing more itself – for example, by spending more on healthcare, education, defense, and infrastructure. Demand from abroad is also expected to increase, albeit moderately. All in all, we foresee mild economic growth for the rest of this and next year.

That said, the ongoing decline in industrial production is noteworthy in a negative sense. In April, the decrease was even 12% y/y and is therefore a development to monitor in the coming months (see figure 3).

Another indicator to monitor is the development in household savings. After applying our own seasonality correction, we see that the total amount of money Dutch households have deposited at Dutch banks has been declining slightly since January of this year (see figure 4). This is extra salient given that disposable income in nominal terms saw a strong rise due to wage growth and increased employment. It’s not possible to say with certainty what’s behind the recent development of savings. It may be the result of shifts to, among other things, investments or foreign banks, but it may also indicate that some Dutch households have had more trouble putting money aside or need to dip into savings. The latter is for example visible in monthly survey figures from Statistics Netherlands on the financial situation of households show a larger group indicating that they need to draw on their savings (see figure 5). If households seek to change that (for example to reach their saving goals, to maintain or restore their savings buffer, or if they are unable to withdraw further), this might suppress consumption more than we currently anticipate.