Dutch economy: Growth expected for most sectors, negative outlook for construction and transportation

Talks between the four political parties aiming to establish a right-wing government in the Netherlands have entered a new stage. The debate now centers on ten policy issues, including households’ purchasing power, the housing market, security, migration, and determining the appropriate limits on nitrogen emissions.

The debate will also revolve around financing the various wants. The Netherlands Bureau for Economic Policy Analysis (CPB) recently warned that current policy would lead to a rising government deficit. To prevent the budget deficit from exceeding the European standard of 3% of GDP, a new cabinet must take financial corrective measures. Several factors contribute to this predicament: The war in Ukraine, which escalates defence and asylum expenditures, additional costs related to social security, healthcare, climate and nitrogen; and higher interest rates. Without austerity measures, the deficit is projected to surpass the 3% limit by 2026 and become structural by 2028. Notably, Geert Wilders’ election-winning party, the Party for Freedom (PVV), and the Farmer-Citizen Movement (BBB) differ in their approaches from the other two parties involved in the cabinet formation process, the People’s Party for Freedom and Democracy (VVD) and the New Social Contract (NSC). The first two prioritize increased government expenditure, while the other two emphasize a stricter spending policy.

In that context, Statistics Netherlands (CBS) recently released positive news. In 2023, the government spent EUR 3.5bn more than it received, equivalent to 0.3% of GDP. This figure is significantly lower than the initial projection of 1.8% made in November. While this financial windfall may provide some leeway for negotiations, it can partly be attributed to the earlier collection of dividend taxes following tax changes implemented in January this year.

Other positive news from the CBS included an upward revision in GDP growth for 2023. Both Q3 and Q4 growth was revised up by 0.1 percentage points, reaching -0.2% and 0.4% QOQ, respectively. Both household and government consumption were higher than anticipated. Nonetheless, annual GDP growth for 2023 remained unchanged at 0.1%. Looking ahead to the coming quarters, we estimate GDP growth ranging between 0.2% and 0.3% QOQ, which is still slightly below potential growth. Household consumption plays a significant role in driving this growth (see figure 1).

Along with the adjusted GDP figures, the value-added growth by sector for 2023 was also published. Notably, the hospitality industry has experienced much stronger growth than we initially anticipated in our recent sector forecasts. Despite this outperformance, we maintain our forecast that the hospitality industry will grow by 2% both this year and next (see figure 2). This expectation is primarily rooted in the anticipated recovery in purchasing power, which is expected to drive higher household consumption. Additionally, we foresee a recovery in trade, a sector that also directly and indirectly supplies consumers. The transportation sector is anticipated to face ongoing challenges, albeit to a lesser degree compared to 2023. Geopolitical tensions are impacting international trade within the sector. Furthermore, reduced construction activities, in addition to poor prospects for the construction industry, will contribute to a decline in transportation demand.

There seems to be light at the end of the manufacturing tunnel, as evidenced by our growth forecast of 0.5% for the year. The purchasing managers’ index, a key indicator of the prevailing direction in the manufacturing sector, appears to be bottoming out. The March index value of 49.7 points to the smallest deterioration in business conditions in 19 months, with improving business conditions (index above 50) within reach (see figure 3). On the other hand, sentiment among Dutch manufacturers has been negative for a year now. This is primarily because more manufacturers perceive their order position as weak, resulting in producer confidence remaining well below zero (see figure 3). Moreover, there is still no clear tipping point in the recent decline in manufacturing output, despite a revival in December due to a one-off peak in machinery manufacturing (see figure 4). This decline can mainly be attributed to a significant drop in output in the manufacture of coke and petroleum, as well as of cars and trailers in January and February. So, despite some positive prospects, not all lights are green for manufacturing.