Purchasing power recovery will drive growth in Dutch economy in 2025 and 2026 and positively impact broad well-being

After two tumultuous years of declining economic activity in the Netherlands, gross domestic product (GDP) rebounded in the spring and summer. For 2024, therefore, we expect GDP to be 0.9% higher than in 2023. Over the next two years, we anticipate that the Dutch economy will continue to grow steadily, by 1.7% in 2025 and 1.3% in 2026. Rising household consumption and growing government spending will be the strongest contributors: Households will benefit from low unemployment and rising purchasing power, while government spending will rise due to rising healthcare spending and investments in defense and infrastructure, among other things. For the near future, we expect the increase in purchasing power to also contribute positively to the broad well-being in the Netherlands.

Consumers are expected to spend 2.2% and 2.1% more in 2025 and 2026 than in 2024, respectively. Because total consumer spending accounts for more than 40% of the economy, this surging demand for goods and services will contribute strongly to overall economic growth in both years (see figure 1). That demand will be mainly driven by improved purchasing power with wages rising faster than prices. In recent years, purchasing power took a hit as collective bargaining wages (CLA wages) lagged behind inflation. But this trend has reversed and is expected to continue over the next two years (see figure 2). We estimate a 5.9% increase in collective bargaining wages in 2025, followed by a 4.8% increase in 2026. Inflation is expected to be 3.0% in 2025 and 2.9% in 2026.

Moreover, employment remains high in the Netherlands, despite a slight estimated increase in unemployment from an average of 3.7% in 2024 to 4.0% in 2026 (due to the rising number of bankruptcies). Consumers are also more positive again about both their current and future finances (see figure 3). Like rising purchasing power and high employment, this is expected to contribute to higher consumer spending in the coming period.

Inflation will remain relatively high in the coming years. This is partly because inflation in the Netherlands is much higher than in the rest of the eurozone. In fact, average inflation in the eurozone is already back in line with the European Central Bank's target, so it will be inclined to further reduce policy rates. This makes it more difficult to contain Dutch inflation. In addition, the weaker euro against the US dollar is causing import inflation in Europe, which also creates upward price pressure in the Netherlands. The same goes for the expected rise in prices of international trade resulting from the trade restrictions that Donald Trump will introduce in his second term as US president.

Somberness about the future and sharply higher interest rates contributed to a decline in business investment last year. But interest rates have since fallen slightly (see figure 4), while pessimism about the future has ebbed somewhat. This offers both more perspectives and more financial headroom to invest. Moreover, continuing labor market tightness may provide an impetus for companies to invest in software and machinery that will enable them to meet increasing domestic and foreign demand despite labor shortages. We therefore expect business investment to cautiously increase again from mid-2025.

But 2025 is expected to begin with a sharp contraction in business investment. Many entrepreneurs have brought forward the purchase of vans because fuel-engine commercial vans will no longer be eligible for the “bpm” motor vehicle tax exemption next year. This is likely to lead to a major sales dip in 2025, which will weigh heavily on business investment in the first half. On average, business investment will therefore be 2.4% lower than in 2024. In 2026, business investment is expected to average 1.1% higher than in 2025.

Increased interest rates and a short-lived housing price drop in 2022 contributed to a downturn in the number of building permits issued and, in its wake, a dip in housing investment – (the sum of various factors including residential new construction and remodeling of existing homes). This small budget item that typically accounts for about 5% of the economy, is therefore putting a (light) brake on economic activity. But now that interest rate fears surrounding new construction seem to have abated, the number of new homes under construction has been rising again for several quarters (see figure 5). This has presumably contributed to the tentative recovery in housing investment in recent quarters. Another impetus could be the rising number of home sales: After all, when a property changes hands, it’s often remodeled. The recovery in housing investment is expected to continue in coming quarters with limited growth of 1.0% in both 2025 and 2026. Less investment in existing homes due to an estimated decline in sales will likely hamper the recovery somewhat. Policy uncertainty surrounding sustainability may also depress investment in existing homes.

Government consumption and investment (together accounting for about 28% of the economy), are expected to grow strongly in 2025 and 2026. For government consumption – for instance, deployment of civil servants, defense personnel, teachers and health care workers – we estimate a plus of 1.6% in 2025 and 1.7% in 2026. For example, the demand for care is increasing due to the aging population. For public investment, in infrastructure and defense equipment for example, we assume a plus of 5.3% in 2025 followed by further growth of 8.1% in 2026. This is related to the intended expansion of defense, but also to existing plans for maintenance, improvement and construction of infrastructure. Some of these plans have been on hold due to a lack of personnel, but are still on the “to-do” list. Whether they will be implemented in the coming years is unclear, given that labor market shortages are still an issue and will likely remain so.

Dutch exports have grown faster than imports in recent years, increasing the trade surplus to nearly 11% of GDP. In contrast, imports are expected to grow faster than exports in the coming years, and the trade surplus is likely to shrink slightly to about 10% of GDP. We expect imports to grow 3.2% in 2025, followed by a plus of 2.8% in 2026. Indeed, households are expected to spend more money over the next two years; much of it on foreign goods and services. The same goes for rising government spending, especially investment in defense equipment.

Foreign demand for Dutch-made goods and services will also continue to grow relatively fast next year, by 2.9%. But by 2026, export growth will be significantly slower, at 1.9%. Economic tensions with China, and president-elect Trump’s stated intention to raise import tariffs on foreign products during his second term will exacerbate trade tensions.

Although broad well-being consists of more than just economic factors, developments in the economy are indeed related to the broad well-being of the Dutch in the here and now. For example, part of the Broad Well-being Indicator (BWI) developed by RaboResearch with Utrecht University consists of dimensions and sub-indicators related to our macroeconomic estimates.

At RaboResearch, we have made forecasts for 2024, 2025 and 2026 for five sub-indicators. In this way we can indicate how our macroeconomic estimates contribute to the development of broad well-being in the coming years. The five sub-indicators are (see this publication for an explanation of the methodology (in Dutch)):

Together, these five indicators account for 38% of the total score on the BWI (see figure 6). We cannot make a prediction for the remaining 62% (for which the indicators are environmental quality, safety, housing, subjective wellbeing, civic engagement and social contacts). The development of the five indicators for which we can make a prediction is expected to bring a positive contribution of 0.4 percentage points to the growth of BWI in 2024. For 2025, we anticipate a contribution of 0.7% percentage point, and for 2026 we assume a plus of 0.5% percentage point (see figure 7).

The expected slight increase in unemployment will have a small negative impact on the development of broad well-being in the coming years. Loss of work not only has a negative impact on household finances but can also adversely affect well-being in a broader sense, for example through declining subjective well-being (see, for example, Clark, 2018).

The projected increase in hours worked in 2024 and in the coming years also hampers the development of broad well-being. While longer working weeks provide a positive boost to household income, they may actually have a negative impact on the work-life balance. In the BWI, an increase in the number of hours worked via the work-life balance dimension therefore contributes negatively to the development of broad well-being. The number of working hours is expected to rise, mainly because the self-employed have been working more hours, after having less work during the Covid crisis. On the other hand, as of January 1, 2025, the Dutch tax authorities will take stricter action against false self-employment (enforcement of the Employment Relationships Deregulation Act). This is likely to reduce demand for services from the self-employed. But we do not expect this to lead to fewer hours worked. It’s more likely that enforcement by the tax authorities will mainly cause the self-employed to shift to becoming salaried employees. After all, demand for labor is still high.

In fact, rising real per capita income is expected to make a strong positive contribution to BWI in 2024, 2025 and in 2026. After all, we expect that the Dutch will work more hours, and wages will rise faster than inflation. Furthermore, we expect the proportion of people with intermediate or higher education to increase in the coming years, despite a decline in 2023. The recently announced education cuts (in Dutch) will not affect educational attainment in the years of our forecast, because the model assumes a lagged effect between education spending and educational attainment. The expected increase contributes positively to broad well-being, in part because leaving education with a qualification increases people's chances of getting a job. Finally, Statistics Netherlands (CBS) expects the life expectancy of the Dutch to increase in 2024, 2025 and 2026. This also contributes positively to the development of broad well-being.