As the financial year recently came to an end, financial institutions around the world started to release economic growth forecasts. Today’s article will focus on the domestic market and will delve into the economic growth forecast of the Netherlands for 2024.
In 2023, the Dutch economy experienced a notable slowdown, witnessing a contraction in GDP throughout the initial three quarters. This deceleration was primarily attributed to the adverse effects of soaring inflation rates on households‘ disposable incomes, leading to a considerable decline in private consumption expenditure. Concurrently, export volumes dwindled due to a deceleration in economic activity among the Netherlands‘ key trading partners. Investment displayed volatility, maintaining a robust performance in the first half of the year but witnessing a reduction in spending by businesses during the third quarter. The annual growth for 2023 is estimated at 0.2%, marking a downward revision compared to the Autumn 2023 Forecast.
The Dutch economy is expected to resume a moderate growth path after a period of turbulence, with expectations of normalization in the years to come. Following the swift post-coronavirus crisis expansion, the economy encountered challenges such as supply chain overheating and unprecedented tightness in the labor market. The conflict in Ukraine exacerbated an energy crisis and triggered sharp increases in food prices. Despite a slight cooling in 2023 due to global inflationary pressures and central bank responses, the labor market remained notably tight. With rising real wages and sustained government expansionary measures, GDP growth is anticipated to rebound in 2024 and 2025, reaching 1.1% and 1.6% respectively.
Harmonized Index of Consumer Prices (HICP) inflation saw a significant decline in 2023, dropping from 7.2% in the first quarter to 0.4% in the fourth, largely due to a substantial decrease in energy prices. However, headline inflation is projected to rebound to around 3% in early 2024 as the year-on-year comparison for energy prices becomes less favorable. Excluding energy and food prices, inflation is forecasted to gradually ease throughout 2024 and 2025, supported by robust wage growth. Overall, HICP inflation is anticipated at 2.6% in 2024, marking a notable downward revision, while the 2025 forecast remains unchanged from autumn 2023.
Purchasing power is experiencing a robust recovery, propelled by increasing wages and a decline in inflation. Predictions indicate that inflation (CPI) will decrease to 2.9% in 2024, while wages are expected to continue rising by 6%. As a result, median purchasing power is forecasted to climb by 2.7%. However, this growth is anticipated to plateau in 2025, nearly returning to the 2021 level, before the inflationary shocks of 2022 and 2023. It’s worth noting that this trend varies across income groups, with lower-income households generally experiencing positive developments, while higher-income groups may observe a decline. Individual circumstances, like home insulation quality, can also impact purchasing power differently within income brackets.
Targeted policies have effectively reduced structural poverty, with the percentage of people living in poverty projected to decrease to 4.7% in 2024 from 4.8% in 2023 and 6.1% in 2021. However, there’s a slight expected uptick in poverty from 2025 onward, primarily due to social welfare benefits not keeping pace with overall prosperity growth. The sustained poverty reduction is attributed to various structural measures implemented by the government, including raising the minimum wage and associated welfare benefits, as well as enhancing child-related budget allocations and rental allowances.
Looking ahead, moderate economic growth is anticipated in the medium term, though challenges persist in the labor market, public finances, and in balancing development with environmental concerns. Addressing these challenges will require making tough decisions in crucial areas such as education quality, housing development, energy transition, and meeting growing healthcare demands. Redirecting financial resources and potentially adjusting taxation or funding allocations can facilitate the necessary redistribution to achieve social objectives. It is essential to recognize that besides financial allocations, social goals can also be pursued through price incentives and regulatory measures.
The Netherlands and the International Monetary Fund (IMF):
Projected growth in 2024 and 2025 is expected to gradually increase, driven by improved household purchasing power from lower inflation and stronger external demand. However, uncertainties remain high, with downside risks including a possible housing market correction, slower growth in trading partners, geopolitical tensions, and economic fragmentation.
The 2024 budget leans towards expansion, mainly due to increased spending on social transfers, defense, and public investment. Efforts to reduce implicit fuel subsidies are ongoing. Fiscal policy should balance supporting inflation reduction with growth risks, considering the potential costs of underestimating core inflation persistence. To stabilize debt and maintain strong buffers, adjustments will be necessary given rising pressures from fiscal challenges. Structural reforms are needed in pensions, healthcare, and climate policies to support fiscal sustainability.
The financial sector remains generally resilient, but risks from high household and corporate debt, real estate, Nonbanking Financial Institutions (NBFIs), and climate change warrant continued monitoring. Ambitious climate goals are deemed achievable with investments in clean energy and enhanced energy security. Further structural reforms can enhance economic and social resilience, particularly in labor markets and digital transition. Addressing labor market duality, incentivizing part-time workers, promoting training, and investing in digitalization will help alleviate labor shortages and boost productivity.
References
CPB Netherlands Bureau for Economic Policy Analysis. (2024). Central Economic Plan 2024. The Hague: CPB Netherlands Bureau for Economic Policy Analysis.
European Commission. (2024, February 15). Economic forecast for Netherlands. Retrieved from European Commission: https://economy-finance.ec.europa.eu/economic-surveillance-eu-economies/netherlands/economic-forecast-netherlands_en
International Monetary Fund. (2024, April 08). IMF Executive Board Concludes 2024 Article IV Consultation with Kingdom of the Netherlands–the Netherlands. Retrieved from International Monetary Fund: https://www.imf.org/en/News/Articles/2024/04/05/pr24106-netherlands-imf-executive-board-concludes-2024-article-iv-consultation