Netherlands projection note OECD Economic Outlook November 2023

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Netherlands After slowing to 0.2% in 2023, GDP is projected to pick up gradually to 0.5% in 2024 and 1.1% in 2025.

Headline inflation is expected to fall to 3.7% in 2024 and to be close to target by the end of 2025. As the labour market remains tight, core inflation will remain elevated at 3.9% in 2024 before gradually falling towards 2% by the end of 2025. Export growth is expected to improve in 2024 and 2025 as external demand recovers.

The fiscal stance is projected to be mildly restrictive despite a purchasing power package for low-income households and increased defence spending. In the medium term, the fiscal deficit is expected to deteriorate with rising expenditure on interest, climate policy and health care. While prudent fiscal policy is still required, the government should continue to tackle structural challenges, focusing on accelerating the green transition and reducing labour market tightness.

The economy faces severe headwinds in 2023 The economy contracted in the first three quarters of 2023 driven by declines in the trade balance and household consumption. Headline inflation has declined steadily since April 2023, due to falling energy and food prices, with consumer prices in October 1% lower than a year earlier. However, core inflation remains elevated at 4.7% on the back of sharply rising collective labour agreement wage rates and a persistently tight labour market. Private consumption remains subdued, with stable but below long-term average consumer confidence. Business confidence has deteriorated steadily, with production in the industrial sector contracting by 9.3% over the year to September.

Netherlands

Source: CBS; and OECD Short-Term Indicators database.

StatLink 2 https://stat.link/4sohgy

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

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Netherlands: Demand, output and prices 2020

Netherlands GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding¹ Total domestic demand Exports of goods and services Imports of goods and services Net exports¹ Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation² Unemployment rate (% of labour force) Household saving ratio, net3 (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition⁴ (% of GDP) Current account balance (% of GDP)

2021

2022

2023

2024

2025

Percentage changes, volume (2015 prices)

Current prices EUR billion

796.0 335.6 207.4 173.1 716.0 0.3 716.4 622.0 542.4 79.6

6.2 4.4 5.0 2.9 4.2 0.4 4.6 8.0 6.2 2.0

4.4 6.5 1.6 1.8 4.0 -0.2 3.8 4.6 4.0 1.0

0.2 0.2 2.7 2.7 1.5 -0.5 0.9 -0.9 -0.4 -0.5

0.5 0.2 1.7 -1.8 0.2 0.0 0.1 0.6 0.2 0.3

1.1 0.8 1.4 0.2 0.8 0.0 0.8 2.3 2.1 0.4

_ _ _ _ _ _ _ _ _

2.9 2.8 1.8 4.2 17.0 -2.2 65.8 51.7 12.1

5.6 11.6 4.8 3.5 12.7 -0.1 54.3 50.1 9.3

7.3 4.4 6.7 3.6 12.7 -1.5 54.0 49.8 10.2

3.3 3.7 3.9 4.0 12.7 -1.9 55.0 50.8 9.8

2.7 2.4 2.5 4.4 12.6 -2.0 56.1 51.9 10.1

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

3. Including savings in life insurance and pension schemes.

4. The Maastricht definition of general government debt includes only loans, debt securities, and currency and deposits, with debt at face value rather than market value.

Source: OECD Economic Outlook 114 database.

StatLink 2 https://stat.link/d2y5mi

As a small open economy, the Netherlands is exposed to global trade disruptions. Depressed world trade growth amidst heightened geopolitical tensions has weighed on the economy, in addition to high energy prices and increased uncertainty. The Netherlands is well integrated in the global financial system. High interest rates to tame inflation over a prolonged period could pose a risk to the domestic financial system as household debt in the Netherlands is particularly high.

The fiscal deficit is set to deteriorate The fiscal deficit is projected to increase gradually over the projection period from 1.5% of GDP in 2023 to 2% of GDP in 2025. The positive effect of removing the energy price cap after December 2023 will be mitigated by planned spending on infrastructure, nitrogen and climate policy and additional defence expenditure. In September, the caretaker government also announced a poverty-reducing package supporting low-income households through increased benefits and selected tax credits. The budgetary cost of these measures amounts to about 0.3% of GDP, which will be largely funded by raising the threshold for the top income tax band by less than inflation, and increased excise duties on alcohol and tobacco. The government debt ratio is likely to marginally increase from around 50% of GDP in 2023 to 52% of GDP in 2025.

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023

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Economic growth will improve slowly GDP is set to grow by 0.5% in 2024 and 1.1% in 2025. Headline inflation is expected to pick up at the beginning of 2024 due to upward pressure from the removal of the energy price cap, but will then gradually fall from 3.7% in 2024 to 2.4% in 2025. Wages are projected to increase by 6% in 2023, before moderating to 5% in 2024 and to 4% in 2025, as the labour market remains tight. Core inflation is therefore expected to be persistent, declining to 3.9% in 2024 and 2.5% in 2025. Subdued private consumption and investment will weigh on growth as inflation and interest rates remain high. External demand is expected to improve from 2024 as economic growth in key EU trading partners recovers. The outlook is surrounded by significant risks. Heightened geopolitical tensions could hit external demand and weigh on export growth.

Increasing pressure on businesses from higher interest rates and labour costs, and greater uncertainty could significantly increase bankruptcies, although these could also support the reallocation of workers and ease labour market tightness in the medium term. Higher income households could also support growth by spending a greater share of their excess savings.

Increasing labour supply should be a priority The Netherlands is in a good fiscal position, but an ageing population and advancing the green transition will add budgetary pressure in the medium term. Ageing-related expenditure alone is expected to increase roughly 1.5 percentage points to about 14.5% of GDP over the next five years. The incoming government should address long-standing structural challenges, focussing on increasing labour supply to mitigate some of the pressures. While employment is high, hours worked are low, particularly for women.

Government plans to expand free childcare should help to increase the labour supply of mothers.

Streamlining existing income-dependent benefits into a system of fewer allowances and tax credits could further help to increase working hours, as the net benefits of an additional hour worked would be more transparent. Shifting the composition of active labour market policies towards training, especially to improve green and digital skills, could help to reduce skill mismatch and accelerate the green transition.

OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 2: PRELIMINARY VERSION © OECD 2023