Netherlands projection note OECD Economic Outlook November 2022

 179

Netherlands Following a 4.3% expansion in 2022, economic growth is projected to slow to 0.8% in 2023 and 1.1% in 2024. Inflation is expected to moderate to 3.9% by the end of 2024, after peaking at 15.4% in the fourth quarter of 2022. Private consumption is projected to weaken in the short term, but will gradually strengthen, aided by government support measures and welfare adjustments. Despite a small increase over the projection period, unemployment will remain low at 4.3% in 2024 as the labour market remains tight.

The fiscal stance set out in the 2023 budget is expansionary. The energy price cap to cushion the impact of high energy prices on households is needed but should be targeted more towards lower income households and better incentivise energy savings. The government should continue to tackle structural challenges, prioritising an acceleration of the green transition to ensure energy security and reduce fossil fuel dependence.

The outlook has darkened GDP declined in the third quarter of 2022 by 0.2%, and high frequency indicators indicate a further deterioration in the outlook. Inflation reached 16.8% in October mostly due to rising energy prices.

Unemployment is low, at 3.8% in September. The number of vacancies remains high, with less than one unemployed person per vacancy, indicating a tight labour market. Collective labour agreement wage rates are starting to accelerate and were up 3.5% in October over a year earlier. Business confidence dropped for the third successive month in October, and consumer confidence has fallen to an all-time low amid rapidly rising living costs.

Netherlands

Source: Eurostat; and CBS. StatLink 2 https://stat.link/3ca6gh

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

180 

Netherlands: Demand, output and prices 2019

2020

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)

2022

2023

2024

Percentage changes, volume (2015 prices)

Current prices EUR billion

Netherlands

2021

813.0 353.6 200.1 172.9 726.6 6.8 733.4 670.7 591.2 79.6

-3.9 -6.4 1.6 -2.6 -3.3 -0.8 -4.2 -4.3 -4.8 -0.1

4.9 3.6 5.2 3.2 4.0 -0.1 3.9 5.3 4.0 1.4

4.3 5.8 0.7 2.6 3.6 0.0 3.6 4.5 3.7 1.1

0.8 0.4 3.8 0.0 1.3 0.1 1.4 1.8 2.5 -0.4

1.1 1.0 2.5 1.0 1.5 0.0 1.4 2.0 2.4 -0.2

_ _ _ _ _ _ _ _ _

1.9 1.1 1.9 4.9 18.8 -3.7 70.4 54.7 5.1

2.5 2.8 1.8 4.2 17.6 -2.6 66.5 52.5 7.2

5.8 12.2 4.9 3.6 11.6 -1.1 64.3 50.3 6.4

7.8 8.5 8.7 4.1 10.7 -3.4 65.2 51.2 6.4

4.1 4.2 4.4 4.3 9.9 -2.4 66.0 51.9 6.5

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 112 database.

StatLink 2 https://stat.link/nfe93b

The Dutch direct dependence on Russian gas is limited, only 3-4% of energy consumption was imported from Russia in recent years. Gas storage levels over 90% and a 25% reduction of gas consumption in the first half of 2022 significantly mitigate the risk of gas shortages. Nevertheless, the Netherlands is a netimporter of gas and therefore vulnerable to spill-over effects from rising global energy prices. The government will introduce an energy price cap in 2023 to protect households and other small energy consumers as well as a separate measure that provides an allowance to energy-intensive SMEs. The cap covers the difference to market prices and could have a significant budgetary impact if energy prices are persistently high, as assumed in the projections, or if demand is high, due to weather conditions. Russia’s war of aggression against Ukraine has led to an inflow of 82 000 refugees to the Netherlands by the beginning- of November. Around 40% of the earlier arrivals were employed by end-August.

Support measures and higher public spending will increase the fiscal deficit After a deficit of 1.1% of GDP in 2022, due to lower COVID-19 related expenses and high economic growth, the fiscal deficit is projected to increase to 3.4% of GDP in 2023 due to increased spending on energy support measures and raised welfare benefits. The budget announced in September includes a purchasing power package to protect households from cost-of-living increases. The package amounts to about EUR 11 billion in 2023 (1.1% of GDP), with around EUR 6 billion in temporary measures, such as an energy discount for lower-income households and a continuation of the 21% reduction in excise duty fuel.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022

 181 Almost EUR 5 billion are allocated to structural measures, such as a decrease in the tax on labour, increased child and rental allowances and a 10% increase in pension and welfare benefits that is to follow the 10% increase in the minimum wage in January 2023. The total cost of the energy price cap and the allowance for SMEs, will depend on energy price developments, but is estimated at approximately EUR 25 billion (2.4% of GDP). As temporary energy support measures are scheduled to be phased out by end 2023, the fiscal deficit will decrease to 2.4% of GDP in 2024.

Economic growth will slow GDP growth is projected to be 4.3% in 2022 before slowing to 0.8% in 2023 and picking up to 1.1% in 2024. Headline inflation is projected to reach 15.4% in the fourth quarter of 2022 before moderating over 2023 to an annual average of 8.5%, aided by the energy price cap, and to 4.2% on average in 2024 as tighter monetary policy takes effect, although the removal of the price cap could add to upward pressure on inflation. Wages are projected to increase by around 5% in both 2023 and 2024 and to stop declining in real terms at the end of 2023. Private consumption is projected to be subdued as disposable income will be eroded by high inflation. However, the recent government support measures will cushion the impact of high energy prices. After strong export growth in 2022, the deterioration in growth in main EU trading partners (notably Germany) will weigh on exports in 2023, before some improvement in 2024. The outlook is surrounded by significant downside risks as a further escalation of the war could increase energy prices even more and worsen the economic outlook in main trading partners and, if combined with a cold winter and reduced availability of LNG gas, the government could be obliged to strongly incentivise the reduction of gas consumption. Bankruptcies, which are still below the pre-pandemic level, could rise significantly due to the increasing pressure on business from higher interest rates, labour cost and uncertainty. An upside risk to the projection is that higher income households could spend a greater share of their excess savings.

Carefully monitoring support measures and ensuring energy security is key Well-targeted fiscal policy support to aid vulnerable households with high living costs is needed as long as high energy prices persist and significantly erode households’ disposable income. The government should carefully monitor the energy price cap, and revise it as needed, to ensure that it is targeted at households in need and that incentives to save energy are in place. An acceleration of the green transition, to ensure energy security and reduce fossil fuel dependence should be a priority. Implementing re-skilling and upskilling programs to address the tight labor market, particularly for jobs supporting the green transition, could help towards this goal. Boosting productivity, by stepping up the adoption of digital technologies, improving digital skills, and reducing regulations, would support debt sustainability as the population ages.

OECD ECONOMIC OUTLOOK, VOLUME 2022 ISSUE 2: PRELIMINARY VERSION © OECD 2022