The Netherlands - Contours of growth in 2024 taking shape

Since the positive Q4 GDP print (+0.3% qoq), in which the Dutch economy exited the technical recession, economic momentum has remained broadly stable. Incoming data is in line with our expectations of positive but weak growth going forward. Industrial PMIs point towards some bottoming out in export-orientated sectors such as industry and trade. Business and consumer confidence are increasing but still negative. Recent labour market data indicate continued tightness with unemployment moving sideways at historical lows. Bankruptcies are increasing from pandemic lows but the run-up remains contained compared to eurozone peers. Finally, disinflation has broadly continued, with core inflation falling below 3% in February for the first time since March 2022.

Looking forward, the outlook for the first half of 2024 remains positive but weak. We expect growth to pick up later in the year as financial conditions ease and external demand increases on the back of eurozone growth. In the last quarter of 2023 we already saw the contours of the components that will drive growth this year. Improved purchasing power of households, fuelled by very strong CLA-wage growth and further disinflation, will support private consumption. Indeed, during 2024, CLA-wage increases will have surpassed increases in the price level, raising purchasing power. The government, despite its caretaker status is also contributing to growth, in two ways. First, by further raising purchasing power of lower income households via redistributive policies, such as a higher housing rental allowance. Second, by adding directly to GDP via increasing government consumption, for example higher public wages and investment growth in for instance infrastructure.

We anticipate some payback in consumption in the first quarter due to the historically high consumption growth in Q4. Our research suggests a significant driver of the expansion was the concentrated payout of the energy allowance of EUR 1300 to low income households. Indeed, contrary to 2022 where the payout was spread over the year, in 2023 75% of the energy allowance was paid out in Q4. Our research (in Dutch) suggests about 40% of this allowance to low income households was spent within three weeks. A back of the envelop calculation suggests that roughly 25% of the total consumption growth in Q4 was related to the energy allowance payout. As the energy allowance is phased out in 2024, Q1 consumption growth will face some payback from Q4 highs.

Negotiations to form a government recently gained new momentum. The expected coalition between election winner PVV (far-right), outgoing prime minister Rutte’s VVD (liberal centre-right) and newcomers the Farmer Citizen Movement (BBB, right) and New Social Contract (NSC, centre-right) have resumed talks over forming a new government. Contrary to a typical majority coalition, the parties intend to form a ‘program’ or ‘extra-parliamentary’ coalition in which they act upon loosely defined policy goals rather than a very concrete and well-defined coalition agreement. As a result, political parties in Parliament will have more power, something that has broad support in the Dutch political landscape.