The Netherlands - Domestic demand drives growth

The Dutch economy expanded by 0.3% qoq in Q4, which brings the 2023 growth figure to 0.1% yoy, in line with our forecasts. After three consecutive quarters of negative qoq GDP growth(Q1: -0.5%, Q2:-0.4%, Q3: -0.3% qoq), the Dutch economy returned to growth in the final quarter of 2023. It outperformed the eurozone total, which remained stagnant in Q4, and main trading partner Germany which contracted by 0.3% qoq. The expansion was primarily driven by private consumption (+1.8% qoq). Declining inflation and high wage growth has lifted real incomes and raised purchasing power. The increase was however large by historical standards and thus risks being revised down. Government consumption also contributed positively to the GDP figure (+0.4% qoq). Despite the caretaker status of the government, fiscal policy has continued to support growth.

Looking at the other main components of GDP, external demand is showing signs of bottoming out after contracting in the first half of 2023. Since both exports and imports expanded by 0.3% qoq, the contribution of net exports was marginal. Additionally, as expected, investment continued to contract (-2.1%) on the back of restrictive financing conditions and weak growth prospects for the Netherlands and the eurozone.

Over the course of 2024, growth will stay positive but sluggish. The growth composition will be mixed. On the one hand, domestic demand will drive growth, supported by government and private consumption, as purchasing power recovers further. Indeed, the CPB recently raised its purchasing power forecasts for 2024, to 2.7% from 1.8%. On the other hand, external demand is expected to be muted and not contribute to growth until later on in the year when eurozone growth recovers and Germany has bottomed out. All in all, we expect growth to average 0.7% in 2024 (was 0.5%) and 1.2% in 2025 (was 1.1%), up from 0.1% in 2023.

The labour market remains tight and we see only modest signs of easing. For instance, the number of open vacancies per unemployed person held steady at 1.14 in Q4. Employment increased steadily over 2023 and rose to a net participation record of 73.4% of the population. At the margin we do see some signs of easing in labour market tightness. Jobs at temporary employment agencies are receding and people are working fewer hours. As bankruptcies are normalising from pandemic lows, labour mobility is also likely to increase going forward. Despite this, we do not expect a sharp rise in unemployment, as both private and public sector labour demand remains high going forward. The unemployment rate will increase to 4.0% in 2024 and 4.2% in 2025, up from 3.6% in 2023.

The caretaker status of the current government looks to have been extended as the first round of formation talks for a new government came to a halt. The New Social Contract (NSC) party pulled out after an intense seven weeks of negotiations (read more). Because of this, policy uncertainty remains high in the coming period, particularly in the areas of pension reforms, climate policy and other necessary reforms. The starting date for a new government remains elusive.