The Netherlands Outlook 2024 - Coalition talks kick off with weak growth prospects

After three quarters of contraction, growth is expected to pick up cautiously

With the elections behind us, the process to form a new coalition government has started. This formation is coming against the backdrop of weak growth prospects. Indeed, after three consecutive quarters of contraction, the headwinds from higher rates and inflation are still fierce. With annual growth in the Netherlands’ main export destinations stagnant (eurozone) or projected to slow compared to 2023 (US & China), near term prospects remain weak. Still, in 2024 we expect the Dutch economy to start growing again, albeit cautiously. The ECB pivot, with policy rate cuts expected from June onwards due to more favourable inflation data, should enable the eurozone to recover somewhat later in the year. As a result, demand for Dutch exports is expected to recover again after declining in 2023. Domestically, as inflation moves lower and wage growth staying high, private consumption is likely to pick up again in the coming quarters. Annual growth is expected to recover to 0.6% in 2024 from 0.2% in 2023. In 2025, as interest rates fall further, we expect GDP growth to pickup further to 1.1%.

External demand to stay weak in the near term

As a highly trade-oriented economy, global weakness in trade and industry is weighing on the Dutch economy (see our Macro Watch). Globally, economic activity is being squeezed by higher interest rates and inflation. The slowdown in global demand for goods has already pushed Dutch industry into recession, with turnover and output in manufacturing down sharply year-over-year in September. Cyclical weakness in manufacturing is also compounded by structural factors: wage and especially energy costs have increased substantially since the energy crisis, even more so for Dutch manufacturers than for eurozone competitors. This has contributed to a loss of competitiveness (see here). Consistent with this, Dutch goods exports have fallen sharply over the past three quarters. As external demand is expected to bottom out next year, the negative contribution from the trade balance will gradually turn positive during 2024.

Inflation is taking the long way down

As in the eurozone, inflation is also declining in the Netherlands. Assuming no further price shocks in energy markets, energy prices will no longer be the main contributor to inflation in 2024. The indirect contribution of energy, through the prices of energy-intensive goods and services, is also declining. From a macro perspective, external price pressures resulting from worsening terms of trade are diminishing, while those from domestic factors are becoming more dominant. For instance, wage increases, especially in the labour-intensive services sector, suggest that it will take longer for inflation to move back to 2%. Furthermore, despite recent GDP contractions, the Dutch economy is still running close to capacity limits, and this is slowing the inflation decline. We expect inflation to reach 2% on a sustainable basis in 2025, which is later than in the eurozone and US. Inflation (HICP) is expected to average 3.2% in 2024 and 2.7% in 2025, down from 4.4% in 2023.

Investment outlook follows growth outlook down

A strong first half of the year brings full-year growth in investment to +2.7%. However, this somewhat distorts the bleak outlook for investment. Investment ambitions are linked to growth prospects and financing conditions, both of which remain unsupportive going forward. Domestic and international growth forecasts have recently been revised downwards and financing conditions remain tight for the time being. Moreover, the deteriorating outlook makes lenders more risk averse. We see this taking its toll. In business surveys, demand for credit and investment ambitions are being scaled back. The uncertainty stemming from the recent election outlook and possible new coalition are not supportive for investment either. With that said, housing investment is likely to see some support from the recent recovery in house prices.

Consumption to pick up slightly in 2024

After contracting in H1 2023, the outlook for consumption is improving. Although consumer sentiment remains poor, inflation is easing. This will raise real incomes, as wage growth will likely stay elevated into 2024. The labour market remains tight and government policy is supporting purchasing power, particularly at the lower end of the income distribution. Consumption patterns are also reverting back to normal. The catch-up in services spending (which had weighed on goods spending) is behind us. Finally, the housing market stabilised and rebounded slightly. We expect consumption to pick up during 2024.

Labour market cools marginally, but unemployment remains low

Economic weakness has not yet led to slack in the Dutch labour market. Quite the opposite is true. In October, unemployment actually declined again slightly to 3.6% of the labour force (361 thousand people). We see labour demand marginally cooling though. Employers' expectations of labour demand are stabilising and the number of new vacancies is declining. Nevertheless, we still see signs of labour hoarding, and the labour market is expected to remain structurally tight. Expansive fiscal policy, particularly in labour intensive projects such as the energy transition, and other infrastructure investment will keep (public) labour demand high. An ageing population will also put downward pressure on labour supply. Particularly from 2027 onwards, when the Netherlands is expected to face outright declines in labour force volumes. For next year, we expect a limited rise in the unemployment rate to 4.1%, up from 3.6% this year.

Likely coalition is expected to raise deficits, exceeding the target set by Budget Committee

While still being in deficit, Dutch government finances have improved recently, particularly due to higher than expected revenues as well as inflation, which raises nominal GDP. However, a deterioration in the medium term looms. Based on calculations of party programmes, the trend of increasing deficits will continue, particularly when we look at the winners of the elections: BBB, NSC, and PVV. Deficits calculated from party programmes are much higher in 2028 than the current baseline. This is against the advice of the Budget Committee. The Committee advises future coalitions on appropriate fiscal policy. In its report, it targets a deficit of only 2% in 2028, citing the future burden on public finances coming from ageing, climate adaptation and the energy transition as already considerable. The resulting agreement between (expected) coalition parties is still undecided, but the party programmes suggest that Dutch government finances are set to deteriorate.

This article is part of the Global Outlook 2024