DNB Autumn Projections 2023

Outlook for the Dutch economy

The Dutch economy has been hit by exceptionally high inflation in recent years amid strong growth in gross domestic product (GDP). Inflation is set to decline markedly in the coming years, as the economy stagnates in 2023, followed by gradual recovery in 2024 and 2025.

The paltry 0.1% growth of GDP in 2023 is mainly due to high inflation and sharply higher interest rates. In addition, monetary policy has tightened globally and world trade is contracting, causing Dutch exports to fall. The economy should recover in 2024, mainly on the back of higher government spending. In addition, households will see some increase in real disposable income on average as wage growth outstrips the steadily declining inflation rate. Household consumption should also be underpinned by purchasing power measures. Economic growth will gain further momentum in 2025, largely fuelled by domestic expenditure. However, world trade growth will remain subdued, causing export growth to show only marginal growth. In an alternative scenario accompanying our projections, we have simulated the impact on the Dutch economy of a further downturn in the global economy due to rising uncertainties worldwide and geopolitical tensions.

Following the exceptionally high inflation seen in 2022 (11.6%), HICP inflation is expected to be significantly lower in 2023 (4.1%). This is not only due to the decline in economic activity, but also to the sharp fall in energy prices. In 2024 projected inflation will decrease further to 2.9%, and by the end of 2025 inflation is expected to return to below 2% (producing an average of 2.2%). Core inflation, which excludes energy and food, will also fall significantly.

The fact that projected inflation is set to be above 2% for some time is related to the tightness in the economy and labour market. Labour costs are rising sharply, which slows down the decline in inflation. Unemployment will rise only slowly (to just over 4% in 2025), while real wages will grow and the share of workers in national income (the labour income share, LIS) will rise again. The government budget deficit will not exceed 1% of GDP in 2023 but will increase to almost 3% in 2024 and 2025, partly due to higher interest payments. The debt-to-GDP ratio will fall at first but is set to rise again from 2025 onwards.