DNB Autumn Projections 2024

Accelerating growth in an uncertain environment

The growth recovery is taking firmer shape. The Dutch economy rebounded in the second half of this year and is set to grow faster than previously expected in 2025 and 2026. Gross domestic product (GDP) will grow by 0.9% this year and by 1.5% in 2025 and 2026.1 Growth is mainly driven by private consumption and government spending. Dutch exports will also start contributing more to economic growth on the back of recovering world trade.

Geopolitical uncertainty may slow the recovery, however. Geopolitical tensions, such as developments in the Middle East and Russia’s war in Ukraine, continue to cloud the economic outlook. Dependence on other countries, through trade and investment, makes the Dutch economy vulnerable to global shocks. Negative impacts on confidence due to geopolitical uncertainty may also weigh on domestic spending. Added to this is the threat of a trade war with higher import tariffs on international trade. Uncertainty surrounding this threat has increased sharply since Trump was elected the new president of the United States in November this year. New trade restrictions could hit the Dutch economy hard, just as the pandemic and the energy crisis did before. A trade war therefore poses a downside risk to the growth outlook, as the alternative scenario in these Autumn Projections shows.

Economic growth in the Netherlands is driven mainly by domestic demand. A key driver for this is the recovery in consumption growth that we have seen in the second half of 2024. This is in line with the rise in household incomes. Consumption growth is set to continue in 2025 and 2026. Business investment growth is also recovering. Investment in housing is being stimulated by government measures, such as subsidies to municipalities for housebuilding. Government spending will also contribute significantly to growth in the years ahead, in an already strained economy. Over the projection period, demand for products and services will remain more than 1% higher than the production capacity (the output gap). The excess demand in the Dutch economy is higher than in the euro area.

A declining trade balance contributes negatively to GDP growth in 2025 and 2026. This is because the recovery in domestic demand is accompanied by strong growth in imports. Export growth lags behind, reducing the trade balance. Dutch exporters also loose market share, partly due to their declining price competitiveness. This is impacted by relatively high production costs and could come under further pressure in the event of a trade war, as import tariffs in a foreign market would put Dutch exporters at a competitive disadvantage.

High wage growth and inflation in the Netherlands

Wage growth is higher in the Netherlands than in the euro area. The high wage growth in 2024 and 2025 is due to recently concluded collective labour agreements. The tight labour market means workers have a stronger bargaining position. This is reflected in wage growth that is higher than that of the euro area. Wages also rise more than inflation over the projection period. This is part of a rebalancing of the tight Dutch labour market. The labour market eases slightly over the projection period and wage growth declines slowly. Unemployment is set to remain low. The tight labour supply means higher productivity growth is required to sustain GDP growth over the long term.

Inflation remains around 3% over the projection period, partly due to wage growth. This means inflation in the Netherlands is significantly higher than in the euro area as a whole. Unlike in the 2022 energy crisis, this high inflation has mainly domestic causes: excess demand in the economy, high wage growth, higher indirect taxes and the pass-through of inflation to regulated prices such as rents. Import inflation remains subdued, partly because of lower prices of products imported by the Netherlands from China.

This higher inflation must not become the new normal. If inflation stays above the ECB’s 2% target for a prolonged period, people may get used to higher inflation, causing inflation expectations to rise. This would make it harder to achieve price stability, as higher inflation expectations could trigger higher wage demands and selling prices. A structural inflation differential relative to the euro area could also harm Dutch competitiveness. It would lead to relatively high production costs for businesses, making them less competitive in export markets. The Netherlands can only rely on the ECB’s monetary policy to a limited extent, as it focuses on inflation in the euro area as a whole. Trade unions, employers and domestic policymakers have a shared responsibility to curb higher inflation expectations.

Sharp increase in household income. With wage growth outpacing inflation, households’ real disposable income is rising. Income is set to rise by 4.5% in 2024 and somewhat less in subsequent years. Households are using part of the increase for additional savings, so the savings ratio excluding pension contributions increases and remains high. Dutch households save among other things to pay off their mortgage loan or to buy a house.

House prices are also set to continue rising in 2025 and 2026. This rise is driven by income growth and somewhat lower mortgage interest rates, coupled with positive sentiment and tightness in the housing market. The recovery in housing investment is helping to ease the tightness, but more building permits are needed. Housing affordability has declined over the past decade, as households’ borrowing capacity has risen less than house prices. This must be addressed not only through increased housebuilding but also by reducing the upward pressure on house prices. This can be done by limiting the demand stimulus and letting the rental market act as a pressure valve for the housing market.

Public finances are in better shape than anticipated, but there is little room for manoeuvre. The budget deficit is lower than we anticipated in the Spring Projections. In 2024, this is due to increased revenues on the back of higher GDP growth, and the fact that some planned expenditures have not been incurred (underspending). The capacity to absorb shocks nevertheless remains limited, with the budget deficit set to rise to 3.1% of GDP in 2026, above the European deficit ceiling. This is undesirable, because unexpected economic shocks could also put pressure on public finances