Modest growth only in 2023 and 2024
After a very strong recovery from the Covid-19 pandemic in 2021 and 2022 that was driven by strong private consumption(mostly for services) and good results from foreign trade, economic growth in 2023 and 2024 should be noticeably slower. In 2023, private consumption is unlikely to maintain the pace of the last two years – although the inflation rate eased noticeably during the year – due to a fall in European energy prices. The translation between energy prices and inflation is swift as gas is the main source of heating in the Netherlands and 3.5 million households (44%) have only have a short-term heating contract (6 months) so that prices adapt quickly. The Dutch government previously implemented an electricity and gas price cap, which also helped to bring down energy prices. Production in the Groningen gas field of has deteriorated markedly and will end in October 2023. However, by then, energy supply will be secured by two LNG terminals in Eemshaven and Rotterdam. In combination with full gas storage levels (88% in late July 2023), scarcity of natural gas in winter 2023-2024 and the related increase in natural gas prices will be less likely. This means that the inflation rate should even out to between 3.0 and 2.5% in 2024 when the basis effects from the energy crisis will have disappeared and the impact of ongoing high service and food prices should hold the inflation rate at a relatively high level. Household purchasing power will have strengthened and is expected to continue increasing in 2023 and 2024, thanks to higher collective bargaining agreements that have included wage rises of around 10% for many sectors in 2023 and will be supplemented by further smaller increases in 2024. The ongoing low level of unemployment has prompted and should further encourage unions to ask for higher wages. The minimum wage grew by 10% in January 2023, and by another 3.1% in July 2023. It is expected to increase further in January and July 2024, albeit by a lower margin. Nevertheless, private consumption (43% of GDP) should remain subdued as it has chiefly relied on a reduction in the savings rate in recent years. In Q2 2023, the savings rate of private households fell to 17.5%, which is the lowest level of the time series (started in Q3 2019). House prices declined by 6% in the first half of 2023 and the expectation of durably high interest rates should also lead to more hesitant spending behaviour. In 2024, when wages increase further and faster, private consumption should pick up slightly again.
Private construction and corporate investment should also remain subdued in the second half of 2023 and the first half of 2024 as higher financing costs weigh on activity. Between January and July 2023, the European Central Bank (ECB) had increased its key marginal lending rate four times by 175 basis points to 4.25%, i.e., one of the highest levels in the central bank’s history. With Dutch and European inflation on the downtrend, the ECB should go into a “wait-and-see” mode. The initial rate cuts are not likely to occur before mid-2024. In terms of quantitative easing, the ECB already stopped reinvestments of its APP program in July 2023. The maturing papers under its Pandemic Emergency Purchase Program (PEPP) have been fully reinvested until at least the end of 2024. Less support for economic growth should also come from the public side. The state should spend more on digitalisation and environmental actions through the EU’s Recovery and Resilience Facility in 2023, but for 2024 the government will probably adopt harsher austerity to bring down the deficit further. Foreign trade – exports account for 89% of GDP, and imports 77% in GDP – should represent only a modest growth factor in 2023 due to stagnating activity in Western Europe, but could pick up somewhat in 2024. Taken together, the quarterly growth rates of the Dutch economy should be noticeably higher in 2024 than in 2023. However, due to a positive carry-over effect from the year 2022 to 2023, this is not directly visible in the yearly GDP growth rates for 2023 and 2024.
Public deficit set to decrease
Although the Dutch government is generally on an austerity path, 2023 will end with a public deficit due to the state energy subsidies that will terminate at the end of the year. Furthermore, tax income will be lower due to the lower growth outlook. In 2024, the public budget will improve somewhat, but remain in a deficit for another year. Public debt is decreasing as a share of nominal GDP thanks to the durably robust growth in GDP that is not price-adjusted.
The Dutch current account registered two very strong surpluses in 2021 and 2022. They are mainly linked to the balance of international investments revenues, which, from its structural deficit, switched to positive in 2021. This phenomenon can be attributed to the transfer of Shell’s headquarters from the Netherlands to the United Kingdom at the end of 2021, which changed the direction of these revenues. This effect already levelled out somewhat in 2022 and will fully dissipate in 2023. Therefore, the current account surplus should decrease slightly in 2023, but still remain high. In 2024, the goods trade surplus should again benefit from higher export volumes, while only minor changes are expected to the services surplus and the structural deficits of investment trade and the balance of transfer of assets.
Elections in November 2023 likely to shake up Dutch politics
Mark Rutte of the conservative-liberal party VVD has been leading a caretaker government since July 2023. His government coalition formed from of the VVD (34 out of 150 seats in the House of Representatives), the Social-Liberal D66 (24 seats), the Christian-democratic CDA (14 seats) and the Centrist CU (5 seats) broke up over a dispute on immigration. While the VVD and CDA supported a stricter asylum policy, which would noticeably reduce the number of asylum seekers allowed to bring their families with them, the D66 and CU blocked it. This coalition was the fourth in a row under the leadership of Rutte since 2010. It took a record time of almost 10 months to form a coalition after the last general elections in March 2021. After the coalition broke up, new elections were announced for 22 November. Rutte and the leaders of the CDA and D66 announced that they would no longer run for election. Political themes have changed since the last general elections in 2021: the EU nitrates directive to drastically reduce nitrogen emissions became a major controversial issue. The Netherlands has to reduce its emissions by 50% by 2030. This requires a significant reduction in livestock and means the end of about 30% of farms in the Netherlands. The BBB (Farmer-Citizen Movement) developed in 2019 out of the farmers’ protests. After securing only 1% of the vote in 2021, they won by a landslide at the provincial elections in May 2023 and, with 19.2% of the votes, became the biggest faction in the provincial councils as well as the largest party in the Dutch Senate. However, while the BBB had been well ahead in the polls from March 2023, support weakened immediately after the announcement of fresh general elections when it became clear that the leaders of the movement do not see themselves governing the country. The social democrat Labour Party (PvdA) and the environmentalist Green Party (Groen Links), both smaller opposition parties, formed an election alliance. In summer 2023, with their new leader Frans Timmermans, Vice-President of the EU Commission who stepped down to become candidate, the new alliance was leading the polls with 18% of the vote, followed by the VVD (17%) and the BBB (16%). The election outcome is highly uncertain, but if the BBB wins, it could form, together with the nationalist PVV, the first right-wing, anti-EU government of the Netherlands.