Economic growth continues, uncertainty increases

“The ECB's inflation target is 2%, a level which benefits the economy. While a 3% inflation rate is not inherently problematic for a short while, it is important that it does not become entrenched in the inflation expectations of households and businesses. If that were the case, 3% would become the new normal, eating away at our purchasing power and eroding our competitiveness. What’s more, pushing down inflation from 3% to 2% would be a costly and painful exercise. There is only so much we can expect the ECB's monetary policy to do for us – after all, euro area inflation as a whole is declining towards 2% at a more rapid rate. This means unions, employers and the government must work together to prevent 3% inflation from becoming entrenched,” said Olaf Sleijpen, DNB’s Executive Director of Monetary Affairs and Financial Stability.

Growth to accelerate

Estimated economic growth, of 0.9% this year and 1.5% in 2025 and 2026, is slightly higher than we expected in the most recent DNB Spring Projections. In June 2024, we estimated growth of 0.5% for 2024 and 1.3% for 2025 and 2026. Growth is mainly driven by private consumption and government spending. On the back of recovering world trade growth, Dutch exports are also expected to start contributing more to economic growth.

Geopolitical uncertainty could slow growth

Geopolitical uncertainty is threatening this accelerating growth, however. As a trading nation, the Netherlands remains sensitive to developments abroad, such as unrest in the Middle East and the Russian war in Ukraine.

Added to this is the threat of a trade war fought with high reciprocal import tariffs. Uncertainty about this has risen sharply since Donald Trump was elected the new US President. A trade war could significantly undermine economic growth in the Netherlands, as our calculations show.

Growth is generated at home

Economic growth in the Netherlands is driven mainly by domestic demand. Private expenditure increased especially in the second half of this year, thanks to higher household incomes.

With wage growth outpacing inflation, households' real disposable income is up 4.5% this year. Dutch households use part of the increase for additional savings, for example to pay off their mortgage loan or buy a home.

In addition to consumption growth among households, firms are investing more. Government spending is also contributing significantly to growth in an already strained economy.

Wage growth and inflation in the Netherlands are higher than in the euro area

Wages are growing faster in the Netherlands than in the euro area as a whole. This is part of a rebalancing of the tight Dutch labour market. Recently, the labour market tightness has eased slightly, with wage growth slowing down.

At 3%, inflation in the Netherlands will remain above the inflation rate for the euro area in the years ahead. The difference can largely be attributed to domestic factors – excess demand in the economy, high wage growth and the pass-through of inflation into regulated prices such as rents. Increased taxes on tobacco and hotel accommodation, for example, also contribute to inflation in the Netherlands.

Alternative scenario: trade war will damage the Dutch economy

A trade war fought with higher import tariffs will dampen world trade growth. Although a mere 6% of Dutch goods exports were destined for the United States in 2023, the Dutch economy could be significantly damaged by US protectionism. Not only will exports to the United States grow less, but a trade war will also indirectly affect Dutch trade with other countries . In an alternative scenario which we present in our Autumn Projections, growth of the Dutch economy declines sharply in 2025 and, more notably, in 2026, when a paltry 0.4% of the projected growth of 1.5% remains.

Policy recommendations

The risks to our economy reside in uncertain external developments, over which the Netherlands can exert little influence. There are things we do have control over, however. Apart from the need to avoid inflation that is structurally too high as mentioned above, these are:

Buttress the competitiveness of Europe and the Netherlands

Reports by former ECB President Mario Draghi and former Italian prime minister Enrico Letta fittingly highlight the importance of strengthening the competitiveness of Europe and the Netherlands. Doing so is vital to remain a leading player in foreign markets. Promoting productivity growth is key to becoming more competitive. Both reports provide policymakers with sufficient building blocks to boost growth and competitiveness.

Exercise restraint in retaliating by imposing import tariffs

The alternative scenario in our Autumn Projections reveals how vulnerable the Netherlands is to protectionism. The Netherlands should therefore advocate, in the European context, for the least restrictive environment for international trade. It may seem logical to retaliate by imposing tariffs, but allowing a trade war to escalate will only lead to less economic growth, especially in the Netherlands.

Get public finances in order for the long run

In the short term, public finances are in better shape than we previously estimated, but in the long term, developments in the government deficit and public debt continue to give cause for concern. With the government deficit exceeding the European 3% threshold by 2026, there will be little or no room to absorb new shocks in the government budget.

Media representatives can contact Bouke Bergsma by email at bouke.bergsma@dnb.nl or by telephone at +31 653 258 400.