Moderate growth follows soft landing of Dutch economy

It is a remarkable feat that an economic downturn was avoided, given that a series of interest rate hikes – which were needed to push inflation down – has often been accompanied by a recession in the past. As such, this testifies to the Dutch economy’s resilience. It should be borne in mind that the economy has not only been affected by an inflation shock, but had also just emerged from a pandemic not long before. These macroeconomic data mask large individual differences. Not every citizen is reaping the benefits of our improving economy and falling inflation. There are still people who experience financial difficulties or are worried about their prospects.

Growth is generated at home

The tentative growth seen this year is driven by increased spending on the part of the government and households. Real wage growth and consumer confidence are picking up and employment is rising, albeit somewhat less than in recent years.

House prices have been rising again since 2023, which also stimulates consumption and thus contributes to GDP growth. Average house prices are now above the previous peak of July 2022. This quickly reversed the decline recorded over the past two years.

Falling corporate investment and exports act as a drag on growth but should recover in the next two years. Economic growth will then also be driven by the corporate sector and thus be more broadly based.

The risks to our economy are related to uncertainties abroad. Wars and conflicts can send energy prices sharply higher or lower and also slow down world trade, from which the Netherlands, as an open economy, always suffers more than other countries on average. Geo-economic fragmentation – which often stems from international conflicts – also affects the Netherlands.

Inflation continues to fall steadily

Inflation, which peaked at 11.6% a mere two years ago, is expected to reach 2.8% both in 2024 and 2025. This is still well above the target of 2% set by the European Central Bank. Inflation is set to fall further to 1.8% in 2026. This downward path is somewhat more gradual than we expected to see in our Autumn Projections of December 2023, mainly due to higher expected energy prices.

Core inflation (which excludes the erratic food and energy price movements) is also falling. At 2.9% in 2024, it has already more than halved compared to last year’s core inflation rate (6.4%). According to our projections, core inflation should be 2.4% in 2025 and 2.0% in 2026.

According to the caretaker government’s 2024 Spring Memorandum, rising public expenditure will contribute to economic growth, while at the same time pushing up the budget deficit from 0.3% of GDP in 2023 to 2.4% in 2024. It could even be as high as 3.7% by 2026, which is well above the European deficit ceiling. Although remaining amply below the European threshold, public debt is expected to rise from over 47% to almost 51% in 2026.

Our calculations based on the outline coalition agreement

Our projections do not take account of the outline coalition agreement drawn up by the future coalition parties PVV, VVD, NSC and BBB. Separate calculations, supplementing our Spring Projections, show that this agreement will have a moderately positive impact (+0.1%) on annual economic growth up to 2028. The measures announced in the agreement will increase the budget deficit compared to our projections over the next two years, which means that it will exceed the European ceiling next year, at 3.3%. After edging up further to reach 3.8% in 2026, the deficit should improve in the following two years but remain just above 3% in 2028.

These projected deficits are well above the 2% maximum recommended by the Working Group on Fiscal Space, in which DNB participates. Such a deficit would provide headroom for pursuing trend-based fiscal policies. Neither current fiscal policies nor the outline coalition agreement allows for such headroom, thereby increasing the likelihood of undesirable pro-cyclical policies.

Strengthening the economy’s resilience

Given the uncertainties abroad, it is important to bolster the Dutch economy’s resilience. We can do so if we succeed in further strengthening or completing the European single market with its 450 million consumers, the banking union and the capital markets union.

A strong international competitive position also strengthens our economy. This hinges on higher productivity growth, especially given the current tight labour market and capacity constraints. Our country’s social partners – the government, employers and employees – have a joint responsibility in this respect.

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