The Dutch economy is cooling down, driven by decreasing export volumes and a drop in real consumption spending in the first half of 2023. Going forward, the still strong labour market, decreasing inflation rates and increased wage growth are expected to support a mild recovery in domestic demand. Growth is also set to benefit from increased public consumption and investment. However, business investment is projected to remain weak because of tightening financial conditions. Overall, growth is forecast to remain limited in 2023 and to pick up slightly in 2024 and 2025. The government deficit, forecast at 0.5% of GDP in 2023, is expected to widen further over the forecast horizon mainly due to growing expenditure on public investment and social benefits. Government debt is projected to decrease to 46.8% of GDP by 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 0,6 | 1,1 | 1,7 |
| Inflation (%, yoy) | 4,6 | 3,7 | 2,0 |
| Unemployment (%) | 3,6 | 3,9 | 3,9 |
| General government balance (% of GDP) | -0,5 | -1,8 | -2,0 |
| Gross public debt (% of GDP) | 47,1 | 46,6 | 46,8 |
| Current account balance (% of GDP) | 9,2 | 9,2 | 9,1 |
A slowing but resilient economy
Following strong growth in the post-pandemic years, the Dutch economy has cooled down in the first half of 2023, with two consecutive quarters of negative real GDP growth. Real consumption spending decreased (q-o-q) in both the first (-0.2%) and second quarter (-1.6%) of 2023, as households adjusted to the higher price levels. At the same time, export volumes decreased as the economic outlook in the main trading partners worsened. The widespread slowdown also shows in a sharp decrease in industrial production.
However, the labour market remains strong, with the unemployment rate still at a historically low level and with significant increases in wage growth. The pick up in wage growth is projected to lead to a recovery in real wages and a return to modest private consumption growth towards the end of 2023. Overall, GDP growth in 2023 is expected at 0.6%.
In 2024 and 2025, quarterly growth is forecast to pick up progressively, as a further drop in inflation, coupled with still strong wage growth, are set to support real disposable incomes. With demand from the main trading partners stabilising, the contribution from net trade is projected to improve, moving from negative in 2023, to broadly neutral in 2024 and slightly positive in 2025. Growth is also expected to be supported by increased public consumption and investment. On the downside, tightening financial conditions and persistent labour shortages are set to weigh on business investment growth in the next years. Annual growth is forecast at 1.1% in 2024 and 1.7% in 2025. The current account surplus is forecast to remain sizeable, at around 9% of GDP, over the forecast horizon.
The labour market remains strong
The Dutch labour market continues to be tight, with vacancies exceeding the number of unemployed persons, and several sectors experiencing labour shortages. The unemployment rate picked up marginally to 3.5% in the second quarter of 2023, while remaining historically low. On the back of a slowing economy, the unemployment rate is forecast to increase to 3.9% in 2024 and 2025, yet remaining well below the unemployment rates seen before the pandemic. Fuelled by a tight labour market and surging inflation, nominal wage growth increased considerably and is expected to reach 6.2% in 2023, 5.5% in 2024 and 3.9% in 2025.
Inflation set to gradually decrease further
HICP inflation (y-o-y) has come down sharply, thanks to a significant drop in energy prices since the peak in autumn 2022. Headline inflation rates are projected to continue to decrease as energy prices are set to remain stable while inflation in the other price categories is expected to slowly decelerate. Overall, headline inflation is forecast at 4.6% in 2023, 3.7% in 2024 and 2.0% in 2025. HICP inflation excluding energy and food remains elevated as of the third quarter of 2023 but is expected to ease as the impact of the energy price increases on other price categories dissipates and the cooling demand relieves the pressure on prices. With wage growth and the labour market set to remain strong, HICP inflation excluding energy and food is forecast to come down gradually over the forecast horizon.
Government deficit set to increase
In 2023, the general government deficit is expected to increase to 0.5% of GDP, up from 0.1% in 2022. This is largely driven by a package of measures to mitigate the impact of high energy prices on households and companies. The total net budgetary cost of energy-related measures is estimated at 1.0% of GDP in 2023 and 0.0% in 2024. In 2023, higher-than-expected revenue from corporate income tax, as well as lower public investment than initially budgeted, are expected to lead to a lower deficit than projected in the spring forecast.
For 2024, the current caretaker government is planning to introduce a limited set of measures to support the purchasing power of low-income households. The increase in spending due to these measures is partially compensated by additional revenue from taxes on income as the annual income above which the highest income tax rate applies is not fully indexed to inflation. The widening of the deficit to 1.8% of GDP in 2024 is driven by an increased defence budget, and growing expenditure on interest, social benefits, and public investments. However, full implementation of the government’s investment plans is expected to be held back by, among other factors, continued labour market tightness.
The government deficit is projected to widen further in 2025 to 2.0% of GDP. The widening of the deficit is mainly driven by higher public investments with respect to 2024, as the impact of the labour market bottlenecks is expected to moderate.
Despite the increase in expenditure, continued high nominal GDP growth is projected to contribute to reducing the government debt-to-GDP ratio, from 50.1% in 2022 to 47.1% in 2023 and 46.6% in 2024. It is projected to increase slightly to 46.8% in 2025.