Economic activity picking up after slowdown
The Dutch economy slowed down markedly in 2023, with GDP growth reaching just 0.1%. Real GDP contracted over the first three quarters of the year before returning to modest growth in the fourth quarter. High inflation rates eroded households’ disposable incomes, affecting private consumption spending. At the same time, a slowdown in economic activity in the Netherlands’ main trading partners resulted in a decrease in export volumes. Investment proved to be volatile, with a robust first half of the year, followed by negative growth in the second as businesses cut back on their investments.
In 2024, a recovery in real wages is set to support private consumption. Growth is also expected to benefit from an increase in public investment related to the green transition and defence, among others. However, business investment is projected to remain weak due to persisting labour shortages and tight financial conditions. Net trade is set to have a minor negative impact on GDP growth in 2024. Overall, real GDP is forecast to grow by 0.8%.
In 2025, growth is expected to pick up further to 1.5% as solid wage growth and falling inflation continue to support households’ real disposable incomes. In addition, the outlook for business investment and trade is set to improve on the back of easing financial conditions and a stronger external environment.
The labour market remains tight
The labour market remains tight overall but shows signs of easing. While the number of outstanding vacancies is decreasing, it continues to exceed the number of unemployed. Employment growth is also decelerating and the unemployment rate is forecast to gradually pick up to 3.9% in 2024 and 4.0% in 2025. On the back of a tight labour market and surging inflation, nominal wage growth increased substantially to 6.2% in 2023. Wage growth is forecast to remain high in 2024, at 5.9%, before easing to 3.8% in 2025.
Inflation continues to decelerate
HICP inflation came down significantly during 2023, from 7.2% in the first quarter to 0.4% in the fourth quarter. The exceptionally low inflation in the fourth quarter can mainly be attributed to a strong decrease in energy prices. At the beginning of 2024, headline inflation bounced back to around 3% due to a less favourable year-on-year comparison for energy prices. However, it is set to decelerate as the lower energy prices are passed through to other price categories. Inflation excluding energy and food is expected to come down more gradually as services inflation remains more elevated and is supported by strong wage growth. Annual HICP inflation is forecast at 2.5% in 2024 and 2.0% in 2025.
Government deficit to increase in 2024 and remain broadly stable in 2025
In 2023, the government deficit rose to 0.3% of GDP. Windfalls from dividend tax revenue due to anticipation effects as well as underspending on public investment projects have contributed to the low deficit. Budgetary costs for measures to mitigate the impact of high energy prices amounted to 1.0% of GDP in 2023.
In 2024, the government deficit is projected to increase to 2.0% of GDP. On the revenue side, a shortfall in dividend tax revenue amounting to some 0.5% of GDP is expected, reversing the previous year's windfall. The total budgetary cost of measures to mitigate the impact of high energy prices is set to fall to 0.1% of GDP. The only measures remaining in 2024 are reduced excise duties on gasoline and diesel, which are expected to be phased out in 2025. Expenditure on social benefits is projected to increase in 2024 due to the measures taken to improve the purchasing power of low-income households, with a budgetary impact of around 0.2% of GDP. Moreover, commitments to increase military and financial aid to Ukraine are expected to have a budgetary impact of around 0.3% of GDP.
Based on unchanged policies, the government deficit is forecast to increase slightly to 2.1% of GDP in 2025, mainly due to an expected further increase in public investments. Growth in corporate tax revenue is set to normalise at lower rates than those recorded in past years.
Following 46.5% in 2023, the government debt-to-GDP ratio is projected to increase to 47.1% in 2024 and 48.4% in 2025.
