| Growth is projected to strengthen from 0.9% in 2024 to 1.6% in 2025 and 2026, driven by improving private consumption and higher external demand. Headline inflation will remain elevated, decreasing only slowly from 3.2% in 2024 to 2.5% in 2026 as price pressures in labour-intensive services persist on the back of a tight labour market and continuous strong wage growth. Unemployment will rise slightly, from 3.7% in 2024 to 3.9% in 2026. |
| The fiscal stance is expansionary, following underinvestment of budgeted funds in 2023, with government expenditure on debt interest, social and health care, and defence set to increase over the projection period. While a more prudent fiscal stance is required, the fiscal position is healthy and the government should continue to tackle structural challenges, focusing on investments in the green transition and easing labour shortages through productivity-enhancing measures while also boosting labour supply through reforms to the tax‑benefit system. |
| The economy is improving. |
| GDP increased by 0.8% in the third quarter of 2024, following a 1% pick up in the second quarter. Recent improvements were primarily driven by both private and public consumption, as well as investment. Headline and core inflation both stood at 3.3% in October 2024, as a tight labour market continues to exert upward pressure on costs. Job vacancies per unemployed person are still above pre-pandemic levels, even though bankruptcies have been rising since mid-2022 and surpassed pre-pandemic levels in early 2024, freeing up some labour. Wage rates under collective labour agreements continued to increase and were 6.8% higher in the third quarter of 2024 than a year earlier. Real wage growth exceeded its 2019 level in the first quarter of 2024, and while consumer confidence has improved compared to the beginning of 2024, it remained well below its long-term average in November. Business sentiment has picked up throughout 2024 but remains low amidst persisting and widespread labour shortages across sectors and skill levels. |
| As a small open economy, the Netherlands is sensitive to global trade developments. While recent improvements in trade positively affected output, the current weakness in key EU trading partners has led to a deterioration in manufacturer’s assessments of near-term export conditions. |
| Fiscal policy is expansionary. |
| The fiscal deficit is set to widen from 1.3% of GDP in 2024 to 2.4% of GDP in 2026, in line with government plans for higher social security and health care spending. After underinvestment in budgeted resources in 2023, government spending on infrastructure, nitrogen and climate policy, and defence will increase. The government plans to support low- and middle-income household purchasing power through the introduction of a new reduced tax bracket in income taxation, reducing revenues by about 0.4% of GDP. Additional measures include an increase in the rent allowance and the extra payment for low-income families’ children. These spending increases are partially offset by spending cuts in education, public services and development aid. Overall, the debt ratio is expected to rise from the historically low level of 45.1% of GDP in 2023 to 47.9% in 2026. |
| Growth will strengthen |
| GDP growth is set to be 0.9% in 2024 and rise to 1.6% in 2025 and 2026, supported by improving global trade. Private consumption is expected to strengthen, supported by a boost in real income as wages catch up to past peak inflation. Annual headline inflation will slow from 3.2% in 2024 to 2.7% in 2025 and 2.5% in 2026. Core inflation is expected to remain stickier at above 3% until mid-2025 before slowing to 2.5% in 2026, with strong wage growth continuing to exert upward pressure. Unemployment will increase marginally from 3.7% in 2024 to 3.9% in 2026, as a normalising rate of bankruptcies allows for the reallocation of labour. Investment will recover, supported by gradually declining interest rates. The outlook is surrounded by significant risks. Heightened geopolitical tensions could hit external demand and weigh on export growth. A tighter labour market than in the rest of the European Union could increase domestic inflationary pressures as euro area policy rates are lowered, weighing on price competitiveness, purchasing power and household consumption. On the upside, households could spend a greater share of their excess savings, supporting growth. |
| Reforms are needed to tackle a tight labour market. |
| The Netherlands’ healthy fiscal position allows for a moderately expansionary stance, but spending pressures due to population ageing and significant investment needs for the green transition will arise in the medium term. To increase the share of renewables in the energy mix, the government needs to support investment in the electricity grid. The government should address long-standing structural challenges, focussing on easing labour market pressures and supporting productivity. Simplifying the tax and benefits system and removing distortions towards certain types of investment could ease tensions in the labour market and increase productivity-enhancing investment. A system with fewer allowances and tax credits could offer greater transparency for the net benefits of additional work hours, thereby increasing working hours. Aligning tax rates and social security contributions across contract types for similar jobs could ease transitions into regular employment, improving upskilling opportunities necessary for increased labour productivity. Enhancing digital skills and increasing the adoption of digital technologies could further boost productivity growth. |
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