The Netherlands - A slowing but resilient Dutch economy

Last week, GDP data showed a quarter-on-quarter contraction of 0.7% in 2023Q1, following a 0.4% expansion in Q4 – which was revised downward from 0.6%. This means that Q1 growth for the Netherlands was lower than the eurozone average, which came in at 0.1% qoq. The figures indicate that the external environment of the Netherlands is weakening but that domestic demand is still resilient for now; albeit slowing. Indeed, the trade balance turned negative in Q1 as exports (-1.8% qoq) contracted more than imports (-1.3% qoq). This decline was driven by goods exports as services exports recovered further from the pandemic lows. The drop in private consumption in Germany (the Netherlands’ main export market) by -1.2% qoq in Q1 probably played a role here. The change in inventories reduced overall GDP growth significantly, as companies are further depleting their stocks in the wake of slowing external demand. On the domestic side of the economy, demand has remained resilient for now. Government spending contributed positively to growth. Private consumption stagnated (0% qoq), despite elevated inflation and low consumer confidence. Dutch household spending is supported across all income groups by a still exceptionally tight labour market, accelerating wage growth, and government support to counterweigh the loss in purchasing power. As a result, we expect consumption to remain more resilient over the coming quarters compared to eurozone peers. Finally, fixed investment expanded by 1.1% qoq in Q1.

Based on the above we have lowered our growth forecasts to 0.7% for 2023 and 1.0% for 2024, down from 1.2% and 1.3% respectively. Although the slump in Q1 significantly raises the possibility of a technical recession (two consecutive qoq contractions), we do not expect a prolonged downturn or recession in the Netherlands – the economy will slow down primarily on the back of lower external demand but resilience, especially on the domestic front with a tight labour market, expansive fiscal policy and strong household balance sheets, is still in place (see also Box 1 in this month’s Global View).

Indeed, thus far, households are resilient despite the loss of purchasing power. A significant slump in spending is also unlikely because consumption will remain supported by the energy price cap, while year-on-year wage growth has surpassed the inflation rate and will do so beyond 2023. Tightening of monetary policy will reach peak impact on the economy in H2 of this year. One channel of impact is declines in investment. However, in the near term there are signs that investment activity is still firm – for instance in the industrial sector. Finally, the housing market has turned a corner.

Recent developments in the housing market suggest price falls continued in Q1 2023. Higher mortgage rates have reduced affordability and have cooled housing demand. Buyers, of which many are reluctant to step into a market with falling prices, now prefer mortgages with a shorter fixed-interest period. Reticence amongst investors and nitrogen emission limits are constraining the construction of new housing. In the longer term, housing affordability should improve again due to wage increases. This will support price developments in 2024. We expect housing prices to fall by 6% on average this year, and by 4% in 2024. Due to base effects, this means that the majority of the price adjustments will happen this year.

This article is part of the Global Monthly of May 23