The Netherlands - Disinflation takes longer due to rents and wages

The Dutch economy grew by 1% qoq in the second quarter, surpassing both our and consensus expectations. Growth was primarily driven by increasing exports and, to a lesser extent, government consumption. The contraction in the first quarter was revised up from -0.5% q/q to -0.3% q/q. In terms of growth, Q2 was the mirror image of Q1, with net exports contributing positively by 0.8pp after a decline in Q1 (-0.7pp). Private consumption fell following the strong expansion in Q1. The expansion in exports was largely fuelled by the export-oriented Dutch industrial sector, which retraced some of the losses born in Q1. On balance, export volumes are roughly unchanged in the first half of the year. Considering the weak industrial sentiment in the broader eurozone, the outlook for the Dutch industrial sector remains fragile. Quarterly figures have shown high volatility, with larger-than-average adjustments compared to the past five years. Looking at the bigger picture, the Dutch economy grew moderately in the first half of the year (+0.7% compared to 2023Q4). This aligns with our expectation of below-trend growth for 2024 as a whole, given the macroeconomic environment of weak external demand – particularly from key trading partner Germany – restrictive interest rates, and domestic constraints such as the tight labour market and the electricity grid, which continue to hamper activity. We expect continued positive q/q growth in the second half of 2024, with an average growth of 0.6% for 2024 and 1.3% for 2025.

Surprisingly, private consumption declined in Q1, while we expected an expansion due to easing inflation and high wage growth. However, Dutch households appear reluctant to spend their real wage gains. The savings rate remains high, and surveys indicate that households currently prioritize saving, to profit from the high interest rates. Other factors contributing to the decline in consumption include bad weather during Q2 which dampened services spending, the discontinuation of government support (such as the energy lump-sum payment), and unequal distribution of wage growth, with some households having already caught up in purchasing power while others might not have yet. This is all reflected in the consumer confidence index, which is on a decline again since the start of 2024.

Wage growth accelerated again in June and July, with July’s rise largely due to the minimum wage increase. While some upward wage pressure persists, many CLAs have already seen inflation compensation. This removes an important driver of recent strong wage growth. The tight labour market does give workers more bargaining power. On balance, wage growth is expected to have peaked, but will stay high for the rest of the year. This puts upward pressure on inflation, particularly in labour-intensive services. In July, inflation came in higher, mainly driven by higher housing rent indexation. This led to an upward adjustment of our services inflation forecasts for the coming 11 months. Additionally, the delayed transmission of the excise tax on tobacco played a role. All in all, we think services will be the key driver of inflation in the coming months. We have revised our inflation forecasts to reflect these developments. We expect the average HICP to come out at 3.1% this year, and 2.8% next year; staying above the 2% target of the ECB.