The Netherlands - Households reluctant to spend real wage gains

The second calculation of Dutch GDP confirmed that the Dutch economy grew by 1% q/q in Q2, and growth in Q1 was also unrevised at -0.3%. The underlying picture stayed the same, with the increase in GDP driven by rising goods exports, largely stemming from the export-oriented Dutch industrial sector which compensated a weak first quarter. Government consumption and investment also contributed positively to growth, but to a lesser extent. The second calculation of GDP is accompanied by the underlying distribution of investment. A packed public investment agenda of the government was the main driver of the increase, while private investment declined. We think that this strong growth in Q2 finds no continuation in the subsequent quarters. High interest rates, weakness in manufacturing and reluctant consumers keep growth down. Growth will pick up next year when rates are cut further, global trade picks up, and consumer demand increases. We expect growth to average 0.6% in 2024 and 1.3% in 2025.

Households have been reluctant to spend their real income gains. Similar to the European story in the headline piece, Dutch real incomes have generally been rising. While services spending continues to perform well (although marginally hampered by bad weather during Q2), goods consumption is lagging behind. Surveys continue to indicate that households currently prioritize saving in order to profit from the high interest rates, with the savings rate exceeding pre-pandemic levels in Q2 of this year. These high interest rates also cause households to borrow less. The bulk of Dutch borrowing from households happens through mortgages, and these declined sharply when rates were increased. This amplified the general trend that started in 2013 with households paying off their mortgages more than in the past due to regulatory changes that have reduced the attractiveness of interest-only mortgages. The pandemic, the energy crisis and restrictive rates appear to have sped up the process, with the mortgage debt as share of GDP reaching a 22 year low in Q2 24. Given real income growth, gradually rising consumer confidence, and a pickup in new mortgage lending, we pencil in an increase in household spending for the rest of the year.

It has been a busy few weeks in Dutch politics with the presentation of the 2025 budget at ‘Prinsjesdag’ and the announcement of the new cabinet’s first term plans last week. Overall, the budget for next year seems to favour short- term spending over longer term investments. The main topics are migration, the ambition to drastically increase the housing supply, and purchasing power relief via for instance lower mandatory healthcare contributions and an additional tax bracket to decrease the burden on middle income households. At the same time, policy on longer-term trends (labour market tightness, ageing) and challenges (reaching climate goals, reducing nitrogen emissions, weak productivity trend) facing the Dutch economy is either not concrete or absent. With the new plans, we expect GDP growth to be slightly higher in 2025, although the impact of the policy package is limited. At the start of the cabinet, public finances are in a good shape. In the past two years the budget deficit has been limited and the debt ratio is far from the 60% norm at around 40%. However, the direction is one of further deterioration, with high budget deficits and a rising debt ratio.