The Netherlands - Provincial elections loss is a blow to Coalition plans
The risk to medium-term growth is to the downside, despite near-term strength.
We continue to expect below consensus growth as a Eurozone recession and monetary headwinds suppress external and internal demand
We expect annual growth to slow to 1.2% in 2023 (from 4.5% in 2022)
Recent activity data show risks to our near term view are to the upside. In contrast, risks in the medium term are to the downside, given the banking turmoil and strains on the credit channel
A thumping electoral victory by the BBB is a blow to Coalition plans, possibly intensifying the construction gridlock instigated by binding nitrogen norms
We expect a further cooling of headline inflation but an ongoing broadening of price pressures to core. HICP is expected to average 4.7% in 2023 and 4.1% in 2024
On 15 March Dutch provincial elections were held, which determine the makeup of the senate. The loss for the current coalition proved to be even bigger than expected, with a larger-than-polled win for the new Farmer-Citizen Movement (BBB). The relatively new party, founded four years ago, is expected to become the largest party in the senate, with 17 out of 75 seats. The Coalition, which consists of four parties, lost 10 seats. The main goal of the BBB is to relax the government’s environmental policies, and with their large new mandate, changes to these policies are expected. In our view, this risks further delays to solving the nitrogen crisis, as legally binding nitrogen norms will continue to inhibit construction, mainly of housing and infrastructure. This is likely to derail ambitions of the government regarding the construction of houses and other government investment.
Recent activity data suggest the economy has been resilient moving into 2023. Private consumption declined somewhat in January from the December highs, but remained firm despite the ongoing broadening of inflation. Spending at the start of the year was supported by a number of factors; pension funds have indexed benefits in January by on average 7% (20% of the population receives pensions), the minimum wage – and linked to that social security – increased in January by 10%, boosting purchasing power. Next to that, employment growth is still positive. Fixed tangible investment has not yet shown concrete signs of weakening, despite higher lending costs and tightening credit conditions. These factors mean near term activity may be higher than currently expected. However, signs of a significant weakening of activity over the course of 2023 remain present, with the recent banking turmoil – which risks further dampening the credit channel (see this month’s Global View) – may increase headwinds.
Indeed, we expect growth to slow over the course of 2023, given that: 1) the blow to purchasing power will not be fully offset by government support and wage growth, 2) external demand is cooling, and 3) the impact of monetary policy tightening will be increasingly felt over the course of this year. Thus far, the effects are limited, with modest increases in the number of Dutch firms experiencing financial constraints. However, bigger increases are visible in interest rate sensitive sectors such as construction and real estate. As rate hikes by the ECB are ramped up further (to a peak of 3.75% in June) and higher rates filter through to the economy, these effects will intensify. Despite the expected weakness, however, we continue to expect the Dutch economy to outperform the eurozone throughout the year and grow by 1.2% in 2023 and 1.3% in 2024.