Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Kingdom of the Netherlands–the Netherlands and endorsed the staff appraisal without a meeting.
The economy has cooled, but signs of overheating remain. After two years of strong recovery, growth decelerated in 2023, reflecting the energy shock, tighter financial conditions, and a slowdown in key trading partners, particularly Germany. Still, core inflation remains elevated, reflecting a tight labor market, robust wage growth, and healthy profit margins.
Growth is expected to regain momentum in 2024, driven by higher private consumption and external demand. High interest rates will weigh on business and residential investment. Growth in the medium term will be underpinned by public investment and reforms, including from the Recovery and Resilience Plan (RRP), but ageing will have offsetting effects. Amid high uncertainty, downside risks dominate, including from a more severe housing market correction, a sharper slowdown in trading partner growth, deeper geo-economic fragmentation, and geopolitical tensions. Higher core inflation could become persistent if higher wages lead to second-round effects.
Executive Board Assessment[2]
In concluding the 2024 Article IV Consultation with the Netherlands, Executive Directors endorsed staff's appraisal, as follows:
While growth has slowed, the Dutch economy continues to show important resilience. After 2 years of strong recovery, growth decelerated in 2023, reflecting the energy shock, tighter financial conditions, and weaker external demand. Growth is projected to increase gradually in 2024 and 2025, driven by improved household purchasing power from lower inflation and stronger external demand. Inflation should continue to moderate. Amid high uncertainty, downside risks dominate, including from a possible housing market correction, a sharper slowdown in trading partner growth, geopolitical tensions, and deeper geo-economic fragmentation. The external position in 2023 is assessed to have been stronger than the level implied by fundamentals and desirable policies.
The 2024 budget is moderately expansionary. This mostly reflects higher spending on social transfers, defense, and public investment. Social-support measures are generally well-targeted, but the extension of reduced excise duties is not—the phase-out this year is therefore welcome. Efforts to reduce implicit fuel subsidies are also ongoing and welcome.
In the near term, fiscal policy should balance support for inflation reduction with downside risks to growth. Given the higher cost of underestimating core inflation persistence, adopting a non-expansionary fiscal stance is warranted. While revenue overperformance and some underspending may in the end deliver the desired stance, proactively identifying and implementing deficit-reducing measures would send a stronger signal. A good way to achieve this is through unwinding untargeted energy measures and rationalizing fossil fuel subsidies. Given high uncertainty, fiscal policy should be agile and flexible if risks materialize.
Given rising pressures from medium-to-long term fiscal challenges, adjustment will be needed to stabilize debt and retain strong buffers. The current public debt/GDP ratio is low, and debt is sustainable. However, significant pressures need to be addressed over the medium term. Staff support the authorities' objective to stabilize medium-term debt at its 2028 level. To this end, the required adjustment should be of high quality, not be achieved by lower overall investment spending, but should protect or ideally increase investment spending on key medium-term challenges—climate, labor markets, housing, and education. Structural constraints to investment implementation should be addressed to reduce policy uncertainty.
Structural reforms are needed to support fiscal sustainability. On pensions, linking the retirement age to longer life expectancy is an important instrument. On healthcare, consideration should be given to a combination of efficiency gains, adjustments of the basic policy package, and higher co-payments that could generate savings while mitigating risks and supporting solidarity. On climate, tilting the balance away from fossil-fuel subsidies towards higher carbon pricing would help achieve climate goals efficiently while supporting fiscal sustainability and allowing for more targeted social spending. Streamlining tax expenditures would also help safeguard sustainability. Decisive actions in these areas will ensure policy continuity and predictability.
The financial sector is generally resilient to adverse scenarios, although risks are elevated and warrant continued monitoring. The main risks stem from high household and corporate debt, real estate, NBFIs, and climate change. The 2023 FSAP recommends further adjustments to borrower-based measures; adapting supervisory approaches to a rapidly changing market environment; equipping supervisory authorities with necessary resources, access to technologies, analytical tools, and granular data; and ensuring operational readiness of resolution plans and crisis preparedness and management.
Ambitious climate goals appear achievable. Measures to invest in clean energy and enhance energy security are commendable. Staff welcomes the authorities' commitment to enhance climate mitigation and transition policies and policies for climate change adaptation.
Additional structural reforms would help enhance economic and social resilience. Efforts to tackle structural challenges in labor markets and advance digital transition are welcome. Further progress in reducing labor market duality would increase labor participation and productivity. Addressing labor and skill shortages calls for incentivizing part-time workers to increase hours worked, strengthening the framework for self-employed workers, promoting training and labor mobility towards priority sectors (green transition, digitalization, health), and measures to speed up adopting of new technology (including AI), while optimizing international labor, where needed. Investment in digitalization will help attenuate labor shortages.
The Netherlands: Selected Economic Indicators, 2022–25 (Percent change, unless otherwise indicated) |
||||
2022 |
2023 |
2024 |
2025 |
|
Est. |
Proj. |
Proj. |
||
National accounts (percent change) |
||||
Gross domestic product |
4.3 |
0.1 |
0.6 |
1.3 |
Private consumption |
6.5 |
0.4 |
0.5 |
1.3 |
Public consumption |
1.6 |
3.1 |
2.8 |
2.0 |
Gross fixed investment |
1.8 |
1.5 |
-1.1 |
1.5 |
Total domestic demand |
3.7 |
0.8 |
1.2 |
1.7 |
Exports of goods and nonfactor services |
4.5 |
-1.3 |
0.2 |
2.3 |
Imports of goods and nonfactor services |
3.8 |
-0.8 |
0.8 |
3.0 |
Net foreign balance 1/ |
1.0 |
-0.6 |
-0.5 |
-0.2 |
Output gap (percent of potential output) |
2.0 |
0.4 |
-0.4 |
-0.6 |
Prices, wages, and employment |
||||
Consumer price index (HICP) |
11.6 |
4.1 |
2.7 |
2.1 |
GDP deflator |
5.5 |
7.7 |
1.9 |
2.2 |
Hourly compensation (manufacturing) |
5.4 |
5.9 |
5.5 |
3.7 |
Unit labor costs (manufacturing) |
-6.2 |
3.9 |
3.5 |
1.7 |
Employment (percent) |
||||
Unemployment rate (ILO definition) |
3.5 |
3.6 |
3.9 |
4.2 |
NAIRU |
5.2 |
5.0 |
5.0 |
5.0 |
External trade (percent of GDP) |
||||
Merchandise balance |
7.7 |
8.8 |
7.2 |
6.8 |
Current account balance |
9.3 |
10.2 |
9.1 |
8.8 |
General government accounts (percent of GDP) |
||||
Revenue |
43.4 |
43.0 |
43.0 |
43.2 |
Expenditure |
43.5 |
44.1 |
45.0 |
45.3 |
Net lending/borrowing |
-0.1 |
-1.1 |
-2.0 |
-2.2 |
Primary balance |
0.3 |
-0.5 |
-1.3 |
-1.4 |
Structural balance 2/ |
0.6 |
-0.7 |
-1.7 |
-1.8 |
Structural primary balance 2/ |
1.2 |
0.0 |
-1.0 |
-0.9 |
General government gross debt |
50.1 |
47.2 |
47.7 |
48.2 |
Sources: Dutch Official Publications, IFS, and IMF staff calculations. 1/ Contribution to GDP growth. 2/ In percent of potential GDP. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] Management has determined it meets the established criteria as set out in Board Decision No. 15207 (12/74); (i) there are no acute or significant risks, or general policy issues requiring a Board discussion; (ii) policies or circumstances are unlikely to have significant regional or global impact in the near term; and (iii) the use of Fund resources is not under discussion or anticipated.
