Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with the Netherlands.
The Netherlands was more resilient than its peers during and after the pandemic. Reflecting the prevalence of telecommuting and a strong fiscal response, the Dutch economy experienced a less severe recession followed by a more robust recovery than in the euro area. Real GDP grew by 4.9 percent in 2021, surpassing its pre-pandemic level, as private consumption staged a vibrant recovery boosted by the release of accumulated savings and a strong labor market. By end-2022, inflation had eased after a record high in September, but remained elevated, largely driven by energy prices. The labor market is tight with a low unemployment rate and high vacancies, although wages have not picked up strongly so far. Overall, the economy appears to be overheating.
Russia's invasion of Ukraine is posing new challenges, but the Netherlands has suffered a smaller decline in the terms of trade compared to the rest of the euro area. The current account surplus is expected to have declined to 5.5 percent of GDP in 2022, from 7.2 percent of GDP in 2021, mainly driven by deteriorating terms of trade The government has taken several measures to address the rising cost of living, and higher public gas revenues and the strong post-pandemic growth have strengthened the fiscal balance. The financial cycle has started to moderate, accompanied by rapid cooling of a richly valued housing market.
Growth is projected to slow to 0.6 percent in 2023 from 4.2 percent in 2022, as high inflation weighs on consumption, external demand wanes, and financial conditions tighten. Over the medium term, growth will be underpinned by public investment and reforms. Headline inflation is expected to moderate in 2023 with the activation of the energy price ceiling, while core inflation is projected to peak in 2023 at about 7.3 percent. The fiscal deficit is projected to increase to 2.8 percent of GDP in 2023, mainly reflecting government measures to cushion the impact of high energy prices and the economic slowdown. However, the Dutch fiscal position remains strong, with the public debt to GDP ratio expected to remain below 50 percent over the medium term.
Executive Board Assessment[2]
Executive Directors agreed with the thrust of the staff appraisal. They took positive note that the Dutch economy showed impressive resilience during and after the pandemic, supported by a strong policy response. Nevertheless, the energy shock caused by Russia's invasion of Ukraine, elevated inflation, and tighter financial conditions, as well as lower external demand and a cooling housing market, pose challenges.
Directors considered that a non-expansionary or modestly contractionary fiscal stance is called for in 2023 to help monetary policy fight high inflation amid a tight labor market. They stressed that fiscal policy should remain flexible, given high uncertainty. While commending the authorities for using their fiscal space to cushion the impact of high energy prices, they recommended better targeting to protect public finances from high volatility in international energy prices and to help price signals incentivize energy saving. In this context, some Directors acknowledged the authorities' view regarding the cost and implementation challenges of some targeted policies. Directors welcomed the authorities' intention to explore additional measures to offset the budgetary cost of the price cap and make the support more targeted.
Directors commended the authorities for taking measures to enhance energy security and fight climate change. Boosting investment in clean energy will also enhance energy security while contributing to the green transition. They welcomed the authorities' commitment to enhance climate policies and encouraged integrating climate adaptation in long-term planning frameworks.
Directors took positive note that Dutch financial institutions are resilient, with considerable capital buffers. Nonetheless, they underscored the need to continue to closely monitor financial sector developments given higher risks stemming from the energy crisis and tighter financial conditions. The recent flagging house price momentum has also heightened vulnerabilities. In this context, Directors welcomed the increase in the counter-cyclical capital buffer, but cautioned that a pro-cyclical stance should be avoided given high uncertainty. To fully address vulnerabilities among Non-Bank Financial Institutions (NBFIs) and mitigate the risk of tensions on Liability-Driven Investment Funds, Directors urged the authorities to continue to closely monitor NBFIs, work toward closing data gaps, and improve the supervision of these institutions, including by contributing to international efforts in this area.
Directors agreed that the Netherlands should continue to use its ample fiscal space to invest in its medium-term challenges with a view to enhancing economic and social resilience, while also contributing to external rebalancing. They welcomed spending and policies, including under the National Recovery and Resilience Plan, to advance the green and digital transitions and to tackle structural challenges in housing, labor markets, capital taxation, and the education system, as well as support R&D. Upskilling and policies to improve female labor participation will be particularly important.
It is expected that the next Article IV consultation with the Netherlands will be held on the standard 12-month cycle.
[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]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
The Netherlands: Selected Economic Indicators, 2021–2024 (Percent change, unless otherwise indicated) |
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