Recent developments, outlook, and risks

The Dutch economy has proven to be resilient. Growth surprised positively in the last quarter of 2022, turning out 0.6% compared to the previous quarter after a small contraction in Q3 (-0.2% GDP q-o-q). Based on this preliminary estimate, GDP has grown by 4.5% in 2022 on an annual basis, slightly above staff’s estimate of 4.2%. GDP growth in 2022 was primarily driven by private consumption growth and increased foreign demand, mostly for services. For 2023, growth is expected to slow down, and inflation is expected to decrease to an average of 4.9%, driven by the dissipation of energy inflation, after having peaked in 2022 at 11.5%. However, core inflation is expected to remain high after 2023, due to overcapacity and an extremely tight labor market. At 3.5%, the unemployment rate in December is exceptionally low.

Headline inflation was overestimated in 2022 due to technical reasons. This has been a consequence of a measurement method that frontloaded energy inflation. The current method assumes fully flexible (variable pricing) energy contracts, while in practice many households have fixed-price energy contracts. Under the current metric, energy inflation will soon dissipate after a year of high energy prices, compared to other countries where the pass-through to energy consumption prices was measured more gradually. In January this year, energy inflation was indeed negative in the Netherlands (-3.4%), also because of the energy price cap set by the government that took effect. Statistics Netherlands (CBS) is currently working on an alternative metric based on the actual costs of energy paid. Implementation of the new metric is expected for the second half of the year.

There are currently no signs of a wage-price spiral, although wage growth of new agreements has been high over the past months. Contractual wage growth was 3.8% in December (y-o-y). In January wage growth increased to 4.6%, which coincides with a large number of new agreements that came in effect on January 1^st. Incidentally, collective agreements have been negotiated for percentages higher than 10%. Yet, the overall wage growth has lagged behind inflation significantly. While companies often pass through higher energy and food prices to consumers, automatic wage indexation was ended in 1980s and companies’ stable and comfortable profit margins allow for a certain wage increase in most sectors without adding to price pressures. The current account is expected to stay within a bandwidth of 5–7% of GDP over the next years, according to both authorities and staff estimates.

The authorities broadly agree on the macroeconomic outlook and the main risks to the outlook. The authorities agree that a sharper downturn of the housing market could negatively impact growth through both residential investment and consumption growth via wealth effects. However, on a macrolevel households sustained their pandemic savings rate through 2022, providing them with some buffer to cope with unexpected headwinds. An intensification of Russia’s war against Ukraine and energy security risks are seen as the main downside risks to the outlook. Differences between the authorities and staff in forecast core inflation can be explained mainly by different definitions of core inflation which, for the IMF, includes processed food.

Fiscal policies

A solid fiscal position with low public debt allowed the government to scale up public investment and introduce energy support measures for households. The coalition agreement, which is being implemented in annual budgetary plans, includes a broad investment agenda including in infrastructure, R&D, and climate. The government announced additional discretionary measures to support households with higher energy costs in the fall of 2022. The energy price cap was set at a relatively high price, whilst the cap covers total energy consumption for about 50% of the households (accounting for 83% of total energy consumption). Providing households with predictability about their energy costs has been the main motivation behind this measure. The government is analyzing whether additional support measures targeted at the most vulnerable households may be warranted after 2023. The budgetary impact of the price cap is estimated at 8 billion (about 0.8% of GDP). Since the budget is also impacted by gas prices via the gas revenues received, this provides a natural hedge to the price cap in 2023.

The government intends to cover the budgetary costs of the price cap measure in the next budget, which would also help mitigate inflationary pressures. Regular budget discussions in spring allow for another political discussion on the funding of the price cap. Further measures to better tax capital income can be considered, as well as further measures to reach the government’s set climate mitigation ambitions. The government currently analyzes the options for further climate mitigation measures that are also intended to be presented and discussed in spring.

Financial sector policies

After buoyant house price developments, house prices have started to decline. After years of acceleration, especially in 2020 and 2021, house prices have started to decline in the second half of 2022 and are expected to decline further in 2023 and 2024, by about 3pp a year according to DNB’s December forecast. The lower limit on LTV-ratios helped to significantly reduce the leverage of homeowners over the years, making them less vulnerable to a downturn compared to the GFC. Even a 20% house price decline would result in negative net equity for only 8% of homeowners. The renewed interest in interest-only mortgages experienced in 2021 and 2022 has likely come to a halt following mortgage rate increases since early 2022, although this has yet to be confirmed by data. Banks’ communication to consumers about interest-only mortgages was improved, following the 2017 FSAP recommendation.

The authorities judge the current macro-prudential stance as broadly adequate. The banking sector is well-capitalized, and profitability has increased with rising interest rates. There has not been any significant increase in banks’ non-performing loans so far. The authorities are currently reviewing the methodology and policy of structural systemic risk buffers (O-SII) and have set the sector-wide (releasable) CCyB at 1%, effective as of May 2023, as part of their redesigned policy toward an objective of 2% in a risk-neutral environment. Both this measure and the minimum risk weight floors for mortgage loans introduced in January 2022 provide the sector with a buffer for a housing market and/or cyclical downturn. The risk of large-scale arrears in mortgage debt servicing seems limited however given the high level of mortgages with fixed-rate contracts and long maturities. Moreover, the government’s mortgage guarantee scheme provides certain homeowners protection against potential residual debts.

Pension funds are preparing for a transition towards a Defined Contributions (DC) system that is currently up for approval by the Dutch Senate. The new system provides for a better indexation of pension benefits. On the other hand, benefits will become more sensitive to financial market developments. Scenario analysis, undertaken by DNB and the AFM, points to liquidity risks at pension funds from a financial stability perspective, resulting from margin calls on their derivatives positions. Potential policy recommendations will be discussed in the context of the Dutch Financial Stability Committee.

Structural/housing market policies

Measures have been taken to further reduce labor market duality. The authorities agree on the importance of realigning tax and other incentives, including social protection, across different types of employment to help reduce labor market duality. A mandatory insurance scheme for the self-employed is planned to be implemented by 2029 and the self-employed person’s tax deduction will be reduced significantly in the next years.

Despite overall high participation rates, the high level of parttime workers needs further attention. The Netherlands is a champion in parttime work. While this can be partly explained by expensive child-care services and a high marginal tax rate, it might also have become a socially accepted norm. The government is working on adjusting and increasing the subsidy for child-care services, intending to fund 96% of the costs of daycare for all households in 2025, which helps to keep women in the workforce. More might be needed to increase labor supply, especially given the current labor market tightness.

Affordable housing has been a top priority for the current government. There’s a broad understanding that limited supply is one of the key factors putting upward pressure on house prices. Therefore, the government has announced the building of 900.000 new houses by 2030. Furthermore, the government has recently proposed regulations to take more control of the permit process which often gets protracted by conflicted interests and regulations on a decentralized level. To ensure sufficient affordable rental housing for mid-income households, an extension of price regulation to the private rental market has been announced. Once in place, the government will analyze the potential negative effects of the regulation on the supply of private rental housing.

Climate change

The Dutch government emphasizes that additional climate policy is necessary to achieve the climate goals and significant steps have already been taken. The emission reduction target in the Dutch Climate Law has been increased from 49% emission reduction compared to 1990, to 55% reduction with the government targeting a 60% emission reduction. Towards this end, a climate fund of 35 billion euro has been established. The government is also in the process of making the tax system greener, amongst others by eliminating certain tax exemptions, increasing the national carbon levy for the industry, and increasing taxes on air travel amongst others. The government recognizes that additional measures are necessary on top of the policies resulting from the coalition agreement. Additional policy options are expected mid-March, in time for the yearly (budgetary) decision-making process in spring.

We very much welcome international efforts, including by the Fund, to better calibrate climate policies. In that context, we are pleased to note that our Minister of Finance will be co-chairing the Coalition of Finance Minister for Climate Action starting in April 2023. We also very much welcome the analysis and recommendations on climate adaptation policies in the SIP. The authorities fully agree with the recommendations to focus on actions with large positive externalities and to further strengthen climate adaptation policies by holistically integrating them into long-term planning frameworks. The Dutch Environmental Agency (PBL) already started work on updating the climate change impacts and risks. Regarding infrastructure, stress tests were finalized in 2021–2022 and follow-up discussions are ongoing. The recommendation to update building codes fits in ongoing discussions on resilient building policies.