Executive Search in Netherlands – 2017 Outlook

Economy Stable with Steady and Broad-based Growth

GDP growth is projected to remain broad-based and steady at around 2%. Private consumption will benefit from improving labour market conditions. The housing market will strengthen further on the back of low interest rates. Wages are set to accelerate as unemployment continues to decline, while inflation will increase gradually from its low level.

The current account surplus is expected to remain high despite firm domestic demand and lower gas exports. Very accommodative euro area monetary policy is supporting demand. The fiscal policy stance is projected to be broadly neutral. Continuing to improve skills, particularly of immigrants and the long-term unemployed, and better matching skills to jobs, would raise productivity and potential GDP growth while also helping to make growth more inclusive.

The public finances are healthy, which provides room that should be used to finance more growth-friendly spending, notably investment in education and R&D. The tax system can be made more efficient, equitable and environmentally friendly, and preparations for a broad tax reform should be revived. In view of the robust housing market recovery, the reduction of mortgage interest tax relief should be accelerated.

Solid growth is driven by domestic demand

The economy is growing steadily, if not spectacularly, mainly driven by domestic demand. Private consumption is supported by accelerating wages and declining unemployment. The housing market is further recovering as reflected by the strong growth in property prices and residential investment. Business investment is gathering pace as capacity utilisation increases, although the uncertainty following the UK referendum may delay certain projects. Inflation remains subdued.

The labour market is improving. After a prolonged post-crisis weakness, employment is accelerating. The share of flexible contracts and the number of the self-employed keeps rising, which risks intensifying labour market dualism. To mitigate this risk, employment protection of those on permanent contracts should be eased by reducing the cap on severance payments, and generous tax incentives that encourage self-employment should be reviewed.

The fiscal stance is broadly neutral

Very low interest rates are stimulating the housing market and business investment, but are also reducing returns on investment by pension funds, leading to increased contribution rates and lower pension indexation. The public finances are healthy, as the public debt ratio is well below the euro area average and on a firmly declining path.  The deficit is low and heading to zero in the next two years.

The 2017 budget is broadly neutral. The fiscal room should be used to raise growth and inclusivity by investing in higher quality of childcare facilities, more support to on-the-job learning and enhanced training programmes for new immigrants and the long-term unemployed.

Supporting investment in research and development would also enhance long-term growth, while stronger investment in renewable energy and energy efficiency is needed to meet environmental targets. Priority spending could be financed, and the tax system made more effective, by accelerating the reduction in mortgage interest tax relief and phasing out lower VAT rates.

Growth will remain steady

Economic activity is projected to continue growing at a pace close to 2% per year. It will be driven by strong private consumption and investment growth. Inflation will gradually increase as economic slack diminishes and wages accelerate, but it will remain below 2% in 2017 and 2018. As the economy expands, the budget is expected to be in balance in both 2017 and 2018.

The current account surplus will decline further because of strong domestic demand and shrinking gas exports, but it will remain large. The main downside risk is that uncertainties following the UK referendum weigh more than expected on business investment and international trade.

The Netherlands is more exposed to Brexit than other European countries due to its strong trade and financial links with the United Kingdom and its position as a commercial hub. Still, it has ample policy space to cushion the impact of a shock. On the upside, private consumption could be stronger than projected if households fully translate their rapid gains in real income into higher spending

To Summarize

The “grand coalition” government of the pro-business Liberals (VVD) and the centre-left Labour Party (PvdA) is unlikely to return after the general election in March 2017. Strong support for the far-right Party for Freedom (PVV) is contributing to increasing political fragmentation. The economic recovery has definitively taken hold, with growth estimated at 2% for the second consecutive year in 2016 and 1.7% on average in 2017-21. Domestic demand will stay strong but external risks are rising.