Three Key Economic Trends Shaping the Dutch Landscape in 2024
Introduction:
With 2023 witnessing a technical recession and moderating inflation rates, the Dutch economy is at a crucial juncture as it steps into 2024. This article outlines three significant trends that will likely define the economic landscape in the Netherlands in the coming year.
- Dutch Economy Bounces Back:
Following a mild recession lasting three quarters, there is optimism that the Dutch economy is on the path to recovery. Forward-looking indicators for business activity are showing improvement, and recent consumer sentiment suggests a positive shift. Notably, retail sales figures from October support the idea that higher wages combined with lower inflation are translating into increased consumer spending. The anticipated growth in purchasing power is expected to extend into 2024, with the government playing a role through measures such as a minimum wage increase and adjustments to old age and welfare benefits.
Despite economic stagnation in 2023, the Dutch economy is projected to grow modestly by 0.7% in 2024. Government spending is expected to be the primary driver of this growth, fueled by demographic factors and policy interventions. However, global economic cooling may limit export development, leading to a contraction in investment. While the recession is ending, the growth rate is likely to remain below the country's long-term potential.
- Labor Market Strain Persists:
The challenges in the Dutch labor market persist, with the earlier economic contraction and below-potential growth impacting employment expectations. Increased bankruptcies and firm exits, especially those deferred during the Covid support program, contribute to a weakening demand for workers. However, the forecast suggests that the unemployment rate is expected to rise moderately to 4.2% in 2024. Despite a decline in employment expectations among businesses, cautious optimism prevails, possibly indicating some labor-hoarding behavior and expectations of a gradual return of demand growth. The government's investment in green initiatives and defense further influences the semi-public sector's role in the labor market.
- Inflation Eases Despite Core Pressures:
In 2024, the Netherlands is likely to experience a reduction in inflation compared to 2023, when the HICP consumer price inflation rate was high at 4.2%. Several factors contribute to this decline, including lower inflation rates in sectors such as food, transport, transport services, hospitality, and education. Despite the termination of the energy price cap, the energy bill is expected to contribute to lowering inflation in 2024, facilitated by tax cuts and lower international wholesale energy prices.
The headline inflation rate is projected to fall to a relatively normal 2% in 2024. However, core inflation, excluding volatile goods like food and energy, will remain relatively high at 3.4%, though it represents a decline from the 6.5% recorded in 2023. The expectation is that a deceleration in wage cost increases will gradually contribute to reducing service inflation in 2024.
Conclusion:
As the Dutch economy navigates the challenges of the previous year, the trends outlined for 2024 present a dynamic landscape. From the expected economic recovery and persistent labor market challenges to evolving inflation dynamics, these trends will shape the decisions of businesses, policymakers, and individuals in the Netherlands throughout the coming year.