The Netherlands Central Bank Statement

Author: IFLR Correspondent | Published: 24 Sep 2019
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Economic growth in the Netherlands is set to slow down. Following growth of 3.0% in 2017 and 2.6% in 2018, Dutch GDP growth is projected at 1.6% for 2019. In 2020 and 2021, growth should be close to potential: 1.5% and 1.4%, respectively.

While the economic momentum is moderating in the Netherlands, the economy will be running at full steam, as the output gap is positive and the labour market is persistently tight. Unemployment is set to remain at an historic low of 3.3% of the labour force throughout 2019, 2020 and 2021.

The lower growth rates are largely driven by a weaker external environment, which will dampen Dutch export growth. The escalated dispute between the United States and China is putting a drag on the world economy with lower trade and heightened policy uncertainty. A further escalation of this dispute poses a risk to projected economic developments. The economic growth will largely rely on domestic spending by the government and households. The government will boost spending, especially in the form of investment. However, businesses are expected to scale back investment in 2020 and 2021, and the cooling of the Dutch housing market is also restraining growth.

House prices are still rising, but at a lower rate than before. While in 2018 prices of existing homes increased by 9%, expectations are that in 2019, price increases will be more moderate. Sales prices in the first quarter of 2019 were 7.9% higher than in the year-earlier period. An annual growth in house prices of around 6% is expected for 2019. While this is below the rates seen in previous years, it still exceeds expected income growth.

Developments in the housing market amplify the cyclical fluctuations in the Dutch economy. The sharp price increases in the housing market have given economic growth a generous boost, as housing investment boomed after 2013. In addition, there is a strong correlation between house price rises and private consumption growth in the Netherlands. Conversely, during the crisis the correction seen in the housing market deepened the economic downturn.

Among other factors, the house price increases seen in recent years are caused by supply lagging behind demand. The scarcity of housing should be remedied by increasing the housing supply, especially in the middle segment of the rental market. Housing production fell sharply during the crisis, causing huge capacity losses, both in the construction industry and in municipal services. The same capacity constraints are now complicating efforts aimed at stepping up house building.

The demand side of the housing market must also be tackled more vigorously. Mortgage interest tax relief and relatively generous loan-to-value (LTV) and loan-to-income (LTI) limits have pushed Dutch households' mortgage indebtedness to high levels by international standards, and the way in which the LTI limit is calculated amplifies price fluctuations. Further reduction of the LTV limit, as well as a review of the system used to determine the LTI limit, is desirable.