What are the main policy challenges?
Economic growth has fallen more sharply in the Netherlands since 2001 than in most other European countries. Domestic factors that boosted growth in the late 1990s - wealth effects from housing and stock markets and pension fund developments - have since turned around, accentuating the effects of the international business cycle. A number of institutional arrangements - residential zoning laws and tax subsidies for owner occupiers, plus weaknesses in pension fund regulation - have contributed to these developments as well as undermining economic efficiency. Output has thus fallen from 3 per cent above potential in 2000 to 2½ per cent below potential in 2003. While the severe economic downturn has taken its toll on public finances, there has also been a marked deterioration in the structural budget balance. From a longer term perspective, economic performance has also been disappointing in some respects. Trend growth in GDP per capita has slowed to 1½ per cent, reflecting lower growth in the labour force participation rate and in hourly labour productivity. Productivity growth is low both from a historical perspective and by international comparison. The main policy challenges are thus to: i) reform policies that undermine economic efficiency and accentuate cyclical swings in activity; ii) put public finances on a sustainable path; iii) increase labour force participation; and iv) increase productivity growth.
What is the economic outlook?
As regards the strong cyclical volatility, the relative severity of the economic downturn in the Netherlands is attributable to a number of factors that boosted growth in the late 1990s but have since ceased to do so or indeed have turned negative.
Wealth effects from increases in real house prices are estimated to have boosted the annual growth rate by ½ percentage point over 1997-2000, falling to ¼ percentage point over 2001-2003. Stock market wealth effects also boosted the growth rate by ½ percentage point over 1997-2000, while the subsequent decline may have reduced it by a similar amount.
The stock market boom also masked the deteriorating underlying solvency position of pension funds and even encouraged some funds to reduce contribution rates. When stock prices fell, pension funds were obliged to increase contribution rates from below the cost-covering level to above it in order to restore solvency, slowing economic growth in the process.
The boom in the late 1990s also set in motion forces - notably, a loss of competitiveness - to slow the economy and hence bring it back to trend. Initially, this loss was masked by depreciation of the euro, but once it started appreciating, there was a large loss of competitiveness and deterioration in export performance.
Movements in the euro exchange rate have had a greater effect on the Netherlands than most other euro area economies owing to its greater openness and exposure to trade with the United States.
Cost competitiveness and export performance (1)
1. Export performance is defined as the difference between growth in exports and growth in the relavant export markets.
With some of these factors now starting to unwind, the Dutch economy should benefit from the recovery in the world economy. Exports are expected to pick up in the coming months and gather some momentum as the effects of the euro appreciation gradually fade away and as wage moderation leads to a decline in relative unit labour costs. Better sales prospects, the need for modernising equipment after years of shrinking investment, increasing capacity utilisation and low interest rates will help business investment to grow again beginning in the first half of 2004. Private consumption, however, is the weak spot in the outlook. With pension contribution rates rising, real wages stagnating or even falling and no positive housing wealth effects expected, consumption expenditure growth will only resume by the end of 2004 in tandem with improving labour market prospects. GDP growth should rise to slightly above the potential rate (around 2 per cent) and unemployment should stabilise by the beginning of 2005. With output levels remaining far below potential, wage restraint on track and the delayed effects of appreciation of the euro, inflationary pressures will be absent. The main risk to the forecast is of a further appreciation of the euro, which would hamper recovery throughout Europe.
The full edition of the OECD Economic Survey for the Netherlands is available from:
Return to the OECD Economic Survey - Netherlands 2004 homepage
A printer-friendly Policy Brief (pdf format) may also be downloaded. The Policy Brief contains the OECD assessment and recommendations, but does not include all of the charts available from the above pages