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Netherlands Economy

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After a strong performance in the 1990s, which brought unemployment to below 3%, the Dutch economy struggled through 2002 and 2003, plagued by relatively high costs and weak domestic demand. GDP growth recovered in 2006 and peaked at 3.5% in 2007. The global financial crisis has hit the Netherlands hard since fall 2008; the Dutch economy entered recession in the fourth quarter of 2008, but annual GDP growth that year was still 2.1%. In contrast, GDP is expected to shrink by 4.75% in 2009 and by 0.5% in 2010 due to slowing international trade--exports are expected to drop by 16.25% in 2009--and decreasing private consumption. In 2010, the increasing budget deficit (expected to be 6.7% of GDP) and unemployment (expected to be 9.5%) are causes for serious concern.

The government has launched three economic stimulus packages since November 2008. The first package was worth about $8.3 billion, the second consisted mainly of government guarantees to stimulate lending and exports, and the third was worth $9 billion, bringing the total value of the stimulus measures to $17.3 billion, or approximately 2% of GDP. A key element of the packages is an agreement among stakeholders that the Dutch Government will not cut its stimulus spending before 2011, and then only if the economy has recovered sufficiently. The state finances have further deteriorated due to government interventions in the financial sector, including the nationalization of the Dutch activities of ABN Amro/Fortis Bank, and capital injections to ING and other financial institutions whose balance sheets were compromised by U.S. mortgage-backed securities and other toxic assets.

Private consumption in the Netherlands, which had grown by 2.1% in 2007, continued to increase by 1.8% in 2008. The unemployment rate, which had previously dropped from 4.5% in 2007 to 3.9% in 2008, is projected to increase to 5.5% in 2009 and 9.5% in 2010 as a result of the global economic downturn. After a drop in the early 2000s, business investment (excluding the housing sector) staged a recovery in 2005-2006. This upward trend peaked in 2008 with an increase of 10.4% but is expected to reverse course in the coming two years, with investment forecast to decline by 14.75% in 2009 and by 13.0% in 2010.

Before the onset of the financial crisis, many firms in the Netherlands cited a loss of competitiveness as a major impediment to growth as unit labor costs outpaced those of their major competitors, including within the euro area. Smaller wage increases codified in collective bargaining agreements before growth accelerated in 2006 helped Dutch firms stay competitive during this period. However, an increasing labor shortage resulted in higher wage demands in the second half of 2007 and into 2008, with the average wage increasing by 3.3%. The pace of job growth reached 10-year highs in 2007, but it fell sharply in late 2008 as fallout from the financial crisis constricted demand. Inflation ranged from 1.1% to 1.7% between 2004 and 2007, reaching its peak in 2008 at 2.5%. The projected inflation rate for 2009 is 1.0%.

The Netherlands was one of the first EU member states to qualify for the Economic and Monetary Union (EMU). Traditionally, Dutch fiscal policy sought to strike a balance between further reductions in public spending and lower tax and social security contributions. During the first half of the current decade, the government struggled to keep the budget deficit within the limit of 3% of GDP set by the EUs Growth and Stability Pact. The government achieved a budget surplus of 0.6% in 2006 and 0.7% in 2007. Despite the financial crisis, it managed to create a budget surplus of 0.9% in 2008, but this is expected to change dramatically in 2009 as a result of increased government spending on stimulus packages, unemployment benefits, and financial sector bailouts. The government is now expecting a budget deficit of 4.1% of GDP in 2009 and 6.7% in 2010, thus exceeding the EUs limit.

Information by U.S. Department of State

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