Netherlands: Risk Assessment
Country Risk Rating
Business Climate Rating
- Port activity (Rotterdam is Europe’s number-one port)
- Dense network of SMEs working with large groups
- Diversified exports and external accounts in surplus
- Attractive: high quality infrastructure and good living standards
- Exposure to the European economy: exports to the United Kingdom generate 4% of the country’s value added
- Household wealth concentrated in housing and pension funds, which are not very liquid
- Banks dependent on wholesale financing (loans/deposits = 136%) and the real estate sector
- Ageing population; second pillar of the pension system under pressure
- Labour market duality: prevalence of precarious work, especially among young people, and part-time work
Growth driven by consumption and expansionary fiscal policy
Growth will be down but still robust in 2019, with consumption the main contributor, ahead of investment. Household consumption (44% of GDP) will increase again, but at a slower pace. On the one hand, unemployment is expected to fall further (to 3.6%) while disposable income will rise more rapidly, following more favorable collective bargaining agreements and lower income taxes. On the other hand, inflation will be boosted by the hike in the reduced VAT rate from 6% to 9% on January 1, 2019 and the increase in energy taxation. The wealth effect linked to home values is set to fade as price increases moderate. Public consumption (24% of GDP) will continue to grow vigorously, supported by the expansionary fiscal policy contained in the agenda of the coalition government formed in September 2017. The health, education, and defense sectors will be the primary beneficiaries. Investment (21% of GDP) could lose some of its spark. Companies, although still benefiting from favorable financial conditions and facing high capacity utilization rates, are feeling less confident.
The same is true for households, which could translate into reduced interest in house purchases. House prices have risen sharply since the low point of 2013, significantly outpacing income growth, and are above the peak of 2008. However, the increase is currently concentrated in the largest cities (Amsterdam, Rotterdam, Utrecht and The Hague) and is mainly due to the shortage of new and social housing, the rent ceiling, and tax incentives to purchase. Household debt, although still high (200% of net disposable income as of November 2018 according to Eurostat), has declined, particularly in terms of its real estate share.
All sectors are expected to remain on a positive trend, except gas development, which is causing earthquakes in the north and is set to end in 2030. The favorable macroeconomic environment is reflected in the low number of business failures, including in trade and construction. However, Coface expects a 2% increase in failures in 2019.
Government balance and current account in surplus
With trade in goods and services accounting for more than 150% of GDP, the Dutch economy is very open. It mainly supplies agri-food products (plants, flowers, dairy products, meat, vegetables), chemicals, medicines and medical equipment, refined petroleum, aluminum, packaging and turbines. Services, including transport, logistics and tourism, make up one quarter of exports. Although import growth could exceed export growth, the trade surplus is still expected to reach 9% of GDP in 2019. However, a hard Brexit would be likely to affect performances, as exports to the United Kingdom account for 8% of the total. Industry – but also wholesale trade and transport, through re-export – would be affected. Re-exporting, linked to the country’s role as Western Europe’s maritime gateway, accounts for two-fifths of the surplus. This activity focuses mainly on petroleum products, as well as electronic and computer equipment. With other items close to equilibrium, the trade surplus shapes the current account balance. The balance of the financial account moves erratically, but is typically negative due to Dutch investments abroad allowed by the recurring current account surplus. Reflecting this, the country has a net external asset position equivalent to about 60% of GDP.
Despite the country’s accommodative and somewhat pro-cyclical fiscal policy, the small overall fiscal surplus will continue. The revenue generated by growth is used to offset the reduction in gas royalties, reduce the tax burden and increase expenditure. However, when adjusted for the favorable impact of the economic situation, the deficit is just balanced out. Nevertheless, this is sufficient to obtain debt relief.
A four-party center-right coalition with a narrow majority
Seven months after the parliamentary elections, Prime Minister Mark Rutte was successfully able to form his third government in October 2017. This coalition is comprised of his own Liberal Party, the Volkspartij voor Vrijheid en Democratie, the progressive Democraten 66 Party and two Christian parties: the centrist Christen-Democratisch Appèl Party and the more conservative Christenunie Party. The coalition has a majority of just one seat in each of the two chambers of Parliament. It could be challenged in the Senate, which will be renewed at the end of May 2019 based on voting by the provincial assemblies, whose own members will appointed by direct elections held in March 2019.