IMF Executive Board Concludes 2018 Article IV Consultation with Kingdom of the Netherlands – Netherlands

On May 23, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Netherlands. [1]

The Netherland’s economic recovery has taken hold. Real growth is forecast to reach 3.1 percent in 2018 owing to robust domestic demand. Private consumption has been supported by rising disposable income and positive wealth effects from increasing house prices. Net exports have proven resilient to global uncertainties, pushing up the already large current account surplus.

Unemployment has continued to decline rapidly, although most of the jobs have been created under temporary contracts or self-employment status. Inflation has been low in the absence of wage growth, which has been lagging productivity gains. Credit growth has been gradually recovering for households, but remains negative for the corporate sector, signaling protracted deleveraging. The banking system has continued to build up capital buffers to withstand challenges associated with the low interest rate environment and new regulatory constraints.

The economy is expected to keep its momentum in the coming years. Domestic consumption and investment are forecast to remain the main drivers of growth, prompting a gradual decline of the current account surplus. Inflation should pick up as the economy reaches its capacity and wages increase. Some important risks loom in the horizon: foreign demand could be dampened by unresolved crisis legacies in EU countries, rising protectionist measures, and uncertain Brexit negotiations. On the upside, improving labor market conditions, positive income developments, and a continued house price recovery would likely continue supporting consumption and investment.

In this favorable environment, the coalition agreement adopted in late 2017 by the new government lays out a broad-based fiscal expansion and an ambitious structural reform agenda. Reforms aim at strengthening the macroprudential toolkit to reduce household indebtedness and reducing duality in the labor market, thereby addressing challenges associated with weak wagegrowth. It also proposes reforming the second pillar of the pension system to promote more transparency and intergenerational fairness, while reducing pro-cyclicality.

Executive Board Assessment [2]

Executive Directors welcomed the broad‑based economic recovery, which was supported by domestic demand, on the backdrop of strong housing prices, and resilient net exports. While unemployment has been rapidly decreasing, Directors noted that wage and inflation developments remained weak. The current account surplus remains large and is expected to only gradually decline over time.

Noting that the risks to the growth projections were tilted to the downside, Directors recommended that economic policies should be focused on further decreasing leverage and boosting potential output, including through measures aimed at improving the housing market, strengthening resilience to financial vulnerabilities, addressing challenges related to labor market duality, and reforming the pension system. Directors supported the authorities’ use of the fiscal space, aimed at boosting potential growth and welcomed the reform plan for international corporate taxation.

Directors agreed with staff on the need to continue lessening household indebtedness through further tightening of macro‑prudential policies in the context of increased house prices and a comprehensive housing market reform. They commended the authorities for accelerating the pace of reduction in mortgage tax relief, and considered that further lowering loan‑to‑value ratios on mortgages would help address financial vulnerabilities.

Directors commended the authorities for enhanced financial sector oversight. While they noted that the banking sector is well capitalized on a risk‑weighted basis, they stressed that a continued buildup of capital buffers remains warranted to cope with challenges associated with high leverage, low interest rates, and significant reliance on wholesale funding. They welcomed the continued close monitoring of financial conditions in the insurance and pension sectors. Directors welcomed the principles laid out in the prospective reform of the second pillar pension system to promote more transparency and intergenerational fairness.

Directors observed that labor market conditions had improved, but noted that employment growth had been mostly in self‑employment and temporary contracts. They supported the authorities’ reforms aimed at making open‑ended contracts more attractive for employers by curtailing excessive rigidity in employment statutes, and discouraging the abuse of flexible work arrangements. Directors supported the authorities’ view to foster increased wage growth in cooperation with social partners.

Compliments of the International Monetary Fund