IMF Executive Board Concludes 2016 Article IV Consultation with Kingdom of the Netherlands - Netherlands
April 3, 2017
On March 29, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Netherlands.
The economic recovery is broad based and has been gathering speed. Real growth is forecast to reach 2.1 percent in 2016 owing to strong consumption and investment, reflecting improving confidence and rising house prices, while net exports are expected to slow down due to weak external demand. Unemployment has been rapidly declining against the backdrop of increasing labor supply. Inflation has remained low in the absence of wage pressure. Credit growth bottomed out recently for households, but remains negative for the corporate sector, signaling protracted deleveraging. The banking system has continued to build capital buffers to withstand challenges associated with the low interest rate environment.
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 would pick up along the closing of the output gap. Risks to the outlook are broadly balanced, as weaker than expected growth in the Euro area or uncertainties surrounding Brexit negotiations could negatively impact the economy, while more favorable labor market developments and a faster house price recovery could further support demand.
Credit continues to decline as banks’ balance-sheets shrink, and firms and households continue to deleverage. Large Dutch multinationals generally have substantial cash balances and access to bond markets, and are not a significant source of increased credit growth. In spite of the ECB’s accommodative monetary policy stance, credit has declined further in the Netherlands as banks continued to deleverage in 2016, reacting to both market and regulatory pressures. While credit to households appears to have bottomed out, credit to non-financial corporations has continued to sag this year, contracting by 6 percent (year-over-year) in July. Despite increased competition in credit market, banks continue to charge relatively high interest rates to risky borrowers to cover their relatively high funding costs. Looking ahead, prices for houses—SMEs’ main source of collateral—should gradually return to pre-crisis levels and credit standards should loosen.
The risks to the outlook are tilted slightly to the downside. Foreign demand could end up being weaker than expected in the baseline as many economies in Europe continue to struggle with post-crisis legacies, in particular in the banking sector, and slow growth which weighs on import demand. Also, the uncertainty surrounding the aftermath of the Brexit decision may have larger than expected effects on the Dutch economy given its openness and relatively large share of exports to the U.K. On the other hand, the strength of domestic demand may be underestimated in the baseline, as suggested by fiscal over-performance and a faster than expected improvement in labor market conditions. Housing prices could also recover faster than anticipated spurring a positive feedback loop of higher consumption, higher investment, especially in the construction sector, higher employment and higher demand for housing.
Executive Board Assessment [2]
Executive Directors welcomed the continued recovery of the Dutch economy despite the ongoing deleveraging process in the private sector. Directors noted, however, that risks to the outlook are slightly tilted to the downside and challenges remain, particularly due to uncertainties related to external developments and low productivity growth. Against this backdrop, they concurred that the priority should be to ensure steady and sustainable growth through policies that focus on decreasing leverage, boosting potential output, and safeguarding financial stability.
Many Directors supported staff’s recommendation to use existing fiscal space to support the recovery in the short term, particularly through additional growth-enhancing spending in public R&D and education or through further reducing the tax wedge for workers at the margin of the labor force; the need to comply with the requirements of the Stability and Growth Pact when using the fiscal space was noted. A number of Directors, however, expressed concern that further fiscal stimulus could become procyclical in the near term.
More generally, Directors agreed that, in the medium run, aiming for some fiscal consolidation would help rebuild buffers in a still highly-leveraged economy.
Directors underscored the importance of lessening the financial vulnerability of still highly leveraged households. They encouraged the authorities to build on the important steps taken in the last few years and accelerate the implementation of real-estate-specific macroprudential measures. In addition, Directors noted that the efficiency and flexibility of the housing market could be improved by removing existing subsidies in the social and owner-occupied sectors—thereby promoting the development of the private rental market—and by easing existing regulations that prevent construction from meeting housing demand.
Directors commended the authorities for improving the oversight of the financial sector, and recommended continued vigilance. They agreed that the banking sector is well capitalized and resilient to risks, but faces challenges associated with high leverage, low interest rates, and continued reliance on wholesale funding. Against this backdrop, Directors saw scope for banks to further increase their capital buffers. They also encouraged the authorities to closely monitor banks’ business models and risk management frameworks.
Directors considered that insurers’ financial conditions should also be closely monitored and Pillar 2 measures should be applied if required.
Directors welcomed the labor tax reduction package introduced in 2016, but stressed that a more fundamental overhaul of the tax system is needed. In particular, they noted that future tax reforms should aim to further improve efficiency, reduce the debt bias, and shift the tax burden from labor toward consumption and property.
Directors noted that the increase of flexible work arrangements calls for addressing potential rigidities in the formal employment sector, while ensuring the sustainability of the safety net. In particular, they underscored the need to better harmonize labor protection as well as social benefits and taxation frameworks across various categories of workers.
Directors also commended the authorities’ efforts to integrate refugees into society and the labor market.
Directors welcomed the principles underpinning the government’s pension reform proposals, which are focused on enhancing transparency and ensuring portability, while preserving financial security at retirement.
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Netherlands: Selected Economic Indicators, 2014–18 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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