## 10. Household Consumption and Real GDP ## Source details **Canonical URL:** [10. Household Consumption and Real GDP](https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021255-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2021/english/wpiea2021255-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2021/english/wpiea2021255-print-pdf.pdf.json) --- ### I. Introduction — scope and limits - Uses financial transactions and balance sheet data for major institutional sectors through 2020Q4 to document evolution of imbalances, explore vulnerabilities, and consider macroeconomic implications. - Limitations: - Sectoral financial balance sheet data do not include non-financial assets and off-balance-sheet exposures. - Aggregate sector data may mask within-sector differences and pockets of vulnerability. - Key contextual observation: - The Netherlands exhibits extraordinarily large gross financial assets and liabilities in firms, households, and financial intermediaries. ### II. Aggregate financial balance sheets — scale and composition - Key facts and magnitudes: - Gross financial assets and liabilities exceed "more than 20 times GDP". - Expansion began in the early 2000s, peaked in 2017, and declined moderately relative to GDP thereafter; both assets and liabilities remained stable as a share of GDP in 2020. - The financial sector is the largest holder of gross financial assets and liabilities and is the main contributor to balance-sheet expansion since the early 2000s. - The Netherlands moved from a net debtor position of about 100 percent of GDP to a net creditor position of around 110 percent of GDP over the past 20 years. - At end-2020, the Netherlands' net financial claims on the rest of the world reached 111 percent of GDP. - Sectoral net positions: - Households are the sector with the largest net financial creditor position. - NFCs (non-financial corporations) and government have net financial debtor positions. - The financial sector’s gross assets and liabilities are roughly balanced over time. ### III. Financial and non-financial corporations — drivers and pandemic effects - Financial sector: - Expansion of gross financial stocks primarily reflects a substantial increase in equity positions. - The size of financial sector balance sheets (assets plus liabilities) increased by "more than thirteen hundred percentage points" of GDP over the past 20 years. - More than half of that increase ("seven hundred percentage points") is explained by rising equity positions. - Despite valuation losses in 2020Q1, financial corporations’ equity positions recovered and grew through 2020. - Role of multinational corporation (MNC) activity and SFIs: - The rise in equity positions reflects the increasing weight of FDI in the Netherlands' international investment position. - SFIs (special financial institutions) in the Netherlands held "more than 60 percent of the cross-border FDI till 2019". - SFIs grew very fast through the end of the euro area crisis, stabilized from 2014, and then "dropped markedly in 2020". - SFIs typically intermediate investment originating in a foreign country and channeled via the Netherlands to a third country and are less involved in domestic economic activities. - Non-financial corporations (NFCs): - NFC equity liabilities fell by almost "100 percent of GDP" from the early 2000s to 2008, increasing NFCs' net financial assets by "more than 100 percent of GDP". - Since the GFC, assets and liabilities of NFCs increased by "more than 130 percent of GDP", while net financial asset positions remained stable. - Rising equity positions led to a considerable decline in average leverage (debt liabilities as percent of equity); notably, the NFC leverage ratio did not rise during the pandemic. - Pandemic-period flows and positions (2019Q4–2020Q4): - Financial firms’ currency and deposits on both asset and liability sides increased by "more than 30 percent of GDP" in 2020. - Financial sector lending (loans) declined marginally while holdings of debt securities increased, reflecting purchases of government bonds issued to finance emergency support. - NFCs’ loan liabilities decreased in the pandemic; NFC sector net financial worth declined by "about 8 percent of GDP" in 2020. - Aggregate sectoral information suggests corporates and the financial sector shifted toward market financing during the pandemic; within-sector heterogeneity (including MNCs and large firms) remains an important unknown. - Cross-border reallocation episode: - After U.S. tax reform and Dutch corporate tax measures, inward and outward FDI stocks were reduced together by "about 130 percent of GDP" during 2017 and 2018 — about "70 percent of GDP" on the asset side and "60 percent of GDP" on the liability side — with more than 80 percent of the declines in SPVs. ### IV. Households — balance sheets, consumption, and housing dynamics - Household financial positions and pensions: - Household pension assets at end-2019 were "about 210 percent of GDP". - Household pension assets continued to increase in 2020 by "about 30 percent of GDP". - Household net financial wealth stood at "276 percent of GDP" at the end of 2020, "35 percent of GDP higher than the end-2019 level". - The Dutch pension system is dominated by occupational defined benefit (DB) schemes; pension funds’ liabilities are calculated as the present discounted value of promised future benefits using risk-free interest rates. - Declining interest rates increased the present value of pension liabilities, contributing materially to rising household net financial assets. - Consumption and saving patterns: - Despite rising financial wealth, household real consumption increased only marginally over the past twenty years; at end-2019 household consumption was "only five percent higher than the level at the beginning of 2000" and equaled the pre-GFC peak. - Household consumption declined by "about seven percent" in 2020 despite the further increase in net financial wealth. - Real GDP per capita grew faster than the euro area average, while consumption growth lagged many European peers. - Household savings remained high; high mortgage payments and the interaction of tax incentives have constrained consumption. - Housing and debt: - Homeownership supported by debt is very high due to shortage in the middle-range private rental market and a debt-bias in the tax system (including generous mortgage interest deductibility). - High mortgage debt and mortgage payments likely dampen household consumption and contribute to high household savings. - Residential investment contributed to domestic demand more than private consumption but is more volatile and thus may increase economic cyclicality. - Mechanisms linking pensions, interest rates, and consumption: - An overlapping-generations (OLG) model with three cohorts suggests that when interest rates decline: - Young households tend to increase consumption (substitution effect). - Middle-aged households tend to reduce consumption (income effect). - With a large middle-aged cohort (baby boomers), aggregate consumption can decline when interest rates fall. - Lower interest rates reduce returns on pension assets; to maintain guaranteed future pension income, pension contribution rates need to increase, which can further depress consumption for young and middle-aged households. - During the post-crisis period many pension funds increased contribution rates or suspended indexation, likely contributing to subdued consumption. - Rising self-employment and opting out of the second pillar may reflect pressures from high contribution rates and employers’ desire to contain labor costs. ### V. Policy-relevant findings and recommendations - Findings: - Large gross financial assets and liabilities are concentrated in the financial sector, while households own substantial net financial wealth. - MNC and SFI activities are the dominant drivers of cross-border equity positions and much of the financial-sector balance-sheet expansion; these large positions have so far not created major domestic financial stability problems but create exposure to external shocks via trade and investment linkages. - Household long balance sheets, high pension entitlements, and mortgage debt have been associated with depressed consumption and more volatile real estate investment, potentially exacerbating the cyclicality of the economy. - Valuation gains to pension wealth during the pandemic should not be expected to support sustained post-pandemic consumption recovery via textbook wealth effects, especially given DB scheme features and contribution dynamics. - Policy recommendations and implications: - The agreed pension reform—moving from a defined-benefit model towards modalities with capitalization features tempered by some risk sharing—is likely to change how aggregate private consumption responds to wealth and interest-rate changes, although effects are uncertain until details and implementation. - Additional measures to reduce debt biases in the tax system and to foster the supply of rental homes would help moderate vulnerabilities associated with household consumption and debt gradually over time, enhancing macroeconomic stability. ### VI. Conclusion — synthesis - The Netherlands is characterized by very large private-sector financial balance sheets: enormous gross positions in the financial sector and large net financial wealth in households. - MNC-related activities (including SFIs) have driven much of the expansion in financial-sector and NFC balance sheets; these positions have not so far led to major financial stability risks domestically but do pose exposure to external shocks via integration in global value chains. - Household balance-sheet features (large pension entitlements, high mortgage debt, tax biases, and pension contribution dynamics) appear to have contributed to subdued consumption growth and greater volatility via residential investment. - Structural reforms in pension design, tax treatment of housing debt, and measures to increase rental supply would help rebalance consumption patterns and reduce macroeconomic vulnerabilities over time. ### ANNEX I. EXTERNAL IMBALANCES OF THE DUTCH ECONOMY — sectoral linkages and OLG model - Sectoral Financial Linkages – All Assets: - Bubble-chart depiction: each sector’s bubble reflects the size of their total assets; connecting lines show size of direct exposures; line color represents assets of one sector to another. RoW represents the rest of the world. Source data: CBS and IMF staff calculations. - Overlapping Generations Model — household optimization (equations and constraints preserved as in source): - Utility maximization and budget constraints presented (equations (1) and (2) as in source). - Pension regulatory requirement shown in equation (3); d is the regulatory (real) discount rate, and r_p is the return on pension investment; both are positively correlated with r, and CR is the minimum coverage ratio. - CRRA utility function (equation (4)) and first-order conditions (equation (5)) are specified. - Consumption as shares of wage derived (equation (6)) — algebraic expressions preserved as in source. - Calibration and parameter choices (following Ciurila et al. 2020): - θ = 2 - β = 0.98 - Minimum coverage ratio (CR) = 1.05 - Return on pension investment: r_p = r + 2 - Pension discount rate schedule and assumptions: - Discount rate schedule (equation (7)) and assumption: nominal discount rate would stay between 2 and 4 percent, and the long-term inflation rate is about 2 percent. - Behavioral and policy implications: - When interest rates decline: - Young households increase consumption (substitution effect). - Middle-aged households reduce consumption (income effect). - If pension funds’ coverage ratios fall to the minimum: - Pension funds need to raise contribution rates to maintain replacement rates, reducing disposable income and consumption for young and middle-aged households. *Source: IMF staff chapter "10. Household Consumption and Real GDP" from wpiea2021255-print-pdf.* ### References ________________________________________________________________21 ### References ________________________________________________________________21 ### Figures - 1. Selected European Countries: Gross Financial Assets and Liabilities by Sector _________4 - 2. Gross Financial Assets and Liabilities by Sector _________________________________5 - 3. Net Financial Assets and Liabilities by Sector ___________________________________6 - 4. Gross Financial Assets and Liabilities - Financial Corporations _____________________7 - 5. FDI Held by SFIs and Non-SFIs ______________________________________________8 - 6. Gross Financial Assets and Liabilities - Non-Financial Corporations _________________8 - 7. Non-Financial Corporation Leverage __________________________________________9 - 8. Changes in Financial Assets and Liabilities in 2020 _____________________________10 *Source: wpiea2021255-print-pdf - References ________________________________________________________________21* ### 10. Household Consumption and Real GDP _____________________________________13 ### 10. Household Consumption and Real GDP ### I. Introduction — scope and limits - Uses financial transactions and balance sheet data for major institutional sectors through 2020Q4 to document evolution of imbalances, explore vulnerabilities, and consider macroeconomic implications. - Limitations noted: sectoral financial balance sheet data do not include non-financial assets and off-balance-sheet exposures; aggregate sector data may mask within-sector differences and pockets of vulnerability. - Key contextual observation: - The Netherlands exhibits extraordinarily large gross financial assets and liabilities in firms, households, and financial intermediaries. ### II. Aggregate financial balance sheets — scale and composition - Key facts and magnitudes: - Gross financial assets and liabilities exceed "more than 20 times GDP". - Expansion began in the early 2000s, peaked in 2017, and declined moderately relative to GDP thereafter; both assets and liabilities remained stable as a share of GDP in 2020. - The financial sector is the largest holder of gross financial assets and liabilities and is the main contributor to balance-sheet expansion since the early 2000s. - The Netherlands moved from a net debtor position of about 100 percent of GDP to a net creditor position of around 110 percent of GDP over the past 20 years. - At end-2020, the Netherlands' net financial claims on the rest of the world reached 111 percent of GDP. - Sectoral net positions: - Households are the sector with the largest net financial creditor position. - NFCs (non-financial corporations) and government have net financial debtor positions. - The financial sector’s gross assets and liabilities are roughly balanced over time. ### III. Financial and non-financial corporations — drivers and pandemic effects - Financial sector: - The expansion of gross financial stocks primarily reflects a substantial increase in equity positions. - The size of financial sector balance sheets (assets plus liabilities) increased by "more than thirteen hundred percentage points" of GDP over the past 20 years. - More than half of that increase ("seven hundred percentage points") is explained by rising equity positions. - Despite valuation losses in 2020Q1, financial corporations’ equity positions recovered and grew through 2020. - Role of multinational corporation (MNC) activity and SFIs: - The rise in equity positions reflects the increasing weight of FDI in the Netherlands' international investment position. - SFIs (special financial institutions) in the Netherlands held "more than 60 percent of the cross-border FDI till 2019". - SFIs grew very fast through the end of the euro area crisis, stabilized from 2014, and then "dropped markedly in 2020". - SFIs typically intermediate investment originating in a foreign country and channeled via the Netherlands to a third country and are less involved in domestic economic activities. - Non-financial corporations (NFCs): - NFC equity liabilities fell by almost "100 percent of GDP" from the early 2000s to 2008, increasing NFCs' net financial assets by "more than 100 percent of GDP". - Since the GFC, assets and liabilities of NFCs increased by "more than 130 percent of GDP", while net financial asset positions remained stable. - Rising equity positions led to a considerable decline in average leverage (debt liabilities as percent of equity); notably, the NFC leverage ratio did not rise during the pandemic. - Pandemic-period flows and positions (2019Q4–2020Q4): - Financial firms’ currency and deposits on both asset and liability sides increased by "more than 30 percent of GDP" in 2020. - Financial sector lending (loans) declined marginally while holdings of debt securities increased, reflecting purchases of government bonds issued to finance emergency support. - NFCs’ loan liabilities decreased in the pandemic; NFC sector net financial worth declined by "about 8 percent of GDP" in 2020. - Aggregate sectoral information suggests corporates and the financial sector shifted toward market financing during the pandemic; within-sector heterogeneity (including MNCs and large firms) remains an important unknown. - Cross-border reallocation episode: - After U.S. tax reform and Dutch corporate tax measures, inward and outward FDI stocks were reduced together by "about 130 percent of GDP" during 2017 and 2018 — about "70 percent of GDP" on the asset side and "60 percent of GDP" on the liability side — with more than 80 percent of the declines in SPVs. ### IV. Households — balance sheets, consumption, and housing dynamics - Household financial positions and pensions: - Household pension assets at end-2019 were "about 210 percent of GDP". - Household pension assets continued to increase in 2020 by "about 30 percent of GDP". - Household net financial wealth stood at "276 percent of GDP" at the end of 2020, "35 percent of GDP higher than the end-2019 level". - The Dutch pension system is dominated by occupational defined benefit (DB) schemes; pension funds’ liabilities are calculated as the present discounted value of promised future benefits using risk-free interest rates. - Declining interest rates increased the present value of pension liabilities, contributing materially to rising household net financial assets. - Consumption and saving patterns: - Despite rising financial wealth, household real consumption increased only marginally over the past twenty years; at end-2019 household consumption was "only five percent higher than the level at the beginning of 2000" and equaled the pre-GFC peak. - Household consumption declined by "about seven percent" in 2020 despite the further increase in net financial wealth. - Real GDP per capita grew faster than the euro area average, while consumption growth lagged many European peers. - Household savings remained high; high mortgage payments and the interaction of tax incentives have constrained consumption. - Housing and debt: - Homeownership supported by debt is very high due to shortage in the middle-range private rental market and a debt-bias in the tax system (including generous mortgage interest deductibility). - High mortgage debt and mortgage payments likely dampen household consumption and contribute to high household savings. - Residential investment contributed to domestic demand more than private consumption but is more volatile and thus may increase economic cyclicality. - Mechanisms linking pensions, interest rates, and consumption: - An overlapping-generations (OLG) model with three cohorts suggests that when interest rates decline: - Young households tend to increase consumption (substitution effect). - Middle-aged households tend to reduce consumption (income effect). - With a large middle-aged cohort (baby boomers), aggregate consumption can decline when interest rates fall. - Lower interest rates reduce returns on pension assets; to maintain guaranteed future pension income, pension contribution rates need to increase, which can further depress consumption for young and middle-aged households. - During the post-crisis period many pension funds increased contribution rates or suspended indexation, likely contributing to subdued consumption. - Rising self-employment and opting out of the second pillar may reflect pressures from high contribution rates and employers’ desire to contain labor costs. ### V. Policy-relevant findings and recommendations - Findings: - Large gross financial assets and liabilities are concentrated in the financial sector, while households own substantial net financial wealth. - MNC and SFI activities are the dominant drivers of cross-border equity positions and much of the financial-sector balance-sheet expansion; these large positions have so far not created major domestic financial stability problems but create exposure to external shocks via trade and investment linkages. - Household long balance sheets, high pension entitlements, and mortgage debt have been associated with depressed consumption and more volatile real estate investment, potentially exacerbating the cyclicality of the economy. - Valuation gains to pension wealth during the pandemic should not be expected to support sustained post-pandemic consumption recovery via textbook wealth effects, especially given DB scheme features and contribution dynamics. - Policy recommendations and implications highlighted in the text: - The agreed pension reform—moving from a defined-benefit model towards modalities with capitalization features tempered by some risk sharing—is likely to change how aggregate private consumption responds to wealth and interest-rate changes, although effects are uncertain until details and implementation. - Additional measures to reduce debt biases in the tax system and to foster the supply of rental homes would help moderate vulnerabilities associated with household consumption and debt gradually over time, enhancing macroeconomic stability. ### VI. Conclusion — synthesis - The Netherlands is characterized by very large private-sector financial balance sheets: enormous gross positions in the financial sector and large net financial wealth in households. - MNC-related activities (including SFIs) have driven much of the expansion in financial-sector and NFC balance sheets; these positions have not so far led to major financial stability risks domestically but do pose exposure to external shocks via integration in global value chains. - Household balance-sheet features (large pension entitlements, high mortgage debt, tax biases, and pension contribution dynamics) appear to have contributed to subdued consumption growth and greater volatility via residential investment. - Structural reforms in pension design, tax treatment of housing debt, and measures to increase rental supply would help rebalance consumption patterns and reduce macroeconomic vulnerabilities over time. *Source: IMF staff chapter "10. Household Consumption and Real GDP" from wpiea2021255-print-pdf.* ### ANNEX I. EXTERNAL IMBALANCES OF THE DUTCH ECONOMY ### ANNEX I. EXTERNAL IMBALANCES OF THE DUTCH ECONOMY ### Sectoral Financial Linkages – All Assets - Figure: Netherlands: Sectoral Financial Linkages – All Assets (bubble chart description) - Each sector’s bubble reflects the size of their total assets. - The width of the lines connecting sectors demonstrates the size of their direct exposures. - The line’s color represents the assets of one sector to another. - RoW represents the rest of the world. - Source data: CBS and IMF staff calculations. ### Overlapping Generations Model — Household Optimization - Household expected lifetime utility to be maximized (equation numbering preserved as in source): - Equation (1): 123 2 12 3 , , max( )()() CC C UCUCUCββ +× + × - Budget and constraints (equation (2)): - 11 221 32 (1) . .(1)(1) (1) CSW st CSWr S CWrS α α λ + ≤−   + ≤− ++   ≤ ++  - Economic assumptions and household choices: - Individuals work in the first two periods, earning wage W and contributing α share of wage to pension, save S with the rate of return r, and receive pension income with a replacement rate of λ. - Pension funds are subject to a regulatory requirement (equation (3)): - 2 2 (1)2 (1)2 12 (1) pp WW rWrWWCRW dd λλ ααα λ  + ++ + ≥+ +  ++  - Where d is the regulatory (real) discount rate, and r_p is the return on pension investment; both are positively correlated with r, and CR is the minimum coverage ratio. - Uniform pension accrual is assumed. ### Utility Specification and First-Order Conditions - CRRA utility function (equation (4)): - 1 (). 1 c Uc θ θ − = − - First-order conditions for the household (equation (5)): - 12 23 ()(1)() ()(1)() . UCrUC UCrUC β β ′′ =+×× ′′ =+×× - Consumption as shares of wage (equation (6)) — expressions preserved as in source: - [] [][] [] [] [] [] [] [] 1 12 2 1 2 12 2 2 3 12 2 (1) ( 2) (1) (1)(1) (1)(1) (1) ( 2) (1) (1)(1) (1)(1) (1) ( 2) (1) (1)(1) (1)(1) C rr W r rrr C rr r W r rrr C rr r W r rrr θθ θ θθ θ θα ββ λα β ββ λα β ββ λα β ββ +− + + = + ++ + + + +− + + =×+ + ++ + + + +− + + =×+ + ++ + + + ### Calibration and Parameter Choices - Following Ciurila et al. 2020: - θ = 2 - β = 0.98 - Minimum coverage ratio (CR) = 1.05 - Return on pension investment: r_p = r + 2 (pension investment return is higher than return on personal savings by 2) - Pension discount rate schedule (equation (7)) and assumptions: - 00 04. 2 24 if r r difr if r ≤   =<≤   >  - Assumptions: nominal discount rate would stay between 2 and 4 percent, and the long-term inflation rate is about 2 percent. ### Behavioral Results and Pension Fund Policy Implications (text chart description) - Interest rate effects on consumption by age group: - When interest rate declines: - Young households will increase their consumption since the substitution effect dominates. - Middle-aged households would reduce their consumption since the income effect dominates as they are closer to retirement. - Coverage ratio dynamics and policy responses: - If coverage ratios of pension funds are above the minimum requirement: - Both contribution rate and replacement rate could be maintained. - If coverage ratios reach the minimum level: - Pension funds need to raise the contribution rate to maintain the replacement rate. - Both young and middle-aged households would reduce their consumption due to lower disposable income. ### Evolution of Dutch Pension Funds - Figure: Netherlands: Pension Funds (chart referenced; no numerical series provided in supplied content). *Source: wpiea2021255-print-pdf - ANNEX I. EXTERNAL IMBALANCES OF THE DUTCH ECONOMY (CBS and IMF staff calculations; equations, parameter values, and text as provided in the source).* --- _Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021255-print-pdf.pdf_