Not everyone benefiting from Dutch prosperity, DNB president says

“We see that while the Dutch economy is doing quite well, it is not working well enough for some groups in society,” De Nederlandsche Bank president Klaas Knot said on Thursday when presenting the DNB’s annual report. He also outlined some challenges facing the Dutch economy.

Despite sluggish economic growth, the Dutch economy is still running above capacity and escaped a deep recession despite the pandemic and high inflation. Inflation - “The biggest headache over the past two years,” according to Knot - has dropped to 2.7 percent and will continue to fall to 2.2 percent next year - very near to the European Central Bank’s target of 2 percent. Inflation has also been falling steadily in the eurozone and should reach 2 percent by 2024. Knot expects that the ECB will lower its interest rates during the course of this year.

The Netherlands also seems to have avoided the spike in unemployment and fall in house prices that typically come with slower economic growth. Unemployment is still low at 3.6 percent, and home prices are climbing again.

“However, our economy also faces significant, structural challenges: in the labor market and in the housing market, and when it comes to dealing with our limited physical space and ensuring our living environment remains healthy. And despite our great collective prosperity, also by international standards, many households are struggling,” according to Knot.

Underlying inequalities, especially in the housing market and labor market, are fueling inequalities in society and need to be addressed, Knot said. Young people are hardly able to find an affordable home in the Netherlands, either as homeowners or tenants.

And in recent years, working people have gotten a smaller and smaller piece of the economic pie. The business community has benefited significantly for years, but wages have not risen at the same pace. And the labor market has grown too flexible. Freelancers are often vulnerable with few buffers. The pandemic, followed by the energy crisis, has resulted in many households running into problems.

According to Knot, the biggest issue is that the Netherlands is running into the limits of its capacity. “In the labor market, in the housing market, but also in our infrastructure: the power grid where demand is sometimes too high, and where supply is sometimes too high, our overcrowded motorways and trains during rush hour. Or environmental and climate limits: carbon emissions and nitrogen pollution.”

The government will have to make some tough choices on what to tackle first, because it is impossible to resolve scarcity everywhere simultaneously. “What can help here is to ensure that all forms of economic activity are charged at their true cost and phase out activities that currently take place below that cost. This implies setting a real price for energy consumption, carbon emissions, and nitrogen pollution, as well as paying at least the statutory minimum wage for labor. Continuing to tolerate the opposite will inhibit much-needed productivity growth, which is ultimately the only source of sustainable prosperity.”

Tackling these issues will cost a lot of money, and it is vital that the government keeps its finances in order. Knot urged the current outgoing Cabinet and the next government not to let its deficit rise above 2 percent.