IMF says Dutch Cabinet has the wrong priorities in mind with short-term economic plan

The International Monetary Fund (IMF) has warned of the dangers that the Cabinet’s short-term economic policies could bring to the country. For example, a lot of money is going to supporting the purchasing power of many people with energy support and lower fuel taxes, while according to the UN organization, it would be better for the economy to invest in infrastructure, education, and research, among other things.

Fabian Bornhost, who led an IMF research group visit in the Netherlands last week, has said that he understands the complaints from companies about the unfavorable investment climate in the country. “The level of investment in the Netherlands is low compared to other strong economies. We also see that the extent to which important bottlenecks are addressed affects business confidence,” he said during a press conference.

Two of the most important issues that he feels require more attention are the nitrogen crisis and the overloaded power grid. “These cases are becoming more important to tackle. If this does not happen, then the economy will not be able to grow as much, and the Netherlands will become less resilient to future geopolitical shocks. While we have learned over the past three years that these shocks will occur more often and more intensely. And the Netherlands needs those buffers."

According to the IMF, the Dutch economy is in good state and is clearly well positioned to absorb the uncertainties that are arising due to the global tensions.

Despite this, the organization has lowered the growth expectation for the Netherlands this year to 1.1 percent. This is lower than the 1.4 percent that was predicted after the last calculations in April. “The households’ purchasing power is still on track, but the trade tensions will reduce foreign demand,” the IMF stated in a conclusion of the visit, in which the organization visited the Dutch Central Bank (DNB).

Looking further ahead, the ageing population and climate change threaten to cost the Netherlands a lot. "These changes will put pressure on the current system. That makes it necessary to focus on policy now. The Netherlands now has enough buffers, but there is no reason to sit back," says Bornhorst.

The IMF is expecting Dutch inflation rates to meet the target of 2 percent next year. As a result, the UN organization has, unlike in previous years, no longer included the still above-average price increases as a point of concern in the report on the Dutch economy.

Dutch inflation has been among the highest within the European Union for some time now. The average inflation rate in the EU is close to the 2 percent target. Inflation in the Netherlands rose to 4.1 percent last month, an increase from March when it was at 3.7 percent.

According to Bornhorst, the tight labor market also continues to play a role in the persistently high inflation. Companies have to do their best to retain and attract staff and therefore increase wages considerably, which also causes them to charge higher prices. The increased salaries also lead to more consumer spending, which drives up inflation.

The IMF expects inflation to be 3 percent for this year, compared to 3.3 percent last year. "Wage growth is expected to slow somewhat, based on the most recent collective labor agreements. The tightness on the labor market is also decreasing. Furthermore, geopolitical tensions could limit price increases, because global economic growth is lower, energy prices are falling, and the value of the euro is rising," the IMF concluded after the research visit. Disruptions in the supply chain could fuel inflation again.