Press Release No. 14/552

Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with the Netherlands

December 5, 2014

On December 3, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with the Netherlands.

The Dutch economy continues to improve, supported by exports, rising house prices, and improving sentiment. Exports are rising on expanding global trade, but consumption remains sluggish as indebted households continue to save. The external current account surplus now exceeds 10 percent of GDP, led by an improving trade balance. Labor slack and the large output gap have pushed down core inflation, raising real interest rates. Following a decline of 27 percent in real terms, housing prices have gradually increased this year, halting the decline in household wealth. Household leverage, however, remains high, concentrated mainly among younger cohorts.

On this basis, growth is expected to reach 0.8 percent this year before rising gradually to 1.2 percent in 2015, supported by rising exports and a modest recovery in housing prices. Investment is projected to remain subdued due to weak domestic demand. The risks to the outlook are on the downside. Near term risks stem from the euro area weakness and geopolitical spillovers, while medium-term growth prospects are overshadowed by the large household debt. Lower energy prices or a faster pickup in housing prices could lift growth.

Executive Board Assessment²

Executive Directors welcomed the continued economic recovery and the pickup in exports and house prices. Directors noted nevertheless that consumption is still sluggish, held down by high household indebtedness and weak incomes, while inflation is still low. In light of these developments and the elevated current account surplus, accommodative macroeconomic policies would be important to boost domestic demand and growth, while also facilitating external rebalancing. Directors called on the authorities to build on recent progress to ensure orderly deleveraging of households, reform the tax and pension systems, and advance broader structural reforms to improve the housing and labor markets, productivity, and potential growth.

Directors emphasized that further repair of household balance sheets is needed to sustain a more robust recovery. They recommended steps to assist the heavily indebted young borrowers, including by facilitating a reprofiling of underwater mortgages, out-of-court debt workouts, and intergenerational transfers to pay down mortgage debt. Directors noted that reducing pension contributions for younger generations could also be considered as part of a broader reform, while safeguarding the soundness of the pension system.

Directors considered it important that banks have strong capital and liquidity buffers to underpin the recovery. They looked forward to the completion of national arrangements for resolution and backstopping in support of euro area institutional reforms for the banking sector. Directors also saw merit in setting ambitious medium-term targets for further reducing the maximum loan-to-value ratios and mortgage interest deductibility, while carefully taking into account the stability and broader developments in the economy.

Directors welcomed the government’s comprehensive reform of the housing market to remove remaining distortions and restore confidence. They supported steps to deregulate the private rental market and scale back public support for the social housing sector. Continued reforms to the social housing corporations are needed to further reduce distortions in the rental market.

Directors broadly supported a neutral fiscal position and a focus on structural targets. They agreed that maintaining a structural balance should remain the medium-term goal, although a few saw scope for a more expansionary stance to prop up growth in the near term. Directors noted that more frequently updated trend forecasts in the context of the Netherlands’ medium-term budget framework would help strengthen predictability and responsiveness of fiscal policy to shocks. A number of Directors also supported the authorities’ commitment to maintain the fiscal rules under the Stability and Growth Pact. Directors welcomed the planned reform of the tax system, noting that consideration could be given to options to promote equity financing, reduce the labor tax wedge, and simplify the value-added tax.

Directors highlighted the role of small- and medium-size enterprises (SMEs) in promoting employment and growth. They called for continued efforts to enhance the availability of credit for SMEs, including by improving the quality and sharing of credit information and developing alternative financing sources.