The hidden weaknesses behind Dutch economic growth
The Dutch economy exhibits resilience, with robust growth driven by high-tech sectors; however, underlying challenges signal potential headwinds. Per the full note from ing-think, while the Netherlands has avoided recession and maintained full employment, factors such as labor market tightness and regulatory constraints threaten future growth. The desk highlights that public sector expansion, which has supported this growth, may also limit structural improvements needed for long-term sustainability. Investors should keep an eye on the Dutch growth model's ability to adapt amid these pressures, particularly as strong numbers may mask vulnerabilities.
What the desk is arguing
The Dutch economy has shown remarkable resilience in recent years, with strong GDP growth and full employment masking deeper structural issues. Per the full note from ing-think, the significant contribution of machinery manufacturing and the high-tech industries are crucial to this performance, but they also highlight the risks embedded in the economic framework.
Despite this impressive growth, certain factors are constraining long-term expansion, including regulatory restrictions in the environmental sector and infrastructure bottlenecks. The labor market, although exhibiting growth in supply, remains tight, and commercial sectors are struggling to maintain employment levels. As highlighted, the semi-public sector has accounted for all net job growth, raising concerns about the sustainability of this model moving forward.
Where it sits in our coverage
Our consensus target for the EUR/USD stands at 1.075, with a range of 1.04 to 1.12, reflecting the mix of potential growth and risks outlined. Notable firms include: - jpmorgan with a target of 1.10 for Mar26 - bofa taking a more cautious stance at 1.04 for the same tenor
This desk's view aligns with jpmorgan, suggesting a cautious optimism that may be balanced by bofa's more bearish outlook, indicating differing perspectives on the Dutch economy's sustainability.
How other firms see it
Aligned firms like jpmorgan emphasize a continued strong performance from the Dutch economy, while contrary firms such as bofa reflect skepticism based on the structural weaknesses outlined. The contrasting views highlight a bifurcation in sentiment surrounding Dutch economic health moving into 2024, which is pivotal for market positioning surrounding the EUR/USD.
Investors may also watch the trajectory of Dutch government spending and structural reforms, as these will influence not only local economic conditions but also the broader sentiment around the euro area. The dynamics at play could significantly impact the EUR/USD if the disparities in these forecasts evolve as predicted.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Dutch economy shows resilience but faces underlying structural challenges.
- 02High-tech sectors drive growth but are inadequate for sustainable future expansion.
- 03Labor market tightness and regulatory constraints pose risks to continuing growth.
- 04Investor sentiment may shift based on the outcomes of government policies and market adaptability.
Market implications
With our target at 1.075, watch for developments in Dutch economic policies or labor market changes that may influence sentiment around the EUR/USD. The performance of high-tech sectors will also be crucial in shaping expectations moving forward.
Risks to this view
If the labor market loosens unexpectedly or government regulations are relaxed, this could improve the outlook for the Dutch economy, forcing a reevaluation of the current bearish sentiment encapsulated by **bofa**'s target of 1.04.
Articles The hidden weaknesses behind Dutch economic growth Published 08:06 The Netherlands Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The Dutch economy has proved remarkably resilient in recent years, powered by its high-tech and semi-public sectors. But this success may be a mixed blessing: strong GDP growth and full employment have helped obscure underlying challenges to the country's longer-term growth potential Bert Colijn and Marcel Klok The Dutch economy has proved remarkably resilient in recent years This article was originally published in Dutch on 10 September . The Dutch economy has proved remarkably resilient in recent years.
Despite the pandemic, the energy crisis, trade tensions and wars, it has avoided a broad-based recession and a sharp rise in unemployment, while outperforming many of its eurozone peers. Growth is being powered by a high-tech engine: a large share of economic growth came from machinery manufacturing (including the ASML cluster), ICT and pharmaceuticals. Concerns that Europe is missing the AI boom and remains stuck in old technologies do not apply to the Netherlands.
The government also boosted growth: higher public spending and a larger healthcare and public sector cushioned shocks, but did little or nothing to strengthen structural growth potential. Yesterday’s growth, however, says little about tomorrow’s. The Netherlands still has a strong growth model, but the labour, space, infrastructure and investment needed to expand it further are under pressure.
Despite strong growth in labour supply, the labour market remains tight. The semi-public sector accounted for more than all net employment growth, while employment in commercial sectors declined on balance. Investment is constrained by nitrogen regulations, grid congestion, permitting and labour shortages, while structural productivity gains require sustained investment and consistent policy.
Today’s strong economy may reduce the sense of urgency around the weakened foundations of our growth potential. In a fragmented political landscape, this poses a risk to the implementation of policies aimed at strengthening the Dutch economic engine. The Dutch teflon economy of the 2020s Over the past six and a half years, the Dutch economy has proved remarkably resilient.
The pandemic, the war in Ukraine and 2022 energy crisis, trade tensions and the war in the Middle East have all caused disruption, but none has triggered a deep or prolonged downturn or a significant rise in unemployment. Despite some temporary dips, growth has remained relatively solid, particularly compared with other eurozone economies. Dutch economy grew relatively strongly between 2020 and 2026 Average GDP growth* from Q1 2020 to Q1 2026 relative to Q4 2019, for the 10 largest euro-area economies excluding Ireland *Gross domestic product based on quarterly data, adjusted for seasonal and working-day effects and expressed in constant prices.
Source: Macrobond, ING Research "> *Gross domestic product based on quarterly data, adjusted for seasonal and working-day effects and expressed in constant prices. Source: Macrobond, ING Research This creates the impression that the Netherlands no longer needs to worry about economic growth. ‘Things will work out anyway’ is a sentiment that increasingly surfaces in the economic debate. Historically, however, that view is not always justified.
Just look at the neighbours to the east. Germany’s economic resurgence in the 2000s, sometimes described as a second Wirtschaftswunder, gave the country a sense of economic invincibility. Over the past decade, it has become clear that Germany is vulnerable to high energy prices, competition and weaker demand from China.
That is why this article examines the reasons behind strong Dutch growth this decade and where the vulnerabilities lie. The Netherlands is benefiting strongly from its machinery manufacturing cluster One striking feature of recent strong growth is the enormous acceleration in machinery manufacturing. Chip-making equipment manufacturer ASML plays a dominant role in this sector.
Growth was already strong in the years before the pandemic, and the sector has expanded rapidly since the AI boom began. ASML and the wider semiconductor ecosystem surrounding it have therefore become a key driver of economic growth in recent years. In Brussels, concerns about missing the AI boom are widespread.
In his report on European competitiveness, Mario Draghi warned that Europe is on the cusp of an AI revolution and cannot afford to remain stuck in the technologies of yesterday. For the Netherlands, such concerns are generally misplaced. Through machinery manufacturing, among other channels, the Netherlands is benefiting fully from the boom.
This single sector has accounted for 14% of growth over the past six years. Read more about ASML’s significant contribution to Dutch GDP here . Machinery’s share of growth has increased sharply Industry share of growth in gross value added in the Netherlands* *Based on annual data, at constant 2021 basic prices.
Growth is the annual average over the period compared with the previous year. A share/contribution can be negative if gross value added declined, but all contributions sum to 100%. Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector.
Source: Statistics Netherlands (CBS), ING Research "> *Based on annual data, at constant 2021 basic prices. Growth is the annual average over the period compared with the previous year. A share/contribution can be negative if gross value added declined, but all contributions sum to 100%.
Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector. Source: Statistics Netherlands (CBS), ING Research Pharmaceuticals and digital services are also performing very strongly The pharmaceutical and IT sectors have also been significant drivers of growth over the past six years, contributing 8% and 19%, respectively. Digitalisation continues to strengthen the role of IT, while the pharmaceutical cluster is benefiting from trends including ageing populations and advances in medicine.
Together, these modern, high-tech sectors have made a substantial contribution to the Netherlands’ recent economic success. ICT and pharmaceuticals’ share of growth have also increased sharply Industry share of growth in gross value added in the Netherlands* *Based on annual data, at constant 2021 basic prices. Growth is the annual average over the period compared with the previous year.
A share/contribution can be negative if gross value added declined, but all contributions sum to 100%. Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector. Source: Statistics Netherlands (CBS), ING Research "> *Based on annual data, at constant 2021 basic prices.
Growth is the annual average over the period compared with the previous year. A share/contribution can be negative if gross value added declined, but all contributions sum to 100%. Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector.
Source: Statistics Netherlands (CBS), ING Research A larger (semi-)public sector is also a key driver of growth As the preceding charts show, growth in the Dutch economy has been driven not only by high-tech, but also by the government and the semi-public sector. The economic shocks of recent years have certainly left their mark, but this has largely been absorbed by a sharp rise in public spending. This has provided substantial support to economic growth at a time when uncertainty among consumers and businesses was holding it back.
Support and purchasing power measures have been substantial in recent years Impact of support and purchasing power measures on the Dutch government deficit, % of GDP Source: IMF, ING Research "> Source: IMF, ING Research At the sector level, the (semi-)public sector has become a more significant driver of the Dutch economy. Healthcare has expanded strongly in recent years, alongside considerable growth in government. This marks a clear shift from the pre-pandemic period.
While other European countries have seen similar trends, the expansion of the Dutch (semi-)public sector has been well above average. The (semi-)public sector’s share of growth has also increased significantly Industry share of growth in gross value added in the Netherlands* *Based on annual data, at constant 2021 basic prices. Growth is the annual average over the period compared with the previous year.
A share/contribution can be negative if gross value added declined, but all contributions sum to 100%. Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector. Source: Statistics Netherlands (CBS), ING Research; "> *Based on annual data, at constant 2021 basic prices.
Growth is the annual average over the period compared with the previous year. A share/contribution can be negative if gross value added declined, but all contributions sum to 100%. Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector.
Source: Statistics Netherlands (CBS), ING Research; This is largely because the government has increased spending in recent years. Demand for healthcare is rising as the population ages, greater attention has been paid to public services after years of cutbacks, and additional funds have been deployed during crises to support households and businesses. However, a larger (semi-)public sector puts greater pressure on the welfare state.
Budget-driven growth has not focused strongly on future growth potential At the same time, growth has been driven mainly by government consumption, with public investment, which is crucial to future growth potential, playing a much smaller role. Substantial purchasing-power support has also helped cushion households from recent economic shocks. As a result, much of the additional spending has supported the economy in the short term rather than strengthened its long-term foundations, through measures such as energy bill relief and fuel duty cuts rather than investment in infrastructure.
Government consumption has recently contributed far more to economic growth than government investment Share of expenditure category in expenditure growth in the Netherlands* *Based on annual data, at constant 2021 prices. Growth is the annual average over the period compared with the preceding year. Contributions sum to 100%.
Source: Statistics Netherlands (CBS), ING Research "> *Based on annual data, at constant 2021 prices. Growth is the annual average over the period compared with the preceding year. Contributions sum to 100%.
Source: Statistics Netherlands (CBS), ING Research The Dutch growth engine is running strongly All in all, the Dutch economy has shown remarkable resilience in the 2020s. While many countries suffered prolonged effects from successive shocks, the Netherlands repeatedly rebounded relatively quickly. A significant share of growth came from the successful high-tech sectors and from a rapidly expanding (semi-)public sector.
A strong high-tech sector sounds promising and makes the Netherlands one of Europe’s most modern economies. To maintain that position, however, those sectors need sufficient space and other factors of production to continue growing. Employment growth dominated by the (semi-)public sector and ICT Share of growth in the employed labour force* in the Netherlands by industry compared with 2013 and 2019 *Based on annual data, population aged 15–75.
A share can be negative if employment declined. Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector. Source: Statistics Netherlands (CBS), ING Research; "> *Based on annual data, population aged 15–75.
A share can be negative if employment declined. Other commercial sector is total less industries 21 Pharmaceuticals, 28 Machinery, J Information and communication and O–Q (semi-)public sector. Source: Statistics Netherlands (CBS), ING Research; The Netherlands must continue to maintain the foundations for strong growth Yet, the strong growth of recent years is deceptive, because it distracts from the need to keep improving structural growth.
The Netherlands has, after all, benefited from a strong business climate for decades. This reflects reliable institutions and policies, as well as a well-educated workforce. Its physical infrastructure – including Rotterdam, Schiphol and the road network – and digital infrastructure are also very strong.
Together, these factors make the Netherlands an attractive location for economic activity, from which the country continues to benefit. However, those foundations have recently been eroding. The factors that keep the economy strong over the longer term are being constrained by unpredictable politics, labour shortages, deteriorating infrastructure and bottlenecks such as nitrogen restrictions, grid congestion and permitting.
The right people for growth are hard to find, partly because of strong public-sector demand The Netherlands has recently seen remarkably strong growth in labour supply, yet a historically high share of Dutch companies report being constrained by labour shortages. This share was even higher following the pandemic and remains above the highest levels recorded before 2020. The limited easing of labour market tightness is largely because, on balance, all employment growth in recent years has gone to the (semi-)public sector.
This sector is also expected to absorb much of the growth in labour supply in the coming years. Businesses will therefore continue to compete for a barely expanding pool of workers. People are also working fewer hours per week than before, making it harder for companies to get all the work done.
In addition, many companies struggle to recruit specific skills: 45% of vacancies prove difficult to fill , while almost two-thirds of employers with hard-to-fill vacancies say candidates lack the required skills. The talent shortage looks persistent and will hold back the economy The expanded supply of labour is therefore insufficient to make the labour market significantly less tight, and labour-supply growth is expected to weaken in the coming years. Despite planned cutbacks in central government, the semi-public sector will continue to exert strong demand for labour , particularly because of rising demand for healthcare.
And with population ageing and lower immigration, the scope for broader labour-supply growth appears largely exhausted. It is therefore difficult to see where the hours worked needed for substantial economic growth will come from. The (semi-)public sector accounts for almost 80% of the expected growth in employment Estimated employment in hours worked in the Netherlands: average year-on-year change in 2027-30 (%) and sector contributions (percentage points) CPB Analyse Coalitieakkoord 2026-2030, ING Research estimates "> CPB Analyse Coalitieakkoord 2026-2030, ING Research estimates Productivity growth is currently rapid, but the underlying conditions are a concern Further growth in labour input therefore remains a major challenge for the Dutch market economy.
The hope then is that labour productivity can increase. Labour productivity growth has in fact picked up again recently, after almost a decade of very sluggish growth. A catch-up process began in early 2024, reversing much of the decline of the preceding years.
This is because companies are improving efficiency after a period of strong wage growth and labour market tightness. The decline in the number of self-employed workers may also be a factor. At first sight, this mainly appears to be a catch-up after an exceptional period marked by the pandemic and related measures, as we discussed here previously.
Structurally, labour productivity is determined mainly by the adoption of innovations and investment in capital. Both enable more to be produced with the same number of people. Artificial intelligence (‘AI’) is an appealing innovation that is highly likely to improve productivity.
The Netherlands is well positioned to benefit from AI-driven efficiency gains, as we wrote here previously. Investment in intangible and human capital is needed Developing and successfully deploying new technologies requires skilled people to implement them. Achieving this also requires investment in research and development.
Those underlying conditions need to be maintained. R&D investment in the Netherlands is relatively modest. In an international comparison, the Netherlands has a relatively mediocre level of R&D investment , leaving considerable ground to make up.
This makes future productivity growth vulnerable. As noted earlier, labour shortages are a major constraint on economic growth. The same applies to productivity growth.
These concerns are not confined to the short term: the availability of well-educated staff also looks set to remain problematic over the longer term. Declining educational performance is a warning sign that finding well-qualified staff, particularly for high-value R&D, will remain a structural problem. Dutch educational performance is declining relative to other countries Average PISA*-score for learning performance of 15-year-olds in the Netherlands Source: OECD via Macrobond, calculations by ING Research; *PISA stands for the Programme for International Student Assessment and assesses general knowledge and skills.
A higher score indicates greater knowledge and/or skills. Scores are scaled to an OECD average "> Source: OECD via Macrobond, calculations by ING Research; *PISA stands for the Programme for International Student Assessment and assesses general knowledge and skills. A higher score indicates greater knowledge and/or skills.
Scores are scaled to an OECD average Investment in physical capital as well Investment in the Netherlands is also too weak beyond R&D. Recently, the limits to physical investment have become increasingly apparent because of shortages of space , nitrogen headroom , grid congestion , shifting policy and – there it is again – labour. This is also visible in the data.
Investment has been weak recently, and capital accumulation, particularly in physical assets, has been much weaker in recent years than before. Physical infrastructure, for example, faces a major maintenance backlog. This became very visible recently when the Merwede Bridge was closed to lorries.
Dutch infrastructure is still of good quality, although the Netherlands has begun to slip in the international rankings. This presents a major budgetary challenge: according to the Netherlands Court of Audit , the funding shortfall for maintenance of the main road and waterway networks, among other things, already amounts to €34.5bn for 2024-38. Productivity growth is therefore currently solid, partly because of the recovery from several weak years, but the underlying growth potential remains constrained.
Particularly weaker investment growth in tangible capital goods Growth in gross fixed capital formation in the Netherlands, total and by asset type *Based on annual data, at constant 2021 prices. Growth is the annual average for the period compared with the preceding year. Source: Statistics Netherlands (CBS), ING Research "> *Based on annual data, at constant 2021 prices.
Growth is the annual average for the period compared with the preceding year. Source: Statistics Netherlands (CBS), ING Research Fragmented politics remains a question mark for struc
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