Dutch economic sentiment improves while consumer pessimism grows

Economic sentiment in the Netherlands improved in February, rising to 100.3 from 99.5 in January, a level close to its historical average and above the value (96.3) for the euro area as a whole, according to the European Commission business and consumer survey published today.

This is consistent with GDP growth at a normal pace. While Dutch manufacturing and retail became more upbeat in February, commercial services were slightly more pessimistic. Retail sentiment improved, especially upon higher expectations for orders and employment, while increasing sentiment in manufacturing was driven by the assessment of the stock of finished products.

Consumer confidence dropped considerably, with February marking the fourth consecutive month of deterioration.

Comparing sentiment indicator levels to a sector’s historical average, it is apparent that (among the aggregated sectors) the construction sector is currently most upbeat. This is likely related to the number of construction permits, which has been rising considerably lately. Industry and commercial service are close to normal sentiment levels, while retail sentiment and consumer confidence are low from a historical perspective.

What really stands out in the survey data is the low consumer confidence level. Yet, the consumer is crucial for our economic outlook as we see household consumption as one of the main drivers of GDP growth in the quarters ahead. We are counting on income outpacing inflation. But consumption growth also requires a consumer who is willing to buy.

While confidence is not at crisis levels, it is more than one standard deviation below its long-term average. Consumers still see the economic climate as negative, even though the Dutch economy left its shallow recession in the second quarter of 2024. Examining the shifts in consumer confidence over the past few months, we observe that the most significant declines were in responses to questions regarding expectations for the economic climate and anticipated price developments over the next 12 months.

While it is challenging to fully understand all the factors influencing consumers' economic assessments, beliefs about prices appear to be particularly significant in explaining the recent low levels of confidence. This is supported by studies from the European Commission and the OECD on European consumers, as well as our own survey among Dutch consumers.

Although expectations regarding their financial situation and the assessment of the next 12 months as a favourable time for large purchases have also deteriorated, these changes have been more modest compared to the declines in economic climate and price expectations. We speculate that recent geopolitical developments may partly explain these changes in consumer confidence, affecting perceptions more than actual willingness to buy. Consider the uncertainty caused by threats of trade tariffs and subsequent announcements of planned changes to US international trade taxes, which have received extensive media coverage.

Consequently, the European Commission’s survey today indicates that the consumer uncertainty index rose in February to its highest level since November 2023, suggesting that consumers find it more challenging to predict their financial situation. While this could potentially make consumers more cautious, it does not necessarily erode (and has not significantly eroded so far) their willingness to buy.

Indeed, the situation is not as dire as the low composite consumer confidence indicator suggests. Consumers feel more positive about their own financial situation compared to the economic climate and are not overly concerned about rising unemployment. This aligns with recent strong contractual wage increases (the latest reading being 5.6% year-on-year), the low unemployment rate of 3.8% in January, and the rise in the number of vacancies in the fourth quarter of 2024 after a three-year decline.

This may also explain why the assessment of the next 12 months as a favourable time for large purchases remains somewhat above historical averages and why household consumption grew in four of the last five quarters. Therefore, we maintain our view that household consumption will continue to grow throughout 2025 (excluding a one-off decline in the first quarter due to car purchases being brought forward to 2024 in anticipation of subsidy terminations), helping GDP return to a more normal annual growth rate this year.