Smooth versus bumpy: differences in growth dynamics in Belgium and the Netherlands

Until the mid-1990s Belgium and the Netherlands remained largely aligned in terms of output growth. However, since then they have shown a more divergent growth pattern as the Netherlands experienced a much more pronounced cycle than Belgium. There are three main explanations.

The Netherlands saw significant equity withdrawals from rising housing prices that only lessened as the real-estate market cooled down at the start of the new millennium, while the dynamic in the Belgian housing market has been much more modest and home equity withdrawal insignificant.

The inflation pressures and labour market tensions that built up during the late 1990s in the Netherlands resulted in high nominal labour cost growth, a substantial loss in international competitiveness and the need for severe wage moderations in the ensuing years, which in turn reinforced the downward part of the cycle. In Belgium, the wage-setting institutions were more geared towards aligning wage developments to those of its neighbours, which prevented large swings in relative competitiveness.

Economic policy was more accommodating in the Netherlands than in Belgium since inflationary pressures mean that real interest rates in the Netherlands were lower, implying a de facto more accommodating monetary stance.

Moreover, fiscal consolidation in Belgium in preparation of the adoption of the euro had a moderating effect on the cyclical upswing, whereas in the Netherlands fiscal policy was somewhat pro-cyclical.