The Dutch economy is set to grow by 1.1% in 2025, with uncertainty and trade tensions expected to keep growth muted at around 1% a year in the following two years, the Dutch central bank said on Friday.

The modest growth will be mainly supported by private consumption and government spending, the bank said in its latest spring forecast. Inflation is expected to gradually fall, but will remain higher than in the rest of the euro area.

The bank has also prepared two alternative scenarios to reflect economic uncertainties. If trade tensions ease, growth would be slightly higher, but an escalation could cause the economy to slow sharply and come to a standstill next year, the bank said.

These scenarios underline the “sensitivity of the open Dutch economy to international trade tensions and the associated uncertainty”, the bank said.

Inflation in the Netherlands is expected to fall below 3% in 2025, due to the global economic slowdown, lower energy prices and a stronger euro, which makes imports cheaper. Domestic factors such as a cooling economy and slowing wage growth will also contribute to lower inflation.

However, the projections still assume a freeze on rents in the social housing sector, which is no longer going ahead. As a result, inflation will be slightly higher this year and in 2026.

House prices are expected to rise by over 7% in 2025, mainly due to mainly due to the increase in borrowing capacity resulting from higher wages, with persistent tightness in the housing market also playing a role, the bank said.

Lower economic growth will lead to a decline in tax revenues, while spending on social security and healthcare is expected to rise, causing public finances to deteriorate.

In 2025, the budget deficit is forecast to approach the European limit of 3% of GDP, and to exceed this limit in 2026.

This will leave the next government with limited fiscal space, making the budget vulnerable to unexpected setbacks, the bank said.