DNB expects lower economic growth due to new lockdown

In that case, growth in 2023 will be 3.1 percent, the central bank of the Netherlands expects, instead of the 1.7 percent that is now written in pencil. Part of the growth forecast for 2022 would then shift to a year later, DNB believes. The current lockdown will initially last until January 14.

DNB, the central bank of the Netherlands, had just finished forecasts for 2022 and 2023 when the coalition agreement was announced and on top of that came the recent lockdown. The expectations for the Dutch economy are therefore surrounded by uncertainty.

Growth in 2022

In the original forecast, so before the coalition agreement and the lockdown were announced, DNB assumed substantial economic growth of 3.6 percent in 2022 and 1.7 percent in 2023. This would come on top of a growth of 4.5 percent. in 2021. With that growth of 4.5 percent, the contraction of 3.6 percent from last year, when the corona virus struck, would have been fully compensated again.

It is possible that the current lockdown will still remove a small fraction of 0.1 percentage point from the expected growth for 2021, but the great uncertainty mainly applies to next year and beyond.

What if corona measures last longer?

DNB has therefore worked out two alternative scenarios. One requires substantial contact-limiting measures due to corona that will be maintained until the end of 2022. If that is indeed the case, then the economy will only be able to grow by 1.4 percent, DNB now thinks.

What if inflation remains high?

The second alternative scenario created by DNB relates to inflation. This has risen sharply lately. DNB believes that inflation will decrease somewhat, because the effect of higher energy prices will diminish.

But if commodity prices remain high for a long time, and wages are therefore raised, which in turn stimulates inflation (a wage price spiral in jargon), inflation could rise further to around 4 percent in 2022 and in 2023, according to DNB. That is considerably more than the 2.7 percent for 2022 and the 3 percent for 2023, which DNB assumes in the base scenario.

So less growth

This higher inflation will also dampen economic growth, DNB expects: by an average of 1 percentage point. We would then arrive at a growth of about 2.6 percent in 2022 (instead of 3.6 percent) and about 0.7 percent in 2023 instead of 1.7 percent.

To prevent such a wage price spiral, it is also a good idea that wages do not automatically increase in line with inflation everywhere, but only in sectors where this is possible, says DNB director Olaf Sleijpen.

Customized support only

However, DNB is not gloomy about everything. For example, the economy is increasingly adapted to the corona pandemic, says Sleijpen.

He therefore advocates that support for companies that are affected by corona measures become more tailor-made, so specifically aimed at companies that really have no alternatives.

With cutbacks or higher costs

And if corona support for certain sectors takes on a more structural character, it would be good to make that support a permanent part of the government budget, says Sleijpen. That extra expenditure would require budget cuts elsewhere or increase the burden on citizens and businesses, instead of the government deficit widening further, he says.

It is good if the government debt does not rise higher than 60 percent of the gross domestic product (GDP), which the euro countries have agreed with each other, according to Sleijpen.

The new coalition expects a government deficit of 58.4 percent in 2022, which will rise to 60.4 percent in 2025.

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