Strong economic recovery, despite resurgence of pandemic

The lifting of the containment measures led to a strong rebound in household spending last spring. The global upturn in economic activity was so fast and convincing, however, that production chains have been unable to keep pace with the recovery in demand. From early 2021 goods production was increasingly constrained by shortages of materials and long delivery times. The Dutch economy consequently reached its capacity limits soon after the 2020 coronavirus recession. The extent to which the pandemic can be brought under control remains an uncertain and determining factor for the economic outlook. The same applies to the new coalition agreement, which has not been included in this projection.

To a far greater extent than usual, the macroeconomic figures in this projection conceal the underlying differences among businesses and institutions. Some businesses and workers are still being severely hit by the ongoing pandemic and the renewed measures, for example in the hospitality and cultural sectors, leaving them facing greater uncertainty and poorer prospects.

The labour market became very tight again soon after the coronavirus recession. Unemployment rose rapidly to 4.6% of the labour force in 2020 but has averaged 3.3% in 2021. The unemployment rate will rise slightly from next year but is set to remain low (3.4% in 2022 and 3.5% in 2023). Some businesses are still having to deal with substantial revenue losses, however, due to the containment measures, while in other sectors the economic recovery is leading to growing staff shortages and pressure for higher wage settlements. Negotiated wage growth in the private sector is expected to average 2.0% in 2021. The projection assumes that wage growth will rise slowly to 2.4% in 2022 and 2.6% in 2023.

 Higher inflation

Inflation has risen sharply during the year and will average 2.7% in 2021. This is due in particular to the unexpectedly rapid rise in energy prices. Inflation is set to remain high in the years ahead, averaging 3.0% in 2022 and 2.9% in 2023. Temporary government measures (cuts in energy taxes and tuition fees) will push projected inflation downwards in 2022 and upwards in 2023. Inflation is also being driven by the continued tight labour market, leading to higher wages and hence to rising unit labour costs. The transmission between wages and prices is not currently strong enough to trigger an undesirable wage-price spiral.

Policy recommendations related to the projection

• The course of the pandemic remains uncertain, as recent developments illustrate. Many businesses and institutions have been severely impacted again by new containment measures. It is also possible that we will face regular waves of infection in the future. We must therefore learn to live with coronavirus. This will require further reflection on the organisation of the economy and society so that extensive government support measures are no longer necessary or taken for granted. After all, they place a great strain on public finances and ultimately disrupt healthy economic dynamics. To the extent that support measures remain necessary, they should be targeted at those sectors whose hands are tied and that are hit hard by the containment measures.
• A long period of low inflation has come to a sudden end. In order to curb the likelihood of a strong wage-price spiral, inflation expectations must remain anchored around the ECB inflation target of 2% over the medium term. Against this background, automatic price compensation to maintain purchasing power amid the current exceptionally high and mainly energy-driven inflation would be undesirable, because it would further drive up inflation.
• Solving the growing shortage of suitable personnel requires a broad package of measures on the supply and demand sides of the labour market to stimulate labour participation and mobility. The new government and the social partners should urgently address the issue of labour shortages; the Social and Economic Council of the Netherlands and the Dutch Labour Foundation also have a role to play in this regard.

Alternative scenarios around the projection

The economic outlook is more uncertain than usual. In an alternative scenario around the projection the pandemic develops in such a way that substantial containment measures are tightened and remain necessary until the end of 2022, after which they are gradually phased out. This could cut GDP growth next year by over two percentage points to 1.4%. In a second scenario, global commodity prices remain high over the long term, with persistent supply disruptions and a stronger wage-price spiral. Dutch inflation in that scenario rises to around 4% in 2022 and 2023, with GDP growth in those years on average one percentage point per year lower than in the baseline projection.

For more information, please contact Bouke Bergsma on +31 20 524 3797 or +31 6 53 25 84 00.