Outdated browser

You are using an outdated browser. DNB.nl works best with:

Challenges for our economy in 2023


Published: 23 March 2023

De uitdagingen voor onze economie in 2023 - DNB jaarverslag 2022

2022 was a turbulent year, with major events worldwide that affected nearly all of us to a greater of lesser extent. This year too, we see the impact of these events clearly reflected in our economy. We outline the most important below, but first we take a brief look back at 2022. What major developments did we see in the economy?

Start of the year marked by rapid growth

After the pandemic containment measures were lifted in the first half of the year, the economy initially picked up very quickly. This rapid growth and the sharp rise in energy and commodity prices due to the war in Ukraine resulted in an unprecedented 11.5% inflation rate. Energy-intensive businesses in particular, such as bakeries and greenhouse farms, saw their costs rise. Household purchasing power declined sharply, especially for lower-income households.

Central banks aiming for lower inflation

A slowdown in the economy was needed to get inflation under control, which meant the cooling down in the second half of the year came at the right time. The European Central Bank (ECB) started to accelerate the wind-up of its debt purchase programmes in 2022. The ECB also raised interest rates several times in the second half of the year to curb soaring inflation. The ECB’s inflation target is 2%. At the end of 2022, inflation was 9.2% in the euro area, and the ECB intends to raise interest rates for as long as necessary to bring inflation back down to the 2% target. More on this

Who is responsible for fighting inflation?

How will central banks fight inflation in 2023?

The ECB has continued to raise interest rates in 2023. In March, the deposit rate now stands at 3%. These higher interest rates are needed to bring inflation down. They affect citizens, businesses, the government and central banks in various ways.

Banks must adjust to higher interest rates

After a long period of low interest rates where money was free, financial institutions are now having to adjust to a world of positive interest rates. Banks typically benefit from higher rates. However, banks with poor risk management can get into trouble, as we have seen in the US and Switzerland. This can have a negative impact on public trust in the sector. But today’s circumstances are very different from the situation during the financial crisis. Banks now have larger reserves and are better prepared for difficult times.

Higher interest rates drive down house prices

The 10-year mortgage rate (with National Mortgage Guarantee – NHG) rose from 0.9% to 3.9% in 2022. This marked a turning point for the overheated housing market. The higher borrowing rate, along with increased uncertainty and the cooling economy, caused house prices to fall month-on-month starting in mid-2022. This did not immediately lead to any problems, partly because the banks had established healthy reserves and because fewer interest-only mortgages are being issued these days. This makes houses less likely to go “underwater” when prices fall.  This does not mean first-time buyers now find it easier to purchase a house, however; financing a mortgage has in fact become more difficult for them. Furthermore, there is still a housing shortage housing shortage.

Higher interest rates boost funding ratio of pension funds

Higher interest rates resulted in higher funding ratios at pension funds. Although global stock exchanges performed poorly due to inflation and interest rates, pension funds saw their funding ratios rise to about 120% in 2022. Due to this and other factors, pension funds were able to resume indexation for the first time in years, a welcome boost to the purchasing power of older people.

Higher interest rates call for sufficient buffers in budget

Just like for a household, interest charges on past loans can haunt a country for a long time. Rising interest rates mean that borrowing has also become more expensive for the government. This makes it essential that the government once again musters the financial discipline to offset higher spending elsewhere in the budget. This is also necessary in view of the major challenges we are facing such as climate change, the energy transition, an ageing population and the need to create buffers to absorb future shocks.

Higher interest rates lead to losses for DNB

Higher interest rates mean we must pay more interest on the deposits commercial banks hold with us, while income from government bond holdings, a substantially larger asset as a result of the ECB's purchase programmes, does not rise in tandem. This will mean losses for DNB, which are expected to continue for several years and could even be so great that our buffer of over €11 billion will not be enough to absorb them.

Why do central banks raise interest rates to bring down inflation?

Higher interest rates slow down the economy which then brings inflation down. How? Higher interest rates make it more expensive to borrow money, while also making it more interesting to save money. As a result, people and businesses spend less money and demand drops. This means prices rise less sharply, which in turn slows down inflation.

More information:

How should we deal with this situation?

The sharply increased prices are clearly having a big impact on our society. Central banks remain committed to beating high inflation. We will feel this in our economy and it will give rise to a number of key areas of concern this year.

Targeted government support

High inflation hits some groups in society disproportionately hard, and the call for income support for these groups is understandable. This support costs money, however, and an overly generous fiscal policy would boost inflation given the current supply-side tightness and make it harder for the central bank to bring inflation down. It is therefore important that government financial support is targeted to those who need it most, that it is temporary and that it is covered elsewhere in the budget.

Higher wages but no automatic price compensation

Higher wages can ease the pain of inflation-induced loss of purchasing power somewhat, especially in sectors with high labour productivity and profitability. Sectors badly affected by high energy prices may be better off with more moderate wage growth, however. Full and automatic wage hikes to compensate for inflation would increase the risk of a wage-price spiral. This could boost inflation further, and would therefore be unwise in any case.

Wage-price spiral

Responding better to labour market tightness

Wages did not rise substantially at an earlier stage, which is remarkable given the shortages in the labour market (see figure). This tightness is structural in nature, partly due to the ageing population, and will not disappear despite the expected slowdown in economic growth. The shortage of workers is a threat to the pace of housing construction and sustainability projects. Who will install all those solar panels and heat pumps? Labour shortages also leave many businesses struggling to cope.
A comprehensive approach is needed to address this. For example, by working smarter and more efficiently, and also by making it more attractive to work more hours. The government, employers and employees all have a role to play in this.

Accelerate sustainability measures

The war in Ukraine is far from over, and energy prices remain an important and uncertain variable that can have a major impact on our economy. High energy prices give citizens and businesses incentives to make more sustainable choices. This can involve simple behavioural changes, but also extensive investments in energy efficiency. It is important that the government’s measures to compensate for high energy prices are modest, for otherwise this would potentially remove the financial incentive for sustainability and slow down the energy transition. That would be a negative development as climate change has the potential to destabilise our prosperity in the broadest sense. Shortages of materials and personnel are a major obstacle in the transition to renewables. The green transition can only be achieved if these problems are addressed.

Shutterstock Zonnepanelen JV

Acting together

We are living in uncertain times. This makes it all the more essential to reduce economic disparities between population groups and combat polarisation. In addition, both the government and the financial sector must ensure sufficient buffers to absorb future shocks. Moreover, the Netherlands has a small and open economy and we only thrive when Europe and the world are also doing well. The Netherlands’ future is anchored in Europe. Not only because of the war and our security, but also because of our economic prosperity both now and in the future.

Want to know more?

This article is based on our annual report. 

Go to our Annual Report