Economic Developments and Outlook - December 2021

The Dutch economy has shown a rapid and strong recovery from the coronavirus (COVID-19) recession of 2020. The gradual lifting of the containment measures led to a strong rebound in household spending in the spring, aided by the revival of confidence. 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.

After the sharp contraction in 2020 (-3.8%), GDP (gross domestic product) is expected to grow by 4.5% in 2021. Assuming that the growing spread of the COVID-19 virus this autumn is gradually brought back under control, the economic recovery will continue in 2022, with projected GDP growth of 3.6%. The economy will then enter calmer waters in 2023 with growth of 1.7%. Uncertainty about the evolution of the pandemic, and hence the economy, remains high, however.

To a far greater extent than usual, the macroeconomic figures in this projection conceal the underlying differences among businesses and institutions. A proportion of the entrepreneurs and employed persons are still being severely impacted by the ongoing pandemic and the renewed measures, for example in the hospitality and cultural sectors, leaving them facing greater uncertainty and unfavourable economic prospects.

The labour market again became very tight shortly after the coronavirus recession. After unemployment quickly rose to 4.6% of the labour force over the course of 2020, the unemployment rate has averaged 3.3% in 2021. The figure will rise slightly from 2022 but is set to remain low (3.4% in 2022 and 3.5% in 2023). This represents a marked improvement compared to our June 2021 projection. 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 sees negotiated wage growth rising slowly to 2.4% in 2022 and 2.6% in 2023.

HICP inflation has risen sharply in 2021 and reached 5.9% in November. The inflation projection for full-year 2021 has consequently been adjusted upwards to 2.7%. This is due in particular to the unexpectedly rapid rise in energy prices. Bottlenecks in many goods supply chains have also led to higher production costs, which to some extent are being passed on in consumer 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) push projected inflation downwards in 2022 and upwards in 2023. Inflation (excluding energy) 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.

The government budget deficit is expected to be 4.4% of GDP in 2021. This is comparable to the high level recorded in 2020 as a result of coronavirus-related expenditure. The deficit is set to improve sharply in 2022, to 1.9% of GDP, and to decrease further to 0.8% of GDP in 2023. The government debt-to-GDP ratio has risen to 55.7% in 2021, compared to 54.4% in 2020, and is set to fall to 52.0% in 2023.Despite the substantial government deficit, the increase in debt is not too severe relative to the size of the economy, thanks to the strong GDP growth.

The economic outlook is more uncertain than usual. In an alternative scenario the pandemic develops in such a way that substantial containment measures remain necessary for longer and have to be tightened again. This could cut next year’s GDP growth by over 2 percentage points to 1.4%. In a second alternative scenario, global commodity prices remain high over the long term, in combination with persistent supply disruptions and a stronger wage-price spiral. Partly as a result of higher energy prices, Dutch inflation in that scenario rises faster to around 4% in 2022 and 2023, and GDP growth in those years is on average 1 percentage point per year lower than in the baseline projection.

This projection is based on data available up to 30 November 2021. The effects of the recently presented coalition agreement have therefore not yet been included.