Economic Developments and Outlook - June 2022

The war in Ukraine is affecting the Dutch economy, which is reaching its capacity limits again after recovering from the COVID-19 recession. The shock of the war is driving energy prices higher, causing uncertainty and depressing the growth of world trade. Economic growth this year will still amount to 2.8%, mainly due to carry-over from 2021. From the end of 2022 GDP growth will pick up, with fiscal policy playing a supporting role. Projected GDP growth is set to exceed the potential (trend) growth rate in both 2023 (1.5%) and 2024 (1.7%).

Inflation is initially high mainly due to energy prices, but is spreading to other goods and services. It is projected to average 8.7% this year, mainly due to the exceptionally high rise in energy prices. Thereafter it is set to fall to 3.9% in 2023 and 2.4% in 2024. The projected core inflation rate (excluding energy and food) will reach 3.6% in 2022 before easing to 2.6% in both 2023 and 2024.

The labour market is extremely tight again immediately after the COVID-19 recession, with staff shortages being felt across the economy. Employment will barely grow next year, but the supply of labour is also reaching its limit. The unemployment rate is projected to average 3.3% in 2022. This is followed by a slight increase (3.6% and 3.4%). The tightness of the labour market and higher inflation are driving wage rises higher. The increase in negotiated wages (private sector) is expected to rise from 2.9% in 2022 to 3.9% in 2023 and 4.0% in 2024.

The government budget deficit and debt-to-GDP ratio are set to fall, despite strong growth in government expenditure in 2023 and 2024. The balance will improve from -2.1% of GDP in 2022 to -1.7% of GDP in 2023 and -1.6% of GDP in 2024.

If the war in Ukraine is more protracted and takes a more serious course than that assumed in the projection, uncertainty will persist, energy and food prices will remain high and world trade growth will fall further. This is the basis for an alternative scenario for the Dutch economy, according to which GDP growth in 2022 is 0.8 percentage points lower than projected, while inflation rises further to 10.8%. GDP would then contract by 0.4% in 2023, with 5.1% inflation, before growing slightly by 1.3% in 2024. In an extension of this scenario, Russia also halts energy supplies to Europe, causing companies to cut production. In that case a recession follows, with growth of 0.4% in 2022 and a contraction of 1.5% in the following year. Growth in that scenario recovers to 3.0% in 2024.