Price shock somewhat tarnishes the recovery

Although the Dutch economy started 2022 on the wrong foot due to severe lockdown measures implemented until mid-February, the signs for another year of dynamic recovery were strong. However, the war in Ukraine, and the related sanctions and trade barriers adopted by all sides, have cooled the high hopes of a strong recovery. The direct impact of the conflict on the Dutch economy is limited. The trade between the Netherlands and Russia/Ukraine is less than 3% of Dutch work (2021). Major Dutch exports include machinery, pharmaceutical products, and flowers. However, 15% of Dutch gas consumption is imported from Russia and cannot be easily substituted with other gas sources. The Netherlands also produces its gas (accounting for 52% of domestic gas consumption), with 59% of the extraction at sea and 41% offshore. The gas field of Groningen is the biggest one. However, in terms of gas extraction operations in Groningen, the Dutch government confirmed in late March its plan to end extraction by October 2022 to limit seismic risks in the region, with gas only to be extracted after that in the event of extreme weather or unforeseen circumstances. To balance out the decrease in gas production and the dependence on Russian gas imports, the state wants to increase its capacity to import liquefied natural gas (LNG), for instance, at the existing terminals in Rotterdam. However, in the meantime, European gas prices increased by 55% between the beginning of the year and early April. Because gas is the primary heating source in the Netherlands and 3.5 million households (44% of all households) have a variable heating contract (with a term of 6 months, after which the prices are adjusted again), while another 2 million households will see their fixed contracts expire, the increase in gas prices is rapidly reflected in inflation rates. In addition, gas is the leading source of electricity and a significant input for manufacturing production in the Netherlands. The high energy prices are also increasingly mirrored in producer prices and consumer goods, especially in the food sector. This could push the inflation rate to double in late summer 2022, the first since the first oil-price shock in 1975. The ECB is slowly reacting to this strong inflation dynamic. The central bank ended the Pandemic Emergency Purchasing Programme in March and could complete all QE purchases in Q3 2022. Although a first deposit rate increase is expected towards the end of the year, the central bankers will probably be cautious with rate hikes, as they want to soothe financial markets and keep yields of European bonds low. Nevertheless, high inflation will decrease the purchasing power of households noticeably. It could even lead to a temporary reduction of consumption expenditures, notwithstanding their very high savings from the last two years of the pandemic. They should get some support from the government, which announced a one-off energy allowance for low-income households, a decrease of the VAT on energy, a cut of the excise duty on petrol and diesel, and a financing package of EUR 150 million to support with energy-saving measures. Private investments should increase, but slower due to higher geopolitical uncertainty and prices. While international trade should still grow in 2022, global supply chain disruptions and trade barriers to and from Russia will cushion the pace. Besides the energy support measures, public investment should be lower this year. The government’s parties are planning a EUR 20 billion investment fund (2.5% of GDP) for the next five years, including the EUR 6 billion grants from the EU’s Recovery and Resilience Facility. 

Another year with a public deficit

2022 will be the third consecutive year with a noticeable public deficit in the Netherlands. Nevertheless, the debt should decrease thanks to higher income tax due to further economic recovery and a reduction in COVID-19-related expenditures, as most will end in late June 2022. Even the new energy prices-related measures should keep the improvement in public finances the same. Accordingly, the public debt ratio should fall and remain limited. The Dutch current account surplus will decrease but remain at a high level. While the exports of goods should still moderately increase, little imports will increase noticeably, primarily due to high import prices. The income balance should retain the small surplus it regained in 2021, after a substantial deficit in 2020, thanks to the ongoing recovery in revenues from Dutch assets abroad. The Netherlands’ net international investment surplus reached 114% of GDP in early 2021 as corporate and households are creditors to the rest of the world.

The resurrection of the previous Rutte government

In March 2021, Prime Minister Mark Rutte and his party VVD (conservative-liberal) won the general election for the fourth consecutive time. However, the government had been involved in a social benefit scandal that made it step down from office two months before the election. The VVD secured 34 out of the 150 seats in the lower house (1 more than in 2017). Right after the election, coalition negotiations failed. Nevertheless, after months of standstill, the caretaking government coalition made of the VVD, the social-liberal D66 (24 seats), the Christian-democratic CDA (14 seats), and the centrist CU (5 seats) was sworn in as the new government in early January 2022, because of a lack of alternatives. Due to this unusual political uncertainty, the coalition parties noticeably lost some support in the population (the VVD went down from its 34 seats to a minimum of 24 seats in the polls, still in the leading position). However, the sentiment changed with the Russian invasion of Ukraine when Prime Minister Rutte could present himself as a strong leader (his polls went up to 28 seats). The next election of the Senate (that can reject legislation), which will take place before May 2023, will be a significant touchstone for the new government.