RaboResearch - Economic Research

Dutch economy likely to face mild recession

Economic Quarterly Report

  • We expect economically tougher times with a mild recession in the last quarter of 2022 and first quarter of 2023
  • Despite the slight economic downturn, we expect unemployment to rise only moderately
  • Households, businesses and our trading partners face high inflation that suppresses domestic and foreign spending and investment
  • The tight labor market and corona savings provide a buffer against declining household purchasing power
  • The government can also soften the economic dip somewhat through public consumption and investment
Infographic: Cooling after the strong recovery of 2021
Infographic: Cooling after the strong recovery of 2021Source: RaboResearch

Overall economic picture for the Netherlands

The Dutch economy showed robust recovery from the corona crisis with growth of no less than five percent in 2021. But 2022 and 2023 look set to be difficult periods economically. Economic growth in 2022 is projected to be 2.9 percent, according to our forecasts. At first glance, this also appears to be robust growth, but so-called spillovers from the recovery from the corona crisis completely dominate this figure (see Box 1 for an explanation). For the fourth quarter of 2022 and the first quarter of 2023, we assume a slight contraction of the economy, popularly known as a mild recession (see Figure 1). As a result, the average growth rate for 2023 will be negative (-0.2 percent). From the second quarter of 2023 onwards, however, we expect economic growth to resume (see Figure 1). Despite the slight economic downturn, we expect unemployment to rise only moderately.

Figure 1: Mild recession of Dutch economy
Figure 1. Mild recession of Dutch economySource: CBS, RaboResearch

For our estimate, we assume that the European Union will impose a boycott on Russian oil, starting at the end of this year. As a result, we expect energy prices to remain high or even to increase somewhat further. However, the boycott is expected to be milder than the one we considered in an earlier scenario analysis. First, the oil boycott only concerns oil transported by ship and not by pipeline. Second, Saudi Arabia seems willing to supply more oil to Europe if Russia is eliminated as a supplier. Therefore, the economic damage in our baseline estimate is less than in the scenario studies. We do not assume in our estimates that the European Union will include Russian gas in its short-term sanctions packages, nor that Russia will (largely) turn off its gas tap. Nor do we assume any new corona measures that harm the economy. If a gas boycott does take place, or if the government announces new corona measures, we will have to adjust our economic picture downwards.

Table 1: Core data of Dutch economy
Table 1. Core data of Dutch economySource: RaboResearch

Box 1: What are spillovers?

A spillover effect means that growth in the previous year affects the average growth rate in the following year. To clarify this, suppose a student averages only a six on all her tests in the first half of the school year and averages an eight in the second half of the year. With this, the student would end the year with an average of a seven. If this student only scores eights in the following school year (and her average for the whole year is an eight), the student has not improved from the second half of the previous school year (when she also averaged an eight). But on a yearly basis, that student did improve from the previous year (when she averaged a seven).

Spillovers play a large role in the 2022 economic growth rate, just as for the underlying spending components (including private consumption and business investment). Due to the enormously strong recovery from the corona crisis, by the end of 2022, analogous to the example of the scholar, 2.7 percent growth has been achieved purely through spillovers (see Figure 2).

Figure 2: With a stagnating economy, annual growth for 2022 is still 2.7 percent
Figure 2: With a stagnating economy, annual growth for 2022 is still 2.7 percentSource: CBS, Macrobond, RaboResearch

High inflation often leads to recession

Figure 3. High inflation often followed by recession after 12 months
Figure 3. High inflation often followed by recession after 12 monthsSource: RaboResearch, OECD, Eurostat, CBS

A period of high inflation in the past has almost always been an omen for a cooling economy. High inflation over an extended period erodes household purchasing power and can be detrimental to corporate profits. Eventually, with a lag (of 12 months), economic growth drops below trend growth, often resulting in a recession (see Figure 3). If we extend this connection to the current situation, the Dutch economy would contract for two consecutive quarters in the fourth quarter of this year and the first quarter of 2023, in line with our estimate.

Consumption under pressure from inflation

We expect household consumption to grow by 3.5 percent this year and to decline by 0.2 percent next year (see Table 1). For the second quarter of 2022, we expect some catch-up growth after the lockdowns of the winter months. But during the year, Dutch household consumption will come under increasing pressure from high inflation.

This is because more and more consumers will have to deal with higher energy prices, as more and more households have to renew their energy contracts over time. Rabobank transaction data shows that the number of consumers with a higher energy bill has increased in recent months. In March, 41 percent of consumers had a higher energy bill than in August 2021. And that increase was more than EUR 60 for 11 percent of consumers and even more than EUR 100 for 5 percent. In response to high energy prices, households are cutting back on gas consumption, which directly leads to lower consumption figures.

Figure 4. Sharp decline in real collectively negotiated wages
Figure 4. Sharp decline in real collectively negotiated wagesSource: CBS, RaboResearch

Moreover, we see that inflation is becoming broader: more and more products and services are becoming more expensive, including food and industrial goods. As a result, we expect inflation to fall only slowly, averaging 7.8 percent this year and 4.5 percent in 2023. Income growth will also pick up this year and next, but not as fast as prices are rising. As a result, household purchasing power is declining (see Figure 4). Government measures to support household purchasing power also do not make up for this loss. These are measures such as the temporary reduction in the tax on gasoline and energy, the temporary income support for low incomes, the increase in the minimum wage and the state pension, and the reduction in the tax burden on middle incomes.

Tight labor market is a buffer for consumption

Figure 5. Unemployment expected to remain low
Figure 5. Unemployment expected to remain lowSource: CBS, RaboResearch

The labor force participation rate was at an all-time high in the Netherlands and the number of job openings per unemployed person is at its highest point ever. In almost every sector, companies say they are experiencing staff shortages. We expect the tightness in the labor market to continue for the rest of this year and for the unemployment rate to average 3.3 percent this year. Due to the expected decrease in economic activity, the number of vacancies will decline somewhat. However, we expect companies to be reluctant to let go of their personnel because they have recently experienced how difficult it is to find (good) personnel. Still, it seems inevitable that the number of bankruptcies will increase, causing more people to lose their jobs (see also explanation below under the heading ' Corporate investment in the minus). But because there are staff shortages in so many places, we expect people who lose their jobs to be able to find work again reasonably quickly elsewhere. Therefore, we anticipate that unemployment will rise only moderately and will average 3.5 percent next year. Hence, it is expected to remain very low (see Figure 5).

Corona savings provide only partial buffer

During the corona crisis, Dutch households saved a lot. In total, savings increased by almost EUR 73bn in 2021 and 2022. By our estimate, that is about EUR 30bn to EUR 50bn more than would have been saved without the corona crisis. This is about 8 to 13 percent of annual household consumption. Also, the share of households reporting to save money rose from about 55 percent before the corona pandemic to 66 percent briefly during the lockdown months (see Figure 6). Meanwhile, the share of households that saves money has dropped back to pre-corona levels. For now, the share of households struggling to make ends meet or getting into financial trouble does not appear to be above pre-corona levels. But given the loss of purchasing power, it is likely that the financial situation of households will continue to deteriorate in the coming months.

The extra money saved will presumably serve in part as a buffer against higher prices. Those who have put extra money aside can use it, for example, for spending on a vacation, new clothes or for a setback in their energy bill. But we know from previous research by RaboResearch that not everyone saved during the lockdowns: in the first corona year, only 35 percent of Dutch people saw an increase in their savings. And these were more often households with higher incomes. They are likely to have financial room to cope with higher prices by saving less, and thus will be less forced to tap into their savings to meet current expenses. Those who already have little or no savings will presumably have no choice but to reduce their consumption.

Economic recessions are also often accompanied by a decline in consumer confidence, out of fear of loss of income. This can make households more cautious about spending resulting in higher precautionary savings. Consumer confidence has also fallen sharply recently, but the main reason seems to be the (negative news about the) high inflation rate. On the contrary, expectations for employment remain quite favorable (Figure 7). We therefore do not currently foresee people saving on a large scale out of precaution.

Figure 6. Financial situation households similar to pre-corona levels
Figure 6. Financial situation households similar to pre-corona levelsSource: CBS, RaboResearch
Figure 7. Unemployment expectations favorable
Figure 7. Unemployment expectations favorableSource: Eurostat

Corporate investment down

Business investment was under pressure in the first quarter of 2022, contracting by 1.2 percent. This is partly due to the lockdown in that quarter. For the coming quarters, we expect business investment to hardly grow and even decline in the fourth quarter of 2022 and first quarter of 2023. For the full year, we foresee business investment growth of 1.0 percent and a sharp contraction of 3.5 percent for next year.

The main explanations behind the sharp decline in business investment are the general uncertainty about the business cycle, the extreme labor shortage, skyrocketing producer prices, higher interest rates and tax arrears. We explain these facets in more detail below.

Staff shortages remain unprecedentedly high

Figure 8. Staff shortage costs economy EUR 5bn in 'lost' added value
Figure 8. Staff shortage costs economy EUR 5bn in 'lost' added valueExplanation: 'Missed' added value is calculated by correcting the number of vacancies in a sector for the long-term average and then linking these vacancies to the productivity per hour in that sector. Source: RaboResearch based on CBS and Eurostat.

As already discussed, the labor market in the Netherlands is currently historically tight. In the first quarter of 2022, there were 450,000 vacancies, while unemployment dropped to an all-time low of 316,000 in April. Due to this enormous tightness, the Dutch economy has lost EUR 5bn in added value, according to a rough estimate (see Figure 8). If people are not available, it often makes little sense for entrepreneurs to invest in fixed assets, such as buildings, machinery, means of transport and ICT equipment. On the other hand, of course, the shortage can prompt organizations to invest in so-called labor-saving technologies. Examples are self-scanning checkouts, packing robots, prefabricated buildings or the use of better ICT in healthcare.

Inflation also worrisome for producers

Not only consumers, but also producers face skyrocketing prices. Producers pay much more for steel, aluminum, wood, gasoline and other raw materials they need to manufacture their products (see Figure 9). These high prices are not only related to the high prices of oil, gas and electricity, but are also the result of value chains that are still severely disrupted worldwide (see Figure 10).

Producers will try to pass on the higher cost of production to consumers, but by no means do they succeed in doing so in all cases. Sometimes, for example, retailers do not accept abrupt price increases from suppliers, something that is clearly visible in the wrangling between supermarkets and food producers. Producers operating in a highly competitive market will be reluctant to be the first to raise their prices. In such segments, skyrocketing producer prices will come at the expense of business profitability and will put a strong strain on investment.

Figure 9. Producer prices remain sky-high
Figure 9. Producer prices remain sky-highSource: Macrobond, CBS, Eurostat, RaboResearch
Figure 10. Global value chains remain severely disrupted
Figure 10. Global value chains remain severely disruptedSource: New York Federal Reserve Bank, Macrobond, RaboResearch

Increasing interest rates and deferred taxes

Against the backdrop of high inflation, capital market interest rates have also risen sharply recently. This has implications for the interest burden in the corporate sector. Currently, 38 percent of the corporate sector has debt with a maturity of less than one year. It is likely that companies will have to refinance some of these debts at higher interest rates in the coming period. Investing will therefore become more expensive and projects that may have been profitable at the ultra-low interest rates of the past few years will not always be profitable anymore at the already increased interest rates.

Table 2. Some service sectors will face hard times
Table 2. Some service sectors will face hard timesSource: CBS, RaboResearch, Ministry of Finance

As of October 1, entrepreneurs also have to start repaying deferred tax debt due to the corona crisis. In some industries, the tax debt to be repaid as a percentage of net profit (measured over the period 2015-2019) is quite large, such as in the security industry, cleaning, graphics and hospitality (see Table 2). The tax repayment reduces the net profit of companies and thus weighs on investment space.

Due to expected cyclical headwinds, high inflation and rising interest rates, discontinued corona support and repayable tax debt, more companies are likely to go bankrupt in the near future. Although bankruptcy often means personal tragedy for entrepreneurs, we do not expect an increase in bankruptcies to immediately cause a huge wave of layoffs. First, the number of bankruptcies is extremely low in a historical sense. To put this in perspective, only a fourfold increase in the number of bankruptcies will bring you close to the long-term average. Secondly, companies that may not go bankrupt right away but are facing a sharp decline in business will not want to lay off staff right away because of the labor shortage of recent times.

Planned government spending may soften dip

In 2022, the contribution of government consumption will still be relatively modest at 1.1 percent growth, due in part to a further scaling back of  corona test and vaccination capacity. For 2023, we expect positive growth in government consumption of 2.2 percent. Planned higher government consumption and investment provide some support for GDP growth in the coming period.

The plans presented by the cabinet in its spring update of the fiscal budget  also underline the ambition to take steps in areas that have been left unfinished in recent years, such as investments in education, knowledge, innovation and the energy transition. In the short term, little money has so far been allocated from the funds, so these investments are not yet directly visible in the estimates. In the medium term, however, this policy impulse is likely to result in higher productivity growth, which is badly needed to keep our public services affordable in the long term.

The cabinet also wants to increase defense spending step-by-step to 2 percent of GDP, and EUR 2.2bn structurally. After years of skimping on defense, the war in Ukraine now provides broad support for meeting the NATO target (2 percent of GDP investment in defense). Ultimately, we expect public investment to grow by 2.2 percent in 2022 and as much as 5.3 percent in 2023.

The spring update of the fiscal budget  also includes some plans that we are critical of, such as linking the state pension to the increase in the legal minimum wage. This will involve nearly EUR 2.4bn structurally; money that will partly end up with wealthy seniors who are unlikely to spend it. We are also critical of the decision to cover part of the budget with EUR 2.2bn in funds from the Climate and Transition Fund and the National Growth Fund. As mentioned above, such investments are a dire necessity in order to kick-start productivity growth in the Netherlands and to combat climate change and environmental damage. This is necessary to guarantee that future generations can count on high-quality care, good education, clean air and dry feet.

High inflation also affects foreign countries

Prices are rising fast not only in the Netherlands, but also in the countries around us, where businesses and consumers are suffering from high inflation. We therefore also foresee a decline in economic activity in the Eurozone and the United Kingdom - but slightly less than in the Netherlands (see also this study on the impact of the oil boycott on the Netherlands and other countries). In the United States, the economy will continue to grow in 2022 and the first half of 2023. This is because high energy prices are hitting the US less hard. China is still suffering from corona-lockdowns that are slowing down the economy, especially this year. The demand for Dutch products and services from our trading partners will therefore decline. We foresee a contraction of exports of 0.6 percent for 2022, and of 1.2 percent for 2023.

Dutch imports of foreign products are also declining due to the expected decline in domestic demand. For 2022, we foresee a contraction of 1.2 percent, and for 2023 a contraction of 0.9 percent. On balance, net trade will still contribute positively to economic growth in 2022, but negatively in 2023.

Hugo Erken
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2223 1650
Carlijn Prins
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 1929 6455

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