RaboResearch - Economic Research

Economic growth in the Netherlands expected to weaken due to war in Ukraine

Economic Quarterly Report

  • Both this year and next year, the Dutch economy is expected to grow at a slower pace than in 2021
  • Sharply increased prices, which are expected to remain high for longer due to the war in Ukraine, reduce consumers' purchasing power and businesses' investment opportunities
  • For example, for this year, we assume average consumer price inflation of 5.5 percent. For 2023 we expect inflation of 2.9 percent
  • Sanctions against Russia and voluntary boycotts of companies are also slowing the growth of Dutch exports
  • We assume 3.1 percent economic growth in 2022, followed by 1.2 percent in 2023
  • Of course, developments in Eastern Europe may soon overtake this outlook

While the Netherlands was ready to let go of most of the corona measures, Russia invaded Ukraine. Although it pales in comparison to what people in Ukraine are dealing with, this is also expected to affect the Dutch economy. In fact, last year it recovered remarkably quickly from the corona crisis. Gross domestic product at the end of 2021 was already well above the level it was at before this crisis, while the proportion of Dutch people in paid employment rose to record levels. Moreover, we were moderately positive about 2022, despite growing concerns about rapidly rising inflation (in Dutch). But in the meantime, the economic situation is once again uncertain. The war in Ukraine and the sanctions against Russia mean that prices for consumers and producers are likely to rise further. In addition, foreign trade is suffering from the economic sanctions. Uncertainty about the course of the war also increases the likelihood that citizens and companies will keep a tight hand on their purses.

For 2022, we therefore assume higher inflation and lower economic growth (see Table 1). We expect the economy to be only 0.7 percent larger at the end of this year than at the end of 2021, with household spending in particular carrying the growth. Due to strong ‘carry-over effects’[1], economic activity will average 3.1 percent higher this year than in 2021. For 2023, we anticipate that economic growth will pick up slightly and average 1.2 percent. In both years, the unemployment rate is expected to remain below 4 percent.

Table 1: Economic expectations for the Netherlands
Table 1: Economic expectations for the NetherlandsSource: Statistics Netherlands (CBS), RaboResearch

Starting points

Of course, developments in Eastern Europe can quickly overtake this outlook. For example, for this round of estimates we have taken into account higher energy prices, but not energy shortages. These would have a significantly larger impact on the economy. For the situation in Ukraine, and relations between the European Union (EU) and Russia, we have assumed that trade with Russia falls sharply. And that prices of grain, fertilizer, certain metals, oil and gas will rise sharply and that it will take at least several quarters for their prices to fall again. Beneath the surface, moreover, the corona pandemic still lurks, but for this estimate we have assumed that there will be no new wave of corona infections, or at least not a wave resulting in the reintroduction of severe measures.

Rising prices put pressure on consumption and business investment

In contrast to the economy as a whole, consumer spending and business investments were still below pre-crisis levels at the end of 2021. We expect these items to continue to recover this year, partly because the low unemployment rate – 3.6 percent in January – is a boost to consumer spending. At the same time, this low unemployment may encourage companies to invest so that they are less affected by staff shortages and can meet demand. On the other hand, the same labor shortages and problems in supply chains can inhibit the ability to actually consume and invest. Many products already have long delivery times.

High inflation may also thwart the plans of businesses and citizens. In the last six months, the prices they have to pay rose sharply, and because of the Russian-Ukrainian war, we expect them to rise further and stay high for longer. For 2022, we assume an average inflation rate of as much as 5.5 percent, followed by another 2.9 percent in 2023 (more on inflation in this publication (in Dutch)). Rising input prices erode the profitability of businesses, and thus their room to invest and/or raise wages. Inflation also erodes consumers' purchasing power, leaving them with less to spend (see Figure 2). Moreover, the fear and economic uncertainty caused by the war and higher commodity prices, can significantly affect the willingness of individuals and companies to buy and invest.

Below the line, we assume that consumers - accounting for over 40 percent of spending in the economy - will spend 4,9 percent more this year than in 2021. The lion's share of that is carry-over from 2021, but nevertheless household consumption is likely to be the main driver of economic growth this year (see Figure 1). For 2023, we expect consumption growth to weaken slightly and household spending to average 0.9 percent higher. In business investment, we expect an increase of 5.1 percent this year, followed by 1.1 percent in 2023.

Figure 1: Household spending main driver of growth in 2022
Figure 1: Household spending main driver of growth in 2022Source: Statistics Netherlands (CBS), RaboResearch
Figure 2: Collective wages no longer keep up with inflation
Figure 2: Collective wages no longer keep up with inflationNote: Refers to hourly collective wage rates, including special allowances.
Source: Statistics Netherlands (CBS), RaboResearch

A downside risk for both is an even higher rise in prices than we currently foresee, or even shortages of oil, gas and other commodities. For example, through tighter sanctions against or from Russia, or a continued disruption of international supply chains (see box 1). The country is a relatively small trading partner for the Netherlands (see figures 4 and 5), but for some raw materials (in Dutch) and foodstuffs, such as oil, gas, grain and certain metals, it is (one of) the most important suppliers. Moreover, these are goods that virtually every consumer and producer needs.

An upside risk is that the government may provide (extra) compensation for households for the sharp rise in energy prices. What we are also not taking into account at the moment is that increasing migration from Ukraine may alleviate the labor shortage in Western Europe somewhat in the longer term, however crude. Furthermore, bringing forward investments in sustainability can be a driver for the economy, depending on the availability of people and materials.

Government wants to spend significantly more, timing of this uncertain

Figure 3: Machinery industry turns overtime
Figure 3: Machinery industry turns overtimeSource: Statistics Netherlands (CBS), RaboResearch

During the corona crisis, the government's role in the economy grew, and the new government intends to continue to spend and invest more. It is difficult to estimate what the exact timing of this will be, partly because of staff shortages and difficult issues such as nitrogen and the wealth tax. For now, we assume that government consumption will increase by 1.9 percent this year, with a further increase of 1.3 percent in 2023. For government investment - a smaller item, accounting for some 3.5 percent of spending in the economy - we even assume an increase of 4.0 percent this year and 11.4 percent next year.

A downside risk here is that the timing may turn out to be pro-cyclical, further fueling already high inflation. There is also a risk that (additional) spending and investments in, for example, education and infrastructure will fail due to a lack of personnel and materials. This was also the case before the corona crisis, when the government spent less than planned for quarters. The same fate could befall the defense sector, despite calls to spend more on it.

Imports expected to grow faster than exports

Trade with other countries drove the economic recovery last year. Lagging household consumption and business investments in fact curbed imports, while exports to other countries soared. This was probably partly due to the strong increase in foreign demand for products from the Dutch electronics and machinery industries (see Figure 4). For this year, on the other hand, we expect trade with other countries to barely contribute to further growth, even reducing growth somewhat next year. Imports are growing faster than exports because of the recovery in consumption and investment. These are directly affected by the economic sanctions against Russia and indirectly affected by the slowdown in growth of major trading partners. For example, the war has also worsened the economic outlook for the rest of Europe, even though the continent directly or indirectly accounts for more than 60 percent of global demand for Dutch goods (see Figure 5).

Figure 4: Producers trade directly with these countries…
Figure 4: Producers trade directly with these countries…Note: refers to 2018 figures. Source: Macrobond, OECD
Figure 5: ... And Dutch exports end up in these countries
Figure 5: ... And Dutch exports end up in these countriesNote: refers to 2018 figures. Source: Macrobond, OECD

A clear downside risk for trade with other countries is a further escalation of the war, as it could put even more pressure on global supply chains. The plans of several European countries, especially Germany, to spend much more on defense could be a boost to exports since a small part of Dutch industry makes defense equipment. Of course, imports may also increase, depending on the precise plans that the Netherlands itself has for the defense sector.

Box 1: What if Russia is boycotted for a long time?

Despite economic sanctions, Russia has not yet stopped its war against Ukraine. Therefore, at the time of writing, stricter sanctions are being considered worldwide. Also, many international companies, transporters and banks have voluntarily ceased activities related to the Russian oil and gas sector, which effectively has the same impact as trade sanctions. An earlier calculation shows that such heavier measures could even cost the Netherlands around 2 percent in economic growth over the next two years compared to a situation without war. It would mean that trade with Russia and Ukraine would fall even more sharply, and that the prices of oil, gas, grain and other commodities would rise even further and remain high for a long time. Here we assume average consumer price inflation of 7.5 percent in 2022 and 5.0 percent in 2023.

Table 2: Economic expectations with longer boycott
Table 2: Economic expectations with longer boycottSource: Statistics Netherlands (CBS), RaboResearch

This affects business investment and household consumption first. In this scenario, producers have less money left over to invest, while consumers have less money left over to consume. In addition, the increased uncertainty leads to rising risk premiums, which further depresses corporate investments. It is also expected that trade with other countries will take a hit, partly because consumers and businesses in other countries will (out of necessity) keep a tight hand on their purses, reducing the demand for Dutch goods and services.

This means that it is expected that the Dutch economy will stagnate in the coming quarters and even contract a bit in the third quarter. This will put economic activity in the final quarter of this year slightly below its level at the end of 2021. Due to a strong carry-over from 2021, the average annual rate will still be 2.6 percent. For 2023, we foresee a slight recovery, with an average annual economic growth rate of 0,4 percent. Again, of course, the downside and upside risks described earlier apply.

[1] For the annual rate of economic growth, the average level of economic activity in 2022 is compared to that in 2021. Because the economy grew very strongly in 2021, the level of economic activity at the end of 2021 was much higher than the average for the entire year. Thus, with that, 2022 also starts at a high level, so that even a small increase in economic activity during the year already leads to a relatively high average for 2022. To illustrate, suppose that economic activity in the first quarter of 2021 was at 100, in the second quarter at 200, third quarter at 300, and in the last quarter at 400. Average activity in 2021 is then 250. Should economic activity remain at 400 in each of the quarters of 2022, the annual average (400) is still much higher than the annual average of 2021.

Nic Vrieselaar
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2216 2257

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