Economy to grow 0.8% this year, inflation remains too high: DNB

June 19, 2023  –The Dutch economy will grow by just 0.8% this year, sharply lower than last year’s 4.5%, and inflation remains too high at 4.2%, the Dutch central bank said on Monday.

While inflation is set to decrease, underlying core inflation – which does not include price increases for energy and food – will rise to 6.8% this year and this, the central banks said, “is worrying”.  

The bank sees growth rising to 1.3% in 2024 and 1.1% the year after. At the same time, inflation, which peaked at 11.6% last year, will fall to 4.2% this year and continue its downward path to 3.7% next year and 2.5% in 2025.

The impact of higher energy prices has now passed on to almost all goods and services and households “are seeing their purchasing power evaporate and are spending less, which slows down the economy”, the central banks said.

In addition, Dutch export growth is losing steam due to the downturn in world trade following the increase in interest rates. This acts as a brake on the economy, as higher interest rates depress business investment and cool the housing market. 

The bank says house prices in the Netherlands are set to fall by 5.1% this year and another 3.8% next year, followed by a small increase in 2025. “By 2025, we expect house prices to have fallen roughly 10% from their peak of the summer of 2022,” the central bank said. 

The European central bank aims for a 2% rate of inflation and the DNB warns that if inflation falls in the eurozone and remains high in the Netherlands, it will be even more difficult to curb. 

“Once the ECB stops raising interest rates, the fight against inflation in the Netherlands will need to be fought mainly by the government, unions and employers,” the bank said. “Wage bargaining is an essential element in this.” To prevent inflation being pushed up further, the bank said, businesses and unions need to achieve controlled growth in profits and wages.

Central bank president Klaas Knot recently warned of the risk of wage price spiral if pay demands are not moderated. 

Pay rises

The surge in pay rates, he said in May, could drive up inflation and lead to the European Central Bank again increasing interest rates. That would damage the economy, he said. ‘And then we will all be worse off.’

Meanwhile, research by employers organisation AWVN found that pay deals sealed in May included an average wage rise of 8.2%.

Wages have now risen for 16 months in a row, the AWVN said, with an average increase of 7.3% so far this year. In 2022, wages rose by an average of 3.8%. 
“We have not seen figures like this since the 1970s,” spokesman Jannes van der Velde told the AD. In total, 200 pay deals have been signed so far in 2023 and another 200 will be negotiated before the end of the year.

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