Global Monthly - The Netherlands: Omicron and inflation weighing on growth

When the Omicron variant started to spread in December 2021, the Netherlands already struggled with overburdened ICUs. Almost 60% of the ICU capacity was already used by covid-19 patients, whereas the average in the Eurozone stood at around 20%. This has caused the government to announce a pre-emptive lockdown on 18 December 2021. However, the rate at which Omicron leads to ICU admittances has been lower than expected, and so some restrictions were lifted last weekend such as on sports activities and non-essential shopping. Despite this easing, the remaining restrictions will depress consumer spending in the first quarter of 2022, albeit less than during the last lockdown (see graph on the right below).

Consumer confidence deteriorated for the third month in a row in December

With this drop, consumer confidence is almost back at its all-time low from the spring of 2020. This is likely not only attributable to covid-19, but also to the sharp rise in inflation (CPI: 5.7%, core 2.2% in December). According to the CBS, 55% of the consumers described the price increases of the past year as ‘sharp’, the highest percentage since the beginning of the time series in 2017. This is confirmed by survey data from the European Commission. To the question ‘By comparison with the past 12 months, how do you expect consumer prices will develop in the next 12 months?’ 32% answered a more rapid increase, while 41% thought inflation will increase at the same rate. Only 27% thought prices would fall at a slower rate or decrease.

The uncertainty resulting from the ongoing threat of the virus and high inflation, will continue to depress growth. We expect all restrictions to be lifted at the end of February, which will be followed be a renewed impulse to spending, as consumers catch-up on some of the lost spending of the lockdown. In our projections, we expect GDP to grow by 2.8% in 2022 (after 4.3% in 2021).

Last month, the Dutch government finally reached a coalition agreement

This agreement includes new fiscal measures to support education, the housing shortage and free childcare. In addition, EUR 60 billion was allocated to multi-year green funds. The plans could also increase the growth potential of the Dutch economy, as more funds are dedicated to research, development and education. Most plans will be rolled-out during the course of 2023, and the agreement will therefore have little to no effect on growth in 2022. In addition, the Netherlands Bureau for Economic Policy Analysis (CPB) said that promises for generous spending may not be feasible in light of the significant labour shortages. The unemployment rate dropped to 2.7 percent in November 2021 from 2.9 percent in the previous month – the lowest figure since the survey began in 2003. Moreover, an increase in labour demand in the public sector could crowd out labour supply in the private sector.