The Netherlands: Outlook 2022 - Robust growth in 2022 but bottlenecks are a drag

With Q3 growth of 3.8% qoq, Dutch GDP bounced back above pre-pandemic levels, mainly led by a rebound in consumer spending after the reopening of the economy. Compared to eurozone peers, the Dutch economy has been remarkably resilient in 2020 and 2021. The initial drop in GDP was smaller, and each successive Covid wave has had less macroeconomic impact. This flexibility and resilience will be crucial for the economy going forward, as catch-up growth fades and uncertainty regarding Covid and supply-side bottleneck increases.

In 2021 global trade expanded further, which benefitted Dutch exporters.

In normal times this leads to a pick-up in investment, but in the second half of 2021 investment actually declined. With producer confidence and new orders at record highs, this is clearly not due to a lack of demand, but rather the result of bottlenecks; global supply issues and shortages in key components and the tight labour market have delayed the execution of investments plans.

Recently, new infections have spiked, prompting the Dutch government to step up restrictions.

The ‘lockdown light’ of previous waves in the pandemic has been replaced by an evening lockdown – where bars, cafés and non-essential shops close at 5pm – of three weeks. The direct impact of these restriction is estimated to be manageable, as it mainly targets bars, restaurants, cinemas and theatres, which comprise together only around 4.5% of total consumer spending. Moreover, in previous lockdowns, we witnessed large substitution effects, with spending redirected from bars and restaurants to takeaway venues, and from cultural activities to at-home activities. The subscriptions to on-demand video have surged as visits to theatres and cinemas were restricted. That said, it remains highly uncertain whether the new measures will be sufficient to relieve ICU occupancy, and therefore an extension and/or tightening of restrictions is a serious risk. The emergence of the new Omicron strain adds to these risks. All told, we expect restrictions to result in a contraction in private consumption in Q4, which followed an already declining growth trend due to the fading out of catch-up effects, in combination with declining consumer confidence due to inflation fears and uncertainty regarding the Covid outlook. Despite a weaker fourth quarter primarily due to Covid restrictions, we still expect growth of 4.4% in 2021.

Outlook for 2022: Covid uncertainty and nearing the limits of growth

As the economy is still in catch-up mode versus trend GDP, we expect above trend growth for 2022, primarily driven by a further recovery of private consumption. Despite higher inflation eroding purchasing power, consumption is being boosted by low levels of unemployment and high savings rates. On top of that, the government has announced to reintroduce the wage subsidy scheme given that Covid-19 restrictions have been tightened again. This will help to sustain consumption as well. Yet, the uncertainty regarding potentially tighter Covid restrictions and the Omicron variant is casting a shadow over the 2022 outlook. On our current forecast, we expect restrictions to remain in place until early 2022, with a rebound in consumption starting in the latter half of February, making 1st quarter consumption growth still positive.

As the economy grows, the constraints on supply are likely to weigh more heavily

The October business survey pointed to increased supply constraints, with firms reporting insufficient inventories to sustain production, and we expect these impediments to continue well into the first half 2022. In addition, thanks to the generous wage subsidy scheme (NOW) by the Dutch government, unemployment has only dropped slightly during the pandemic, and with the re-opening of the economy, the labour market has become historically tight. Currently, unemployment stands at 2.9%, and for every 100 unemployed, there are 126 vacancies. The EC business survey for the Netherlands shows that labour is as big a factor limiting production as the shortage of materials. We do however expect that, when the economy adjusts, these pressures will abate. All in all, while supply and labour market constraints will weigh on growth in 2022, we still expect some catch-up growth, especially in the first and second quarter of 2022. We expect GDP growth of 3.8% in 2022, slowing somewhat from 2021’s 4.4%. The pandemic, however, continues to pose downside risks to the outlook.

Global demand outpacing supply has also driven prices higher in the Netherlands

CPI inflation for November (5.2%, core: 2.5%) showed a further acceleration in price growth. As the difference between headline and core shows, inflation is mainly driven by volatile components, particularly energy. Taking the latest figure into account, we expect inflation for 2022 to moderate to 2.6%. High energy prices, and pass-through effects into goods are expected to continue until mid-2022. Once high energy prices subside, the main source of upward inflationary pressure will fade and we therefore expect inflation to come back down.

Despite these price pressures and a scorching hot labour market, we see no effect on wages.

Collective Labour Agreement (CLA) wage growth has declined slightly in Q3 of 2021. Due to the wage structure in the Netherlands – 75% of all wages are fixed in CLAs – a wage-price spiral is very unlikely at the moment. Incidental wages, including job-switches, promotions and bonusses, have been on a higher growth path lately, but are only responsible for a very small proportion on the total wages. For these reasons, we do not see reasons to change our view on inflation; i.e. we expect it to be elevated well into 2022, but driven primarily by base effects and energy prices, with a normalisation to just-below 2% levels from 2023 onwards. A delay in the easing in supply side disruptions and bigger second round effects are an upside risk to this view.