The Netherlands: Starting another year with a lockdown

After the longest formation process in Dutch history, the Netherlands finally has a new government. On December 15, four coalition parties presented their plans for the coming years. These ambitious plans will lead to a structurally higher government debt and fiscal deficit. There is no immediate cause for alarm, since the financial risks of higher government debt are limited in the current economic circumstances with low interest rates. However, we should not forget that a government in a strong financial position is better able to withstand potential future crises, as the coronavirus pandemic demonstrated.

The Netherlands started the new year not only with a new government, but also with a new lockdown due to the Omicron variant and the slow start of the booster vaccination campaign. First, the Netherlands instituted an evening lockdown at the end of November, which was followed by stricter lockdown measures starting mid-December. These included the closure of non-essential stores and restaurants, among other establishments.

In mid-January, the government announced that non-essential stores and the personal care sector – like hairdressers – could reopen their doors. The leisure and culture sectors, including restaurants and theaters, remain closed until further notice.

The lockdown measures will mostly impact consumer spending. The evening lockdown did not have a big impact on consumption, which still increased by 8.7% y/y in November. Consumer confidence, however, had already deteriorated before the new lockdowns were announced and the index declined further to -28 in January (see Figure 1).

The decline in consumer confidence could be explained by the rise in consumer prices. In December, inflation went up by 6.4% y/y (see Figure 2). The main driver of the rising consumer price index is the increasing price of energy. Although inflation is expected to remain high for the coming months, we foresee a lower increase in price levels in the second half of this year. We would need a wage-price spiral to see a continuous sharp increase in price levels. In such a spiral, employees bargain for higher wages because of higher expected inflation. Higher wages then lead to more employee spending power and higher costs for companies, thus further raising inflation and inflation expectations. We think that such a wage-price spiral is unlikely to happen in the Netherlands. Labor union membership is declining, so the collective bargaining power of employees is diminishing. We expect consumer prices to increase by 3.8% in 2022 and 2.1% in 2023.

Even though inflation and the new lockdown hurt consumer spending, the unemployment rate remains low. Unemployment did increase slightly to 3.8% in December (see Figure 3), not because of fewer employment opportunities but because more people were looking for a job. The unemployment figures are higher than previously reported since Statistics Netherlands recently changed their unemployment calculation method. Our view on the labor market remains the same.

The low unemployment rate and the high working-age population reflect the tight Dutch labor market. Additionally, around 30% of Dutch companies reported in the final quarter of 2021 that personnel shortages obstructed their activity. We therefore expect unemployment to remain low, even after Covid support packages end.

The Dutch manufacturing sector is performing well despite the disruptions in global supply chains (see Figure 4). This good performance might be due to some Dutch ‘champions’ in the mechanical engineering subsector. After fully recovering from a short dip in 2020, manufacturing production continued increasing and improved in November by 0.6% m/m. We expect that production levels have reached their peak and we forecast 1% y/y growth for this year.