The government, trade unions and employers must do more to curb persistent inflation in the Netherlands. The government must show budgetary discipline, employees must be cautious about wage demands and employers must accept that their profit margins will be lower.
This is stated by De Nederlandsche Bank on the basis of its six-monthly economic forecasts. Inflation in the Netherlands will remain high in the coming years, DNB expects, despite the anti-inflation policy of the European Central Bank.
Dutch inflation, which was 11.6 on an annual basis last year, will fall back to 4.2 percent this year, before falling further to 3.7 percent in 2024 and 2.4 percent in 2025, the forecast is. DNB. Falling energy prices are now pulling the inflation rate down, but otherwise price increases remain high. So-called core inflation, from which the volatile energy and food prices have been filtered out, will amount to 6.8 percent this year, 3.6 percent in 2024 and 2.8 percent in 2025. “It is a sign that inflation seems to have become more stubborn,” said Olaf Sleijpen, member of the DNB board, during a press conference Monday morning.
The ECB aims for 2 percent inflation in the eurozone in the ‘medium term’, a period of about two years. In DNB’s estimates, inflation in the Netherlands will be (well) above this target for four years. The ECB is tackling inflation with interest rate hikes, which should slow down the economy. Inflation should also fall again.
But the ECB cannot do it alone, DNB believes. Sleijpen said that the Dutch government is “throwing fuel on the inflation fire” by continuing to spend generously. When the government spends more money, it increases the demand for goods and services in the economy. This fuels inflation.
No recession
According to DNB estimates, the government budget deficit will amount to 2.3 percent of GDP this year and 2.7 percent in 2024 and 2025. “The government is still stimulating the economy and contributing to inflation,” said Sleijpen. According to DNB forecasts, the Dutch economy will continue to grow slightly in the coming years and will therefore remain overheated, although the overheating is declining somewhat. DNB does not foresee a recession.
From now on, according to Sleijpen, every new expenditure in The Hague must be “fully covered” (due to cutbacks elsewhere). Society should rely less on the government: it cannot “solve every problem.”
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Trade unions also feed inflation with high wage demands, Sleijpen said. DNB considers wage increases of between 5 and 7 percent reasonable to compensate for the reduced purchasing power of employees. But DNB sees higher wage increases in the latest collective labor agreements. “There are signs that wages are rising sharply, faster than in other European countries,” said Sleijpen. According to the DNB board member, the Netherlands must accept that it has become collectively poorer due to the very high energy inflation in 2022. And that not every loss can be compensated. “That is a bill that we all have to pay, including the employees,” says Sleijpen.
Sleijpen was less outspoken about the contribution of employers to the fight against inflation. However, the DNB board member said that they should not try to ‘hold’ their profit margins by raising prices, now that they are cost-burdened by higher wage costs (and purchase prices). In the fourth quarter of last year, an important part of inflation in the Netherlands was due to higher net profits of companies. This was not the case in previous quarters. Sleijpen does not want to speak of “grabbing inflation” – the idea that inflation is caused by employers’ greed. “That’s a word we don’t like, it suggests a conflict model.”
In an alternative scenario calculated by DNB, inflation is even higher. Workers demand high wages, employers raise their prices in response. “It cannot be ruled out that wage-price dynamics will feed through to core inflation more strongly than usual,” the report said. Energy prices also rise again in this scenario, by 50 percent. In that case, inflation will increase again, from over 4.3 percent this year to just under 7 percent, and will remain even higher in 2025 than in the base scenario, at just under 3 percent.