Dutch economy to recover to pre-pandemic level by end of year says Central Bank

The Dutch economy has been showing signs of recovery starting from the second quarter of this year after the historic hit to the GDP last year. Recovery is happening so quickly that GDP could eclipse pre-pandemic levels by the end of the year, the Dutch Central Bank (DNB) estimated in their semi-annual report. Unemployment could also rise up to 4.5 percent during 2022.

"Compared to six months ago, the outlook has clearly improved, despite the fact that the pandemic and restrictive measures developed more poorly than expected in December," the DNB stated.

For this year, GDP growth of 3.0 percent is expected. The recovery will continue rapidly next year with a growth of 3.7%, after which the growth rate will normalize to 1.9% in 2023, the DNB predicted. The estimate is based on the assumption that coronavirus restrictions will continue to be abolished, with most of them being fully eliminated in early 2022 due to a successful rollout of the Covid-19 vaccine program.

The expected recovery appears to be progressing more smoothly compared to the 2008 financial crisis. DNB included two alternative estimates in addition to their main projection due to a high level of uncertainty during the ongoing health crisis. According to the rosier scenario, GDP growth in 2021-2023 will be on average 0.4 percent higher compared to the main estimate. This will occur if the pandemic is fully under control by the end of the third quarter.

In case the coronavirus measures stay in force until 2023 due to the emergence of new coronavirus variants, GDP growth would be lower by an average of 1.1 percentage points per year.

Unemployment will jump if government aid is cut off

Unemployment could still rise significantly next year, the DNB said. If government support is phased out after the third quarter of this year, unemployment will rise slightly at first, and then increase further in 2022. As a result, the unemployment rate will jump from 3.6% this year to 4.5% next year, DBN stated.

Because jobs will be easier to find, more people will enter the labor market. That will temporarily lead to higher growth in the labor supply.

Inflation is expected to rise from 1.1% in 2020 to 1.5% in 2021, partly as a result of higher oil prices. In 2022 inflation will remain at 1.5% and in 2023 inflation will increase to 1.8%, in line with the increasing tightness in the labor market.