Worst-case scenario: Dutch purchasing power falls by 3.4% due to Ukraine war

The purchasing power of Netherlands residents may fall by more than 3 percent this year, partly due to the war in Ukraine, Central Planning Office (CPB) calculated. The conflict sparked a sharp increase in energy prices, which came on top of already strong inflation in the wake of the coronavirus pandemic.

The CPB drew up various scenarios. In the worst case, purchasing power will fall by an average of 3.4 percent. The middle scenario, which the CPB uses for its major new economic estimate, predicts a 2.7 percent decrease in purchasing power. And in the best-case scenario, purchasing power will fall 0.6 percent. In these calculations, the CPB assumed inflation of 6 percent, 5.2 percent, and 3 percent, respectively.

"We assume that everyone will feel the higher energy bill in their wallet sooner or later," said CPB Pieter Hasekamp. "But whether it's a thump or a blow depends on the share of energy costs in disposable income." Hasekamp said he is concerned about people with lower incomes, especially if they also live in poorly insulated houses. "Those kinds of effects are not visible in the standard purchasing power charts."

Other possible economic effects of the war, for example, the impact on trade, financial markets, and investment and consumption, are still limited, the CPB said. The CPB mathematicians assume that the economy will continue to grow in the coming years, although not as strongly as in 2021 went the economy rebounded from its contraction in the first coronavirus year.

The size of the economy will grow by 3.6 percent this year, and by 1.7 percent next year, the CPB expects. Growth in the coming years will be driven by extra government investments from the coalition agreement. The labor market will remain tight, so unemployment will likely only rise slightly.

Politicians in The Hague highly anticipated the purchasing power figures. There is tremendous pressure on the Cabinet to compensate for the enormous increases in energy bills and higher petrol prices. The Cabinet has until the Spring Memorandum at the latest, i.e., by June 1, to say which measures they'll take to this end. But the coalition parties in parliament are already pressing for more urgency.

"We cannot expect miracles from the Cabinet, but we can expect action," said ChristenUnie MP Pieter Grinwis in response to the CPB figures. "Certainly for the people who can spare the least, but also for people with a mid-level income." He is thinking, for example, of extra support for low-income families to pay their energy bills and a temporary reduction in excise duties."

D66 MP Steven van Weyenberg acknowledged that "war in Europe is not without damage to our economy and our people's wallets." But he too believes that the Cabinet must quickly come up with a plan to help people "who are now acutely trapped by the sharply increased energy bill."

CDA MP Inge van Dijk called the CPB estimates "gloomy and worrying" and called for "targeted support" for those who need it most. "We must lend a helping hand to people who are at risk of falling through the ice by limiting the loss of purchasing power as much as possible."

On television program Op1 on Tuesday evening, Minister Sigrid Kaag of Finance refused to say what the Cabinet would do about the declining purchasing power. She said that the Cabinet is looking at several options and will focus on lower incomes. As examples, Kaag mentioned that the government could reduce the VAT on energy or the excise duty on fuel.

Prime Minister Mark Rutte told parliament on Tuesday that the Cabinet will likely only be able to dampen the blow to purchasing power, not prevent it completely. He called it "illusory" to make guarantees about that.