DNB expects more inflation, less growth from Iran war; "Wise" to wait on energy measures
The war in the Middle East could result in significantly higher inflation in the Netherlands and undermine economic growth, according to a forecast by De Nederlandsche Bank (DNB) outlining various scenarios. The central bank does not expect the impact to be as severe as during the energy crisis of 2022 following the Russian invasion of Ukraine, and called it “wise” that the government is waiting to take measures.
During the 2022 energy crisis, the gas price rose by over 250 percent to more than €300 per megawatt-hour. Now, prices are only rising to around €50 or €60, DNB pointed out. This comparison does not alter the fact that the new war and violence, and the Iranian blockade of the Strait of Hormuz, which is important for the oil and gas industry, could hit households hard in the wallet.
In a severe scenario, if the war continues for the foreseeable future and energy prices remain high for an extended period, household disposable income will take a hit of 6 percentage points. This would hit lower-income households particularly hard as they spend a larger proportion of their income on fixed costs like energy. Other products and services could also become more expensive, which will likely put pressure on consumption.
DNB president Olaf Sleijpen still called it “wise” that the Cabinet did not immediately decide on potential compensation for households for the increasing energy prices. “Of course, there is talk of compensation for the increased energy prices, and I understand that very well,” he said. “At the same time, I think it is wise for the Cabinet to wait and see what the effects on households are before making a decision on potential compensation.”
Sleijpen pointed out that, in the mildest scenario, households' purchasing power will only decline by 1 percent. And even in the worst-case scenario, the effect remains lower than during the 2022 energy crisis. He also pointed out that many households have fixed or variable energy contracts, meaning that price increases will have a delayed or only partial impact.
“And let us not forget that compensation costs money,” the DNB president noted. “This will have to be covered within the budget, which in turn may come at the expense of other priorities.” He called the failure to financially cover potential steps “extremely unwise at a time when public finances are not in good shape in the medium term.”
“Should it nevertheless be decided to proceed with compensation, it is important that this is targeted and temporary, and reaches the people who really need it.”
DNB’s calculations indicate that inflation will rise by at least 0.5 percent this year and the same next year. In the worst-case scenario, the Netherlands must reckon with 1.6 percent higher inflation this year and an additional 2.8 percent next year.
According to the central bank, economic growth could fall by approximately 0.8 percent this year and next year, in the latter case. That means the economy would barely grow at all.
Sleijpen emphasized in an explanation that there is a great deal of uncertainty. “The development of inflation depends heavily on the duration and intensity of the war. The more broadly the region is drawn into the conflict, the greater the economic effects.”
According to Sleijpen, developments in the Middle East also pose a risk to financial stability. He pointed out that the macroeconomic consequences of the war and the impact on financial markets could also affect banks. "Fortunately, Dutch financial institutions are in good shape and have proven resilient in recent years. But Dutch financial stability is certainly not indestructible."
