Persistent pandemic will delay economic recovery: Dutch Central Bank

The economy will recover more slowly than Dutch central bank DNB expected due to an extended and stricter lockdown. Without emerging from the lockdown until the end of June, the economy continues to shrink. Additionally, the DNB also voiced hope for a more sustainable future.

“Once the restrictions are lifted later in the year, we expect the economy to rebound strongly similar to its performance in the third quarter of last year”, head of the bank, Klaas Knot, said at the presentation of the DNBs annual report. Overall, the DNB now expects the economy to grow by 2.2 percent this year and 4.2 percent in 2022. Knot is confident that recovery is possible. All in all, the pandemic has had a less negative impact on the economy than at first thought.

At the end of last year, the DNB predicted that the Dutch economy would grow by 3 percent in 2021. Due to the lockdown continuing longer and with stricter rules than at first imagined, the DNB lowered that expectation. During the first six months, the DNB believes that the economy will continue to shrink by one percent followed by a rebound in the second half.

Knot called it “irritating” that vaccination campaigns in Europe have not been going according to plan. This puts the Netherlands behind other countries such as the United States and the United Kingdom when it comes to vaccinations and delays the reopening of the economy. New virus variants that are immune to current vaccines could also put a damper on hopes of loosening restrictions.

He underlines that the coronavirus would have impacted the economy even worse had restrictions not been in place, “There is no trade-off between the economy and our health. The economic crisis will only be fully overcome once the pandemic is under control”, Knot says.

Netherlands must increase environmental awareness post-pandemic

One area in which the Netherlands should not return to its pre-pandemic stage is climate change, the DNB said.

According to the DNB, it is not desirable for the emission of carbon dioxide and greenhouse gases to rise to the levels they were at before social restrictions limited travel. “Let's make sure that our recovery from the crisis is a green recovery”, Knot said. The consequences of climate change, such as extreme weather conditions, have a disastrous effect on the economy, the DNB said. They stated that combating climate change is “the biggest challenge” the Netherlands will face in the aftermath of the coronavirus crisis.

Carbon dioxide emissions fell globally by six to seven percent in the past year. In order to make the Dutch economy more sustainable long-term, restrictions for example on nitrogen emissions would have to be placed on certain sectors. There would also have to be arrangements made to accompany these regulations, the DNB states. If the Netherlands wants to achieve climate neutrality by 2050, then carbon dioxide emissions would have to be reduced by 2.7 percent each year. Current policy, however, only leads to a 2.3 percent annual decrease. “Despite all good intentions, the Netherlands is not the best student in the European class when it comes to sustainability lessons.”

Low-interest rates impact general public

Another prediction that the DNB has for the future is that interest rates on savings accounts will stay low along with mortgage interest rates. The central bank said that the negative interest rates on savings will soon be felt by the public when banks pass the low-interest rates on to their customers.

“Although negative interest rates are annoying for people trying to save money, it is obvious that banks will use negative interest rates for customers as long as interest rates remain low long-term”, the central bank said in the annual report. Currently, only a limited number of people are affected by the low saving interest rates because banks do not charge negative interest rates on savings accounts smaller than 250 thousand euros. CEO of the Rabobank, Wiebe Draijer has said it is “extremely unlikely” that this rule will change but has not crossed off the list of possibilities, the ANP reports.

The reason behind European rates being consistently on the lower end has to do with the fact that the banks themselves have to pay interest rates to the European Central Bank. The aging population in Europe along with the effects of globalization have slowed down economic growth leading to lower interest rates.

The coronavirus crisis has further exacerbated these effects which can specifically be felt in the Dutch housing market. Low mortgage interest rates have led housing prices to rise sharper than they have in the past 20 years. The low-interest rates are also reflected in the performance of pension funds and insurers. The DNB stated that the impact of the coronavirus on the economy mirror the need for an urgent reform of the labor and housing market.

Despite the evident worries of the DNB of the performance of the Dutch economy in a post-pandemic world, Knot did add: “I expect next year's annual report press conference to once again be held in person.”