Statistics from the Netherlands reported last week that the economy contracted slightly in the second quarter. Another quarter of decline and the Netherlands, by the accepted definition, has entered a recession. However, many economists assume it won’t be too deep and short-lived. Even according to Knot there is still overheating, with the demand for goods and services exceeding the supply.
Knot calls it “far from certain that a mild recession alone will be enough to curb high inflation.” He points out that not only are food and energy rapidly becoming more expensive, particularly under the influence of the war in Ukraine, but the prices of industrial goods and services are also rising sharply.
High public spending
The high public expenditure, among other things, for energy support to citizens and businesses does not help, nor the large wage increases to absorb the increase in the cost of living. Knot warns that “any factor that pushes demand further will only lead to higher inflation.”
“The cabinet is currently spending too much money,” Knot told political reporter Sophie van Leeuwen. “This is mainly because those support packages were obviously created under steam and boiling water, and therefore are logically untargeted.”
And he continues: “My appeal to the House of Representatives is to ensure that fiscal policy also supports our efforts to bring inflation back to the target: 2 percent in the medium term”.
Curb inflation
The ECB has tried to curb inflation with a series of rate hikes. The prime interest rate has gone from 0 to 2 percent in three leaps and bounds since last summer. And it won’t end there, according to Knot. He expects the policy rate to peak at 3% in the first half of 2023. Whether a reduction will be possible within that year remains to be seen, he says.
Vulnerability
The relatively high debts of Dutch households, especially home loans, are “a vulnerability” in the context of sharply rising interest rates, warns Knot again. The starting position is better than it was when the credit crunch hit in 2008. This is partly because the rules for the maximum mortgage in relation to home value have since been tightened significantly.
Rising interest rates also have consequences for public finances, which have been thrown off balance by high spending during the coronavirus pandemic. Minister Sigrid Kaag (Finance) predicted earlier this week that interest costs will rise by billions of euros a year. “It’s important that budgetary discipline returns,” Knot says.
‘I would ask the government to take a broad view and take a very critical look at all spending. But certainly also on the income side or on our tax system, which we have often asked the DNB’, says Knot.
To intervene
“Prices are rising enormously, so I think we should also take action,” says VVD Eelco deputy Heinen. ‘If you spend too much, you have to start with expenses too. And he looks: where can I spend less? At a time when everything is getting more expensive and bills are piling up, you obviously shouldn’t be raising taxes,” says Heinen.
The MP thought it was a “gloomy message” today, but is still optimistic. The problem is now really recognized. We have heard for a long time that inflation is not that bad, that it is temporary and that it is easing. But we’ve only seen the bills go up since then. I am therefore pleased that the seriousness of the situation is now recognized and that concrete action is now being taken.’