Purchasing power falls in worst scenario by 3,4%

Purchasing power will fall by 2,7% this year, the Central Planning Bureau predicts. However, if energy prices remain at their current level, purchasing power will fall further: by no less than 3,4%. The Planning Bureau also outlines a scenario in which energy prices return to the level of the summer of 2019. Purchasing power then decreases by 0,6%.

Uncertainty from the war in Ukraine dominates the economic forecast. The course of the corona crisis remains relevant for the development of economic growth, but according to the Central Planning Bureau, its importance is decreasing. While the economy grew by 4,8% last year, the Central Planning Bureau estimates GDP growth this year at 3,6% and for next year at 1,7%. The labor market remains tight. Unemployment falls to 4% of the labor force (from 4,2% in 2021). 

Even higher inflation
The main economic consequence of the Russian invasion of Ukraine is a higher energy price, and thus an even higher inflation, according to the Planning Bureau. "The additional increase in energy prices comes on top of an already strong inflation, partly as a result of the economic shocks of the corona pandemic." Inflation was 2021% in 2,7. For this year, it estimates inflation at 5,2%. Inflation is expected to drop to 2,4% next year.

There is also a scenario where energy prices will return to summer 2019 levels next summer and inflation will be 3% this year and 2% next year. In the worst-case scenario, energy prices will remain at January levels in 2022 and 2023, with inflation at 6% this year and 3% next year. Incidentally, the Central Planning Bureau does not outline the even bleaker scenario in which energy prices rise even more. The agency bases its forecasts of energy prices largely on forward contracts.

Inflation erodes purchasing power. Purchasing power, which remained virtually unchanged last year (+0,1%), is estimated to fall by 2,7% this year, before growing again by 1,9% next year. Under the lower inflation scenario (3% in 2022 and 2% in 2023), purchasing power will fall by 0,6% this year and 1,9% next year. If energy prices remain at current levels, inflation is expected to reach 6% in 2022 and 3% in 2023 and purchasing power will decline more this year by 3,4%, before rising 2023% in 1,5. 

Inflation inequality
Energy costs are very different for different households, depending on, among other things, their energy consumption and contract. Major differences hide behind the development of purchasing power. The Planning Bureau talks about 'inflation inequality'. The government cannot compensate for the increased cost of living without increasing taxes elsewhere, it says.

Public finances are stabilizing this year due to the disappearance of the corona support policy and other corona expenditure and higher tax revenues. After the government's term of office, the budget deficit will increase because a number of expenditures (such as climate and nitrogen) are not planned until then, while GDP growth will slow down due to lower growth in the labor supply and the gradual cooling of the economy.

Linda van Eekeres

Linda van Eekeres is co-writing editor-in-chief. She mainly focuses on macro-economic developments and the influence of politics on the agricultural sector.

l.vaneekeres@boerenbusiness. Nl

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