DNB: 'Inflation in severe weather scenario to 9,5%'

"The impact of the war on the economy can become very substantial", Klaas Knot, the president of De Nederlandsche Bank (DNB), stated on Thursday 17 March during the presentation of the annual report. In a 'severe weather scenario' where the economic consequences of the war are deeper and longer lasting, inflation could rise to a staggering 9,5% this year.

DNB has published an analysis that examines the possible consequences of the war in Ukraine on the Dutch economy and financial stability. In this estimate, inflation will be 6,7% this year and 2,8% next year. The economic recovery in mid-2021 was so strong that the Dutch economy is still growing at 3,5% this year and 1,5% next year.

In the bleaker scenario, energy prices will remain high for longer and there will be unrest in the financial markets. Economic growth will then amount to 2,4% this year and 0,5% next year. "Without the spillover from 2021, the economy will contract slightly," says Knot. In the severe weather scenario, inflation will rise to no less than 9,5% this year, before falling back to 2023% in 3,4. The analysis states that in this more negative scenario, economic growth in the Netherlands will fall by an average of 1,1 percentage points per year.

The analysis states: "High inflation is affecting the real disposable income of households, which is holding back spending. Companies are confronted with further rising costs of energy and raw materials. The industrial, transport and agricultural sectors are particularly sensitive to this. The risk premiums for corporate financing are also higher in the scenario. These factors reduce investment opportunities and inhibit GDP growth." Knot emphasizes: "Please note, this scenario is surrounded by a lot of uncertainties and it is impossible to assign a probability to this. After all, we do not know how the war will unfold further."

For example, the negative impact of the conflict on the Dutch economy can increase if sanctions and counter-sanctions cause negative economic dynamics. In this scenario, energy prices will continue to rise worldwide. As Ukraine and Russia are major commodity producers, the analysis suggests that other commodity prices, such as agricultural commodities and metals, are also likely to remain elevated for long periods of time.

Limited impact on financial markets and institutions
"The impact of the war in Ukraine on financial markets and financial institutions has so far proven to be manageable," Knot said. "The direct exposures of Dutch financial institutions in Russia are limited at approximately €11,4 billion (0,25% of total exposures)."

Knot concludes on a positive note: "Finally, and let's not forget that, the economy has recovered quickly after the pandemic, and in the Netherlands has now fully recovered at the macro level. Our starting position for all obstacles to be overcome is therefore an excellent ."

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

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.