Worst crisis ever, or are financial markets right?

"With current energy prices, purchasing power will drop to zero this year," writes the Financieele Dagblad today. Fortunately, it is not that bad. What the newspaper means is that the 1,4% increase in purchasing power projected in the Spring Budget is being completely lost due to higher inflation, which in turn is the result of higher energy prices.

This is stated in a study by the CPB that was released yesterday. In the study, three scenarios are calculated and compared with the picture presented in the Spring Memorandum of a few weeks ago. The least bad scenario is based on what is currently priced into financial markets regarding oil and gas prices. Players in the financial markets assume that the oil price, in particular, is close to its peak and will fall in the foreseeable future. Nevertheless, this scenario forecasts an oil price of approximately $80 per barrel by the end of this year and not much lower by the end of next year.

The Spring Memorandum still assumed a fairly stable oil price of around $60 per barrel. In this scenario, the CPB forecasts 1,0% economic growth in the Netherlands this year, compared to 1,4% in the Spring Memorandum. Inflation will not reach the projected 2,3%, but 3,8%. Wages are largely fixed for the year. So it is simple: a 1,5 percentage point increase in inflation comes directly at the expense of purchasing power growth.

The CPB presents two more scenarios. In both, the oil price rises to $160 per barrel, after which a decline sets in, which proceeds much more slowly in the most pessimistic scenario than in the slightly less pessimistic one. Naturally, inflation rises most sharply in the pessimistic scenario (5,3% in 2026 and 3,3% in 2027). Purchasing power declines in both scenarios, economic growth slows, and in the pessimistic scenario, a period of negative growth occurs, or a recession. However, the growth figures for 2026 and 2027 as a whole do not fall below zero.

What strikes me about those estimates? I think the scenario based on market expectations is very realistic. If inflation averages 3,8% this year, the monthly figure will exceed 5% later in the year. I predicted that as well.

I have more doubts regarding the two scenarios in which the oil price rises to $160 per barrel. Given the amount of oil that cannot be shipped from the Middle East elsewhere and the price sensitivity of oil demand, an oil price of $160 per barrel seems highly unlikely to me. It might be possible for a very short time, but the global economy would take such a hit that oil demand would fall sharply, causing the price to drop again. However, this is only a scenario analysis, not a prediction. Furthermore, what strikes me is that I find the negative consequences for economic growth to be less severe than expected. In fact, I suspect that the economic damage, certainly in the more pessimistic scenario, will be greater than the CPB calculates.

I'm getting incredibly annoyed
The CPB report also calls for accelerating the energy transition to become less vulnerable. It is a call that is made frequently. However, the CPB report offers no context or insight into what we might expect from this. I am utterly annoyed by such casual remarks.

Economic vulnerability to fossil fuel prices is determined by price volatility and the fact that we are a net importer. Solar and wind account for only about 15% of our total energy consumption. We meet over 80% of our energy consumption with fossil fuels. Even if you significantly increase solar and wind production, the dependence on fossil fuels remains. It is an illusion to think that our vulnerability to sharp fossil fuel price fluctuations can be quickly and substantially reduced.

Our dependence on imports also makes our economy vulnerable. This can be reduced by expanding domestic production. But that could just as easily be fossil fuels. You don't hear anyone talking about that.

Finally, one more consideration. We find it very annoying when the oil price rises sharply. What I wonder is what would happen to our energy prices if we were to source a much larger share of our energy from solar and wind. Solar and wind are notoriously unreliable. It does not always blow, and the sun does not always shine. As a result, the volatility of electricity prices throughout the day and between days can be enormous.

The IMF also presented an update to its economic forecasts this week. The tone was quite alarming. However, the adjustment to the forecast for global economic growth was only 0,2 percentage points. That wasn't too bad, at least.

Yet alarmist narratives dominate. The current crisis is said to be the worst ever. I find that a tad exaggerated and note that financial markets are reasonably calm compared to the gloom. Markets are usually right…

US stumbles through
The US Fed's Beige Book, the anecdotal account of the economic situation based on conversations with businesses across the country, was remarkably positive. Of course, inflation is rising and uncertainty is significant, but what was described regarding economic activity was actually more positive than in early March. That does not seem to align entirely with the trend in sentiment among SMEs. The NFIB (National Federation of Independent Business) index, which measures this, fell from 98,8 in February to 95,8 in March. Rising energy prices and increased uncertainty were the culprits.

Homebuilders' confidence also took a hit due to higher energy prices and uncertainty. The so-called NAHB (National Association of Home Builders) index fell from 38 in March to 34 in April.

It seems likely to me that the Fed will decide at its next interest rate meeting in late April to leave interest rates unchanged and to wait and see for the time being.

China is growing, but consumers are not responding.
The Chinese economy grew by 1,3% quarter-on-quarter and 5,0% year-on-year in the first quarter. This was slightly above expectations. However, the Chinese consumer disappointed again in March. Retail sales in March were 1,7% higher than a year earlier. In February, it was 2,8%, but that was nothing to write home about either. Growth in industrial production fell from 6,3% (year-on-year) in February to 5,7% in March.

The value of Chinese exports in March was only 2,5% higher than a year earlier. That was disappointing and sounds quite alarming. However, we must take into account the fact that exports had increased sharply in March 2025 because Chinese exporters still wanted to send as much as possible to the US before Donald Trump introduced his reciprocal import tariffs.

Closing
If energy prices develop as priced into financial markets, our inflation will rise to 3,8% this year and purchasing power will remain unchanged.

Confidence among American SMEs and homebuilders has weakened recently, but the Fed's Beige Book paints a fairly positive picture.

The Chinese economy grew faster than expected in the first quarter, but consumers are not participating. As a result, growth remains fragile.

Next week I am going to an economists' conference and I am taking a short vacation. Therefore, I will not be writing a weekly commentary for the next two weeks. The next commentary will appear on May 8.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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