Introduction by the President at the press conference for DNB’s 2021 Annual Report

In our 2021 Annual Report, we look back on another eventful year, a year dominated by the pandemic. Economic growth was surprisingly strong, and Dutch GDP was clearly back above pre-pandemic levels by the end of the year. While economic growth was a positive surprise, inflation took everyone off-guard: it is back with a vengeance.

The war in Ukraine has clearly pushed the pandemic into the background. In view of current developments, and in anticipation of your questions, today we are publishing a DNB Analysis that looks at the potential impact of the war in Ukraine on the Dutch economy and financial stability. I would like to discuss this briefly now. There is a spoiler, however, namely that the consequences are still shrouded in a great deal of uncertainty, giving rise to the question of what this will mean for economic and financial policy. Having said that, I will do my best to conclude on an optimistic note.

The economic recovery at the mid of 2021 was so robust that our December forecast update still calls for the Dutch economy to grow by 3.5% this year, and by 1.5% next year. Even if the economy were to grind to a halt this year, growth would still be 2.6% higher than in 2021 due to the carry-over effect. This forecast calls for inflation of 6.7% this year and 2.8% in 2023. As a thought experiment, we have also calculated a severe weather scenario in which the economic consequences of the war in Ukraine are more profound and persistent, mainly reflected in energy prices that remain high for longer accompanied by turmoil on the financial markets. Growth in the Netherlands would then slow to 2.4% this year, followed by 0.5% in 2023. Without the carry-over from 2021, in other words, the economy would contract slightly this year. In this scenario, inflation would rise as high as 9.5%, only to fall back to 3.4% in 2023. Please bear in mind that this scenario is surrounded by a great many uncertainties and it is impossible to gauge its likelihood. Indeed, we have no way of knowing how the war will unfold. In any case, the impact of the war in Ukraine on our economy may become quite pronounced.

The war’s impact on financial markets and institutions has proved manageable for the time being. Direct exposures of Dutch financial institutions in Russia are limited to approximately €11.4 billion (0.25% of total exposures). Although uncertainty translates into increased volatility, and investors traditionally seek safe havens in times like these, markets and financial institutions continue to function well. In any case, market stress has been much less acute so far than at the start of the pandemic. The sanctions imposed are primarily affecting the Russian economy, as was intended. But second-order and third-order effects of the war on financial stability cannot be ruled out, and central banks and supervisory authorities worldwide are on high alert.

The war in Ukraine also poses major challenges to policymakers and both sides of industry. Let me briefly review the challenges.

According to ECB projections, inflation in the euro area at the start of this year will be more than 5%, an unprecedented figure. Here in the Netherlands, we expect inflation to be close to 7%. This is well above the ECB’s 2% target. It is moreover likely that inflation will remain above this target for some time to come. Monetary policy normalisation could therefore not come at a better time. As you know, the European Central Bank’s primary mandate is price stability, and this is something we do not compromise on. This means phasing out the purchase programmes and then gradually increasing interest rates, depending on the dynamics of the outlook for inflation. At the risk of sounding like a scratched, old vinyl record, maintaining price stability is the most important thing the ECB can do to promote prosperity and financial stability. And I know from my own experience that scratched, old records from the 1970s are often the best.

The effective application of fiscal policy is certainly one of the success stories of the pandemic. The accumulated buffers meant that fiscal policy could be used to cushion the pandemic shock to a large extent. In the face of this new shock, Russia’s war with Ukraine, fiscal policy can and must play this role once again. However, the government cannot continue to bear all the burdens. We must first and foremost acknowledge that this shock is making us collectively a little poorer (and countries that export oil and gas richer). This makes it only logical for the government, citizens and enterprises to share the burden. Moreover, using the budget to compensate for shocks is not always the most effective and efficient solution. Finally, we must take care to avoid the pitfall of passing on burdens to future generations. Alongside the recently agreed, and very ambitious, additional outlays in the coalition agreement, calls are now going up to increase defence spending, the loss of purchasing power will be partially compensated, and there are setbacks to be absorbed. Under these challenging circumstances, it is therefore no less essential to stick to the fiscal rules that the government itself has agreed upon.

Both sides of industry also have a responsibility in this regard. The agreements published by the Social and Economic Council of the Netherlands in its medium-term advice were welcome six months ago, but are no longer enough under the present circumstances. Labour market tightness, for example, requires an appropriate response, and wage development has lagged behind economic growth for years. As you can imagine, we are not in favour of automatic wage indexation, but there is certainly some incidental scope for higher wages, especially in sectors that have experienced solid earnings growth, despite the pandemic.

I will now wrap up. We acknowledge in our annual report that the world economy is undergoing an unprecedented transformation: addressing post-COVID imbalances, the energy transition and the further digitisation of our economy and financial sector, with all the concomitant opportunities and risks. Added to this is the economic impact of the war in Ukraine. The challenges we face are enormous, but let us not forget three things. First, the war in Ukraine has intensified the geopolitical need for a rapid phase-out of fossil fuels. This will hopefully accelerate the energy transition. Next, the European Union has rarely been as united as it is today. This offers opportunities to further intensify European cooperation, something the Netherlands traditionally benefits from more than average. Indeed, the challenges we are facing can only be tackled effectively at the European or international level. Finally, and let us not forget this, the economy recovered rapidly after the pandemic, and it has recovered completely at the macro level here in the Netherlands. We are thus in an excellent position to overcome all obstacles before us.