ABN AMRO BANK N.V. This month, ABN AMRO's Group Economics published its outlook for 2022. ABN AMRO Chief Economist Sandra Phlippen provided commentary during a live webinar last Wednesday. With Sandra, we look back on the past year and ahead to the new one. How will the pandemic affect our economy? What is inflation doing? Which way is the interest rate going? Sandra updates us on the economic topics of the moment.
"For the Netherlands and Northwest Europe, 2021 has been a year of economic recovery, with growth exceeding expectations. We would certainly have signed up for that. At the same time, a huge gap has opened up worldwide between poor and unvaccinated people, without government aid for their businesses and often unemployed, versus rich, vaccinated people enjoying government aid and mostly still employed. With year-end approaching, we're now faced with new economic uncertainties that we did not see coming. Take Covid. A year ago, we thought the pandemic would be behind us by now and that the economy would continue its steady recovery. But the vaccines are not working as well as we expected and we have a new virus variant, Omicron, the medical and economic consequences of which are still unclear. Rising inflation is also a source of uncertainty, and this is all adding to it. The overheating of the US economy is worrying, too. In short, despite recent economic recovery we're living in a world of unprecedented volatility and uncertainties."
"We've learned that through vaccinations and government support for companies, we can keep an economy ticking over quite nicely. On the demand side, the economy has proved enormously flexible. Consumers made the switch from offline to online in no time, and businesses anticipated that. That shows how resilient our economy is. The number of bankruptcies is at an all-time low, although we should mainly attribute that to government aid. Which was very generous indeed! In the Netherlands, balance sheet support for businesses now amounts to 28 times the support paid out during the financial crisis. That is, of course, a mind-boggling amount. It's difficult to predict how long we'll be able to keep this up. Fortunately, the Netherlands has a healthy government budget and interest rates are still low for the time being, so the conditions for taking on more debt are favourable. A hard lesson that we are learning thanks to Omicron is that nobody is safe until everybody is. Vaccinating only your own people is pointless as long as variants can continue to develop elsewhere, so that Covid can return to us in a new form."
"Uncertainty translates into additional costs, lower investments and lower spending. Transactions become more expensive when conditions are uncertain. People play it safe, raise their contract prices, take out insurance. Companies bump up the prices of their products to cover their extra expenses. Take the construction sector, for example: there's a great deal of uncertainty in delivery times, raw material prices, and staff availability. If a construction company cannot deliver in time or at all, customers will walk away or refuse to pay. Such companies therefore have to look for alternative suppliers, keep surplus stock, recruit staff - all of which cost money. You can see this happening now on the supply side of the economy."
"We have a base scenario in which Omicron was not yet an issue. In that scenario, the economic constraints are gradually lifted in 2022 and recovery gathers steam in the eurozone. We also expect the supply-side problems to disappear in the course of 2022. Energy and freight costs will not rise further. As the pandemic disappears from society, consumers will again spend a larger share of their income in leisure sectors such as hospitality, culture and holidays. As a result, the demand for goods will decrease, leading to less price pressure."
"Because there are several uncertain factors, we've made four alternative scenarios in which we show how the pandemic, the financing space and the economic climate impact each other. These scenarios assume extreme situations: the pandemic persists or disappears, financing conditions become stringent or remain generous. Because we're working with extremes, these scenarios are not very realistic, but they do show how one affects the other."
"Let's suppose the pandemic continues. That would again result in major economic damage. The government would then have to come up with another substantial financial aid package. Expenditure would shift from the services sector to the goods sector, which causes the production side to heat up. This in turn can lead to inflation and - perhaps - interest rate increases. What does this mean for climate policy? Because of the financial tightening, there's less room for green investments, both in the government and in business. And because of the pandemic, the government's priorities are focused on the short term and not the long term - which is also bad news for the climate. So you can work out different scenarios based on extremes."
"In the Netherlands, it's largely been caused by soaring energy prices. We do not expect this inflation level to persist, because the energy shortages are likely to be resolved after this winter. Another cause was the reopening of the economy after the summer. This caused a spike in spending, which meant that supply could not keep up with demand. As these factors are temporary, we do not expect inflation to increase further in the Netherlands and the eurozone. But it's a different story for the United States. We're seeing an overheating of the economy there, which is pushing up inflation. In the US there's also a direct link between inflation and interest rate rises, while in the Netherlands there is no such link, as the key policy rate is determined on the basis of the situation in Europe as a whole."
"For 2022 and 2023 we do not expect a hike. The interest rate is determined by the European Central Bank (ECB), based on the eurozone as a whole. The eurozone economy has not yet recovered from the pandemic and is therefore not yet performing as well as it could. Bear in mind, though, that there are big differences between the northern and southern countries, because Covid has hit the latter much harder in economic terms. As long as the eurozone economy performs below its potential, medium-term inflation will remain below 2%, which means the ECB has no reason to raise interest rates. For the ECB, interest rates are a policy tool for cooling down the economy if inflation is too high."
"Certainly. Missing school has an effect on a person's income for decades, and that effect is unevenly distributed. Children of highly educated parents receive better support, for example in the form of tutoring. The tutoring industry in the Netherlands is causing an ever-widening gap between privileged and underprivileged children. This is bad for the economy. The better educated people are, the more human capital the economy has to help it grow. By better educated people I don't necessarily mean university graduates. Technicians, for example, who have done vocational training, are extremely important, too. Moreover, there's what we call the 'lost Einstein' effect. This is about the 'rough diamonds' who, because of the educational divide, have less opportunity to study and find their way to the top. It's vital that such children do get a chance to reach the top, as they pave the way for others and contribute greatly to economic growth."
"We have lost the momentum to use the pandemic as a way to accelerate the shift to a sustainable economy. That's a missed opportunity, in my eyes. Nevertheless, we do still see some positive effects. For example, working from home leads to much lower energy consumption, despite the fact that you also use power and heat at home. I also strongly suspect that working from home contributes to employment opportunities for women, because there is less of a need to work part-time. For example, many mothers, and fathers too, enjoy being there when their children come home from school. If you work from home, you can do that and still work a full day."
"We expect the surge in house prices in the Netherlands to slow down after last year's 16 percent increase. Houses are becoming unaffordable for more and more people, so demand will fall back down. The slight rise in mortgage interest rates and the expiration of Covid relief will also have a dampening effect on house prices. The new coalition agreement also contains a number of measures designed to increase housing supply and curb demand. These measures could take some of the heat out of the market, but a lot depends on how easy they are to implement. The surging house prices are fuelling huge inequality in wealth accumulation in the Netherlands. That is indeed a worrying development."
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ABN Amro Bank NV published this content on 24 December 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 24 December 2021 05:16:06 UTC.
