More and more economists expect a slight decline, ‘but it is necessary’

NOS

NOS News

  • Carli Kooijman

    editor finance

  • Carli Kooijman

    editor finance

After Rabobank, ING now also expects a slight recession: the bank expects a half percent decline in the second half of this year, according to forecasts requested by NOS. Rabobank has previously reported that it predicts a mild recession. For the full year 2022, banks continue to expect small growth because it still went relatively well in the first six months.

De Nederlandsche Bank (DNB) is not talking about a recession, but it believes that economic growth has almost come to a halt. Most economists seem to agree that the economy will slow down a bit anyway.

“If there is a recession, it will be a deviant recession,” says Marieke Blom, chief economist at ING. “In a recession, people often think of high unemployment, but we do not expect that. We see that almost everyone suffers financially due to high energy prices, especially low incomes.”

A recession may even be necessary to counteract high inflation, says Lex Hoogduin, professor of economics and former DNB board member: “It is hard to imagine that we can get rid of current inflation without a recession”.

Recession is still expected

According to ING, among others, the large price increases are now the driving force behind a mild recession. Energy, fuel and food, among other things, continue to become more expensive – partly due to the war in Ukraine – and the wage increase agreed in various sectors is not high enough to absorb these rising costs.

Inflation is so high that one has to put pressure on demand to bring prices down.

Lex Hoogduin, Professor of Economics University of Groningen

“If you earn the same, but prices rise, or prices rise faster than your salary, you will have less money left and you will be forced to cut expenses,” says Marcel Klok, who is responsible for the estimate at ING. “Eat less out, one vacation less a year, especially for higher incomes.” For lower incomes, it is often not an option to cut into this kind of luxury spending because it is already difficult to manage, according to Wise.

The declining demand means that companies are also making less revenue and profits are lower, which may cause the economy to contract. ING is already seeing the first signs of this: an analysis of payments shows that we spent 3 percent less in June than in May. Research from the Planning Office also shows that in a scenario with persistently high prices, 1.2 million households may experience payment problems.

‘Recession is a drug with side effects’

The interest rate increase announced by the European Central Bank (ECB) also plays a role, says former DNB director Hoogduin. It makes it more expensive to borrow money for businesses, governments and households. They therefore spend less money, is the thought that causes prices to fall.

“The goal of the rate hike is to bring inflation back to two percent,” Hoogduin said. This is the percentage that the ECB is aiming for.

They’re going to hoard staff.

Marieke Blom, Chief Economist ING

Inflation can therefore be curbed at the expense of economic growth. According to Hoogduin, this is even necessary. “Inflation is so high that you have to put pressure on demand to bring prices down.”

A soft landing, where rising interest rates actually lead to lower inflation but not to recession, seems unrealistic to Hoogduin: “The economy is not an airplane where you can physically calculate what the optimal landing is. You never know exactly how people will react to a rise in interest rates. “

Still, it is worth trying to get our overworked economy with high inflation and a tight labor market back to health in the long run, he says: “A short-term recession is a medicine. But with side effects.”

Self-employed insecure

Often, the ‘side effects’ of a recession are that many people become unemployed as a result of reduced demand and production. But this time is different, says Blom from ING: “The labor market is now so tight that companies are more likely to use their profits than to lay off their people. They want to hoard staff.”

She makes two comments: The situation for the self-employed is becoming very uncertain, and the longer the recession lasts, the more employers will have to lay off employees.

“We now have a tight labor market, but a recession could reverse that situation,” Hoogduin said. “Maybe in a few years we will have discussions about high unemployment again.”

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