Middle East war impact on Dutch economy very uncertain: CPB

The CPB said it expects the Dutch economy to continue growing, but more slowly, while geopolitical tensions, including the war in the Middle East, pose significant additional risks to inflation and growth.

The agency forecasts economic growth of 1.4% this year, with the purchasing power of an average household also rising by 1.4%. Wages are expected to increase slightly faster than prices, giving households a small improvement in spending power.

Next year, however, the CPB expects no growth in spending power, and up to 2030 it will increase by just 0.1% per year on average – given the coalition’s current economic strategy. Unemployment will also rise, the agency said.

The limited growth is partly the result of higher taxes and rising costs for households, including higher income tax and increased personal contributions for healthcare. Those measures have been introduced to partly pay for higher spending on defence.

Public spending is also expected to grow more strongly than income, pushing the budget deficit to more than 2% by the end of the decade.

The forecasts do not fully take account of geopolitical risks and the CPB said the war in the Middle East could push up oil and gas prices, leading to higher inflation.

In a scenario based on higher energy prices, inflation this year would be 2.9% instead of the expected 2.3%, cutting into the small rise in purchasing power. In a more negative scenario, inflation could be 1.5 percentage points higher, wiping out the increase altogether.

The CPB said the outlook is highly uncertain and depends on how long the conflict continues and how much damage it causes to supply chains and infrastructure. A prolonged war could push up prices, weaken confidence and cause the economic outlook to deteriorate, the agency said.