The Netherlands: Russian gas cut-off adds to the list of risks

This is part of the Global Monthly, see here

As indicated in our previous monthly, we currently do not have a recession in our base case. However, in recent weeks a major risk to the outlook is crystalising: a European cut-off from Russian gas. While the Netherlands has already been fully cut-off from Russian gas imports, we lay out the possible channels of impact if this were to happen at the European level. While the Dutch economy is less dependent on Russian gas than the eurozone average, a broader cut-off would have significant direct and – given the importance of trade for the Dutch economy – indirect implications. Direct effects include a potential rationing of energy. Taking into account the government’s emergency gas plans, the most gas intensive sectors such as chemicals (2% of VA; of which the fertilizer subsector contributes to 10% of total gas consumption) are expected to be first in scope of mandated stoppages. Indirect effects of foreign industry stoppages run via supply chains disruptions and reduced external demand. Germany – the largest export partner of the Netherlands – has already triggered stage 2 of its emergency gas plan, which could lead to higher gas prices for businesses and hence more insolvencies. In most emergency plans of EU countries, large industrial companies are subject to rationing before SMEs, and given that the former are more heavily integrated in global value chains, Dutch trade may be affected disproportionally.

While the risk of a Russian gas cut-off is beginning to crystalise, as explained in this month’s Global View, we are yet to incorporate this into our growth projections. We maintain our growth forecasts of 3% for 2022 and 1.3% for 2023 for now, but risks especially to our 2023 forecast are now tilted to the downside. Central to our view for 2022 is the extent to which consumption is supported in the short term by the high stock of excess savings, fixed energy contracts which postpone the hit to disposable incomes, and strong labour market prospects. So far, consumption data for March and April – months with CPI inflation above 9% – confirm this view. Overall consumption is still expanding following lockdowns at the start of the year, also driven by a further rebalancing towards services from goods consumption. A crucial factor giving consumers the confidence to use their high stock of savings is a favourable view of the labour market. Surveys suggest that, despite the looming risks on the horizon, consumers’ labour market expectations are still high, which supports consumer spending.

Another drag on growth comes from monetary tightening. Mortgage rates have risen sharply lately, more than doubling compared to the beginning of the year. As a result, mortgage lending conditions are becoming less favourable and home buyers can borrow less. As living costs rise, people have less money to spend on their mortgage payments. As a result, banks have had to reduce the amount people can borrow to buy a home. We expect the housing market to soften. Early signals are the weakening market sentiment, the declining number of transactions and the increasing number of houses for sale. For now house price rises are still strong. However, early indications suggest this won’t last. Next year the rise will turn out to be much lower, and in the case of a recession a price correction cannot be excluded.