Middle East conflict poses significant inflation and growth risks for Netherlands
New calculations by De Nederlandsche Bank (DNB) indicate that the war in the Middle East could significantly increase inflation in the Netherlands and considerably slow economic growth. This impact, driven by high energy prices, is projected to be less severe than during the 2022 energy crisis.
Energy shocks and economic outlooks
De Nederlandsche Bank (DNB) has calculated the economic impact of the Middle East conflict on the Netherlands, modeling three scenarios.
The baseline, assuming energy prices return to pre-war levels by late 2026, projects a limited negative impact on Dutch economic growth and an inflation rise of over half a percentage point in 2026-2027.
In the adverse scenario, with sustained but recovering energy market disruptions, economic growth is forecast to be half a percentage point lower in 2026, with inflation rising by one percentage point.
The severe scenario, reflecting prolonged escalation and infrastructure damage, forecasts a growth slowdown of 0.8 percentage points in 2026-2027.
Inflation in this scenario increases by 1.6 percentage points in 2026 and 2.8 percentage points in 2027, leading to a decline in private consumption by over 2 percentage points in 2027 due to higher inflation impacting real incomes.
Beyond energy: broader economic ripples
Higher energy prices feed into broader goods and services, negatively impacting households' real incomes and consumer confidence, thus curbing spending.
Businesses, especially energy-intensive firms, face increased costs, leading to reluctance in investment due to higher credit risk premiums and uncertain demand.
The severe scenario highlights the risk of persistent high inflation from second-round effects.
Employees demanding higher wages to offset purchasing power loss, a dynamic intensified by the 2022 energy crisis's stronger-than-anticipated pass-through effects, particularly on food prices, can embed high inflation more deeply into the economy.
A familiar threat, less severe
The DNB's scenarios offer a sobering reminder of how geopolitical events can rapidly destabilize economic forecasts.
While the projected impact is less severe than the 2022 energy crisis, the risk of embedded second-round effects on inflation remains a significant concern for policymakers.
This analysis underscores the delicate balance required from monetary policy to ensure price stability amidst external shocks.