Economy

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Thijs Knaap, chief economist at APG, on whether the Dutch are more financially vulnerable than they used to be.

Last year, 60 percent of Dutch people were financially vulnerable or unhealthy. In 2021, the figure was 50 percent. Just over half (54 percent) of households can pay all bills without a problem, compared to 65 percent in 2021. This is evident from research on the financial health of Dutch households conducted by Deloitte in collaboration with Nibud and Leiden University. Does this indicate a downward trend?

Bad year

“2022 was a financially bad year for many people,” Knaap says. “We saw high inflation and declines in real wages (available income after adjusting for inflation, ed.). As a result, people have less money left over at the end of the month. According to Nibud, the situation has improved somewhat this year due to wage increases implemented in many sectors and the increase in the minimum wage.” Nibud therefore sees 2023 as a year in which people need to recover from the blow of 2022. Because many people have had to dip into their savings recently, Knaap believes that a large group is actually more vulnerable now than one or two years ago. However, if we look further back, for example to the 1980s - characterized by economic contraction, unemployment and budget cuts - we are less vulnerable now. Knaap: “We are on an upward trend with occasional nudges up or down, like we just had.” 

Then there is the question of what being vulnerable actually means. According to Knaap, it usually does not mean that you are slowly but surely reaching the end of your budget, but that it happens with a jolt. For example, due to the loss of a job, illness or divorce. “These kinds of shocks have always been there, and the question is, what can you do about it? Part of the solution lies with a social safety net and accessible health care. The other component is resilience: can you withstand a shock, for example by finding a (new) job? In that respect, things have been worse before. Currently, unemployment is about 3.6 percent. In the 1980s it was many times higher, especially among young people. So that resilience is quite high now.”

Gap

Another positive development is the situation of older people. “Seniors traditionally have far fewer options because they usually can no longer work. Fortunately, in the Netherlands we have set up a pension system, so there is very little poverty among the elderly here.”

There is still a gender gap in the Netherlands, but it is slowly closing. “On average, women are already more educated than men and the number of women earning an income independently is increasing. That increases resilience among women. These are all improvements that add up to making the financial vulnerability of the Dutch, on average, lower than it used to be.”

At the same time, the danger lies in that “on average”, Knaap continues. “Because has the situation of Dutch people who are less well off also improved? You could have some concerns about that. For example, people with flex contracts have a harder time absorbing a shock.” This also touches on the gap between so-called “insiders” and “outsiders”, with the insiders (those with jobs) benefiting more from wage increases than from extending employment to the “outsiders”. “This is true at any time, but to get a job you need not only intellectual capital but increasingly social capital. It’s about knowing how to behave, how things work within a company and who to go to for questions. There is a risk that people who have difficulty with that will increasingly be left out. So in many ways the situation now is better than it was in the 1980s, but that doesn’t mean that everyone is able to keep up on their own.”

Young people

Deloitte’s research also shows that young people are relatively often financially vulnerable. According to Knaap, this is related to the difference between solvency (which indicates whether you can meet your payment obligations over time, ed.) and liquidity. “Young people are enormously solvent because they still have a whole working life ahead of them in which they might earn hundreds of thousands of euros. Only, they don’t have those now, so for many young people the lack of liquidity is a problem. Measures they can take closely resemble what pension investors do to avoid liquidity problems: provide a savings buffer and keep an eye on whether it runs out too quickly. Because of the labor market shortage, it is relatively easy for young people to get a part-time job now, thus increasing their financial resilience. As a young person, it is therefore better to be in financial trouble now than it was in the 1980s.” 

APG invests in mortgage loans from MUNT Hypotheken on behalf of its pension fund clients ABP, bpfBOUW and SPW. What does the pension investor expect from the mortgage market in the longer term? And how can this investment contribute to making Dutch homes more sustainable? We asked Kay Mennens, Senior Portfolio Manager Credits at APG.

The investment in independent mortgage provider MUNT Hypotheken involves some 1.75 billion euros. Nine of the ten biggest pension funds in the Netherlands now invest in MUNT Hypotheken. They do this through the platform of DMFCO, which serves as an independent asset manager of Dutch mortgages. 

The housing market seems to be cooling off a bit in the Netherlands. Does the mortgage market still represent an attractive investment?
“Returns are still at a level that an investment like this is interesting enough for investors. However, fewer mortgages are expected to be taken out in the coming years. This is mainly because many homeowners refinanced their mortgage last year. The reason for this was that back then they could fix their loan at a low interest rate for a longer period of time. In addition, people can now take the interest rate and terms of their current mortgage with them when they move. That group is not likely to take out a new mortgage either. These developments do put some pressure on returns as competition increases. After all, the number of investors and the amount of money available remain the same, but the number of mortgages is decreasing. In recent years we saw that there is a lower limit for investors in terms of returns. If the return becomes too weak, some investors drop out, temporarily or otherwise, after which the return will pick up again. So I think the outlook is still positive, and we can achieve attractive returns over a longer period. Our goal is to earn 0.75 to 1 percent more than the risk-free rate.”

DMFCO’s chief executive looks forward to “using the ESG experiences of APG and its pension fund clients to further develop our mortgage business.” What are some examples of these experiences that DMFCO can work with?
“When we invested in Vista Mortgages in 2018, we were the first major investor on that platform, which gave us a firm foothold there. We said then that Vista’s mortgages should get a sustainable character. They then started a so-called ‘green discount’ five years ago. That means you get a discount on your mortgage interest if the home has an energy label A, or if you improve the energy label to A after purchase. That was then adopted by several other mortgage lenders. At the same time, there has been a much greater focus on helping clients make their homes more sustainable. This can be done with financing, but what you see much more often is that the problem lies with the fact that consumers are unfamiliar and inexperienced with this topic. What helps then is providing information and ensuring that the client gets in touch with a contractor. The latter can then clarify how much it costs to make a home more sustainable and what the benefits are.

Another learning point is that the period around the purchase of a house is not the best time to talk to the buyer about sustainability. Often the client already has enough on his mind and information about renovations for sustainability and its financing comes at an inconvenient time. Instead, we look at the possibility of maintaining contact with the client after the mortgage has been concluded. We do this in order to help the client as much as possible and remove possible barriers so that they will actually make their home more sustainable. A mortgage product provides the opportunity to talk to the consumer in a very direct way about sustainability. Mortgages do have a unique role in this, because with other investments you are dealing more with companies.”

It is difficult for many Dutch people, especially first-time buyers, to get a mortgage in 2023. This is partly because the conditions, such as a down payment, are a lot stricter than before. Can APG make a difference now that it invests in mortgages on behalf of its fund clients?
“Many of these conditions are set by law, so there is little APG can do to change that. Incidentally, strict regulation is one of the reasons why mortgage products do well in terms of risk. Credit losses on mortgages over the past few years have been very low. And not only in recent years when the economy was doing well, even during the 2008 financial crisis, losses remained very low: about 0.1 percent in a year based on an entire portfolio. And that’s still talking about a crisis year. Those strict underwriting criteria and conditions are positive for the credit profile of mortgages.

That new mortgage loans are now somewhat less affordable due to higher interest rates is just the way it is. At the same time, the so-called “loan-to-value” limits in neighboring countries are much lower, which means that you have to bring in a bigger down payment to buy a house. Therefore, foreign investors are also reluctant to enter the Dutch mortgage market, because here you can borrow up to 100 percent of the value of your house, which is basically very risky. On the other hand, there is a stricter test to see if the mortgage applicant’s income is sufficient to pay the monthly interest and repayment. Unlike in other countries, a mortgage is granted here based on a person’s income, not just on the house as collateral. That is the big difference.”

In conclusion, what will someone in the Netherlands who want to buy a house notice about this investment?
“To be honest, I think not very much. The landscape of Dutch mortgage lenders has been quite broad for quite some time. There are around 40 mortgage labels on the market. MUNT Hypotheken started in 2014 and has about 25 Dutch pension funds as investors. The total amount of outstanding mortgage debt in the Netherlands is over 800 billion euros. A new investment of 1.75 billion euros is not going to change much about MUNT’s product, but the investment could ensure that they maintain and perhaps strengthen their current market position as one of the biggest mortgage providers in the Netherlands.”

See the press release about the investment in MUNT Hypotheken.

Pay gap, pension gap, loss of purchasing power in divorce, financial dependency. More than 60 years after the abolition of the Incapacity Act, women are still persistently behind economically. On International Women's Day, Parkstad Limburg reflects on the theme of Women and Money. Mariëlle Heuts joins the forum discussion on behalf of APG.

Today, women still get paid less for the same positions as men, are more likely to work part-time and are less economically independent. For the cause, we need to look to recent history, says legal historian Madeleijn van den Nieuwenhuizen. She collects stories about the time when, according to the Civil Code, married women were “incapacitated” - a legal category that also applied to children and the “feeble-minded”.

This law lasted until 1956 and meant, among other things, that as a woman, you could not open your own bank account, take out a mortgage or insurance, and you could only enter into an employment contract with your husband’s formal consent. You would also technically hand over your pay to your husband, because he was in charge of the community of property you would marry into by default at that time. The idea behind this law was that in the union, including the marital union, only one could be the boss. The relentless lobbying of politician Corry Tendeloo led to the abolition of this incapacity to act.

Bizarre. With that one word, Mariëlle Heuts describes the law that was abolished in 1956. Heuts is board secretary and advisor at APG and closely involved in the transition to a new pension system, in which informing and guiding pension participants is an important part. She also helped develop online platforms that provide insight into people's own financial situation. “I kept my grandparents’ marriage booklet. It literally states that the wife owes obedience to her husband. Nowadays, that is unimaginable. After that, by the way, it took until 1980 before the Equal Treatment Act came into being.”

On International Women's Day, you will be joining discussions in a forum about women's economic inequality. What is your motivation for participating in this?  

“Sometimes seems like we are okay with the economic gap between men and women. In any case, development to close the gap is incredibly slow. And that fascinates me. At the micro level, thankfully everyone now takes it very much for granted that men and women have equal opportunities. But at the macro level, it looks like it will be years before the gender pay gap disappears.”

What surprises you the most?
“APG closed the pay gap between male and female colleagues in one fell swoop in 2019 after its own internal investigation. We made the national media with the decision to pay men and women the same salary. That kind of felt like an upside-down world.

But I am also surprised that the Netherlands lags so far behind the rest of Europe, while in other areas we are often seen as an enterprising and progressive country. I visit France a lot privately, where women working full-time is the norm. Here in the Netherlands, we not only have a gap to close between men and women, but also with the rest of Europe.”

What could be the cause of that?

“Women’s rights, as they were established by law, are undoubtedly a cause of this. The traditional division of labor that emerged at that time, even generations later, often still creates social pressure for women to take on most of the family care duties, for example. Also, looking at the current number of women in top positions, there is still a glass ceiling for women, who often see their male colleagues advance their careers faster.

Finally, I don’t think many women realize enough about the effects of certain choices - for example, going to work part-time when children are born. Not only are you signing up for a pay gap during your career, but also for a pension gap afterward.”

Sounds like there’s a lot of work yet to be done, to close that gap. Where should we start?
“It starts with awareness, so good education is essential. I see a role for employers in this. For example, by actively talking to part-time women about how they can be facilitated to work more hours. For example, through more flexible working hours or work from home options. I bet there are a lot more options when you look at reality through a different lens.

Favoring women with a quota is also a common tool. However, I see that more as a tool than a solution. It does not address the source of the problem.

Another role is for husbands and partners; they can encourage their wives. I am reminded of a conversation I had with a female colleague. She took a step up the ladder and got a managerial position. Very nice of course. But her husband didn't like that at all. Because: she was away from home more often, had more responsibility and worked more in the evening. What about the kids? The husband immediately looked to his wife for childcare and not to himself or other solutions.”

And then there are the women themselves, of course. How can they themselves tomorrow close that gap a little bit?

“Start looking for information. There is plenty about this topic on the Internet. Make sure you understand, for example, what working less means, both in the here and now (wage gap), but also for your career and your future after retirement (pension gap). Ask yourself if you would make the same choices based on this information. If you work less, you will later depend on your husband's pension pot. Do you want that? And what if you're no longer together by then? Do you want to run that risk? And discuss this at the kitchen table at home. I have witnessed a divorce in my community where the wife got so much less than the husband. I wouldn't want to experience that. And I wouldn’t wish that on my kids either.

Take a look at your salary too. Women still earn less than men for the same work. On top of that, it is often still a typical woman thing not to negotiate. Or see if you couldn’t work a few more hours. Discuss this with your employer and negotiate your salary. When I took a new step within APG, I asked HR whether my salary was appropriate. It wasn’t even about the money, but I wanted to make sure it had been seriously considered.”

International Women’s Day is also a day to celebrate what is going well, of course. What progress have you experienced yourself and what would you like to pass on?
“Let’s face it, a lot has already changed for the better over the past few generations. For example, my parents encouraged me from childhood to develop myself and earn my own money. Thanks in part to them, I am financially independent. With the full support of my husband, incidentally; I am proud of that too. Buying new shoes with my husband’s credit card? I can’t even imagine that! I am also grateful for the female role models I had. My mother showed me that work and family don't have to get in the way of each other. She always joked that with my father’s income, we paid the fixed expenses and from her income we did the fun things. Both my grandmothers also worked, even in the days when this was not done. So I am not used to anything other than women doing their part. And that is also what I want to pass on to my two daughters. That you can achieve a lot with work. That goes much further than just in a financial sense. Working and being independent is also related to the balance and equality in a relationship. Plus, it’s fun to work and it can be very meaningful.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Senior Portfolio Manager Jan-Willem Brommersma on the feasibility of Dutch industry running on hydrogen instead of gas. ‘A complete conversion of industry in the Netherlands to hydrogen is possible, but I don't see it happening before 2040.”

Recently, Minister Rob Jetten (Climate and Energy), along with companies such as Shell, Tata Steel and Gasunie, paid a visit to a hydrogen plant in Spain. The purpose of the trip: to investigate whether Spain can supply hydrogen to the Netherlands in the future. This is because to run the entire industry in the Netherlands on hydrogen, the Dutch (green) hydrogen production capacity is not sufficient. To completely replace industrial use of fossil fuels with hydrogen, additional capacity from abroad is needed. But how realistic is a completely hydrogen-based industry in the Netherlands? How soon can it be a reality and what still needs to be done to make it happen?

1200 degrees

To answer that question, you first have to look at which industries cannot operate without hydrogen. And according to Brommersma - who as an investor focuses on the chemical companies, building materials sector and part of the industrial sector - these are mainly the industries in which something has to be heated to a very high temperature.

“To reach temperatures above 250-300 degrees you now need gas or coal. That applies, for example, to the production of steel, but also bricks. You also need a temperature of 1,200 degrees for glass wool. With electricity you can heat a well-insulated house, but for this kind of industrial production process electricity is not an option. Hydrogen is.”

Hydrogen has the advantage that you can store it for a very long time, unlike electricity. As a result, you can select the times when you purchase power to produce hydrogen in a targeted way.

Negative electricity price

"To produce hydrogen, you need so-called electrolyzers, but these are expensive to use. So, you have to turn them on when the power price is low or even negative. For example, if it is windy at night, there is a large supply of power from windmills, while the demand is very small. The electricity price may even be negative. You get money to buy electricity, but you have to be able to store it. The current batteries are not really suitable for that because of their limited capacity, but hydrogen is. So, the advantage of hydrogen is not only that you can produce it when the cost price is low, the production of hydrogen can also provide a more proportional distribution of energy consumption.”

When it comes to the question of how soon Dutch industry can run entirely on hydrogen, Brommersma says two main factors are decisive: the amount of hydrogen that can be guaranteed to be produced in the Netherlands and the investments that industry makes to switch over.

“In the transport sector, there is a debate about electrically powered trucks versus hydrogen-powered trucks. Battery technology is not yet advanced enough to electrify long-distance freight transport. But the advantage of electricity is that it is available everywhere and more easily. With the introduction of solid state batteries in the future, electricity for road transport will become a better alternative to hydrogen (solid state batteries are lighter, quicker to recharge and have greater storage capacity, ed.). In that case, you will no longer need hydrogen for the transport sector and you can use it for the sectors that do not have a clean alternative: industries whose production processes require high temperatures and fertilizer production.”     

Maasvlakte

In any case, in order to base the entire industry on hydrogen, the Netherlands will have to import hydrogen from countries that can produce it cheaply. 

“Spain, Morocco and Algeria have the lowest solar and wind energy production costs, making them countries of choice for green hydrogen production. There is enough space at the Maasvlakte to store large supplies of hydrogen that you import from other countries, just as is happening now, for example, with Liquified Natural Gas (LNG). Rotterdam could make agreements with these countries to further distribute the hydrogen in the Netherlands, Belgium and perhaps Germany. For example, to meet the needs of the chemical industry in those countries. Large-scale storage of hydrogen on the Maasvlakte does require safety measures etc. to be adapted.”

When talking about the switch from fossil fuels to hydrogen, there is one company in the Netherlands that Brommersma says you can’t ignore: Tata Steel in IJmuiden.

Huge investments

“A company like Tata Steel has to make huge investments to become hydrogen-based and the lead time is long. A company like that wants to be sure that the required amount of hydrogen will be available in due course. Will the government support that? Can it guarantee that that capacity will be there? In that light, I do understand Minister Jetten’s visit to Spain.”

The challenge becomes even clearer when Brommersma lists the figures in terms of hydrogen requirements and production capacity.

“To ‘green’ existing steel production, Tata Steel alone needs 5-6 gigawatts of hydrogen. Hydrogen production in the Netherlands is expected to be about 3-4 gigawatts by 2030. Add to that the fact that in the Netherlands we have relatively many energy-intensive companies - chemicals, steel et cetera - and we cannot avoid importing hydrogen from countries like Spain and Morocco. We would be crazy not to. So, I’d say a complete conversion of industry in the Netherlands to hydrogen is possible, but I don’t see it happening before 2040.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Thijs Knaap, chief economist at APG, on whether our country’s business climate is under pressure.

When it comes to competitiveness, the Netherlands still scores high in international rankings. However, these rankings are based on historical data, argues VNO-NCW president Ingrid Thijssen in an opinion piece in De Volkskrant and a letter to the House of Representatives. In it she expresses her concerns about the future of the Dutch business climate just as our country is gearing up for the fundamental transition to a new, sustainable economy. Earlier, Boskalis’ top executive threatened that the dredging company would leave the Netherlands if parliament passed the Responsible and Sustainable International Business Act. Is the business community’s criticism justified and is it true that the business climate here is under pressure?

Hurdles
To answer this question, Knaap cites the framework by which APG, as an institutional investor, determines whether or not to invest in a country. He says this involves three questions. “In a nutshell, the first question is economic in nature: is there money to be made? Suppose you want to open a factory, for example, you want to know what raw materials are available and whether the labor force is well-trained. The second question is about who has the power. If you invest in something, you want certainty in advance about the political climate, taxes and regulations. And then there is question three: how much does it cost to open or invest in a business somewhere?”

The first two questions, about economic conditions and who has the power, are reflected in VNO-NCW’s letter, Knaap observes. “It talks about the infrastructure, the level of education of young people and the regulatory pressure from the government, among other things. But what they don’t mention is the cost of establishing a business here. That is a change though, because previously, the employers’ lobby always pushed for wage restraint. That resulted in many companies moving here in the 1980s and 1990s. Now the wind seems to be blowing from a different direction, and the employers’ organization is arguing that we should focus on knowledge, innovation and infrastructure, among other things. The fact that the issue of cost is not mentioned is also not that surprising. There is a record shortage in the labor market, so it makes sense to focus on how people can work as efficiently as possible and pay less attention to (wage) costs. It does say something about what hurdles currently need to be overcome in the Netherlands.”

Interplay
On a number of points, VNO-NCW certainly has a point, Knaap suggests. “For example, they are concerned about the declining PISA scores (international comparative research that tests the skills of 15-year-olds, ed.) of Dutch students in terms of reading and writing. Those scores are indeed falling, and you could also say that there is quite a lot of regulatory pressure in the Netherlands.” What the employers’ lobby proposes for maintaining the business climate is fine, the economist continues. “After all, no one will object to people being better educated or new clean energy networks being built. At the same time, however, you then fail to recognize that other social aspects are receiving less attention. VNO-NCW looks at the world as an entrepreneur. However, most people are consumers and employees and other things are important to them, such as equality. If many people feel disrespected, the high trust society can be put at risk.”

It is precisely this high trust society, a scientific term, that is one of the reasons why the Netherlands ranks so high in international rankings, Knaap said. “Social trust is positive for the business climate. It ensures that as an entrepreneur you don’t have to worry so much about whether a counterparty will keep the agreements made. This trust is an important public good that we have all built up together. It comes under pressure when there is great inequality in society.” That is going on now to some extent, according to Knaap. “There’s a tension there. If, as a government, you invest in infrastructure and put little in the way of businesses, that can conflict with the aim of using higher wages and taxes to help lower income groups get ahead financially. The danger of only listening to companies is that you only hear one side of the issue, even though as a government you have a responsibility for the whole of society.” While VNO-NCW's concerns are justified on some points, “ultimately it is an interplay of many, many factors that determine whether a country is attractive,” Knaap concludes.

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Thijs Knaap, chief economist at APG, on how much debt the Dutch have compared to other Europeans.

The number of Dutch households in debt is expected to increase in the coming period. The cause is the increased energy prices. Currently, debt assistance takes too long and too few people with problematic debts report to the municipality, says Minister Schouten (Poverty Policy, Participation and Pensions). She therefore wants to ensure that households with incipient money worries come into the view of social workers earlier. This should prevent debts from rising too high. Compared to other Europeans, do Dutch households have a lot of debt?

Big debtors

Figures from the Organization for Economic Cooperation and Development (OECD) show that of all European nationalities, the Swiss have the most debt, 255 percent of disposable income. “The Norwegians and Danes are still above that. But recent data from the Bank for International Settlements (the central bank of the central banks, ed.) show that many of them have recently paid off part or all of their mortgages because of rising interest rates,” Knaap says. “That would mean that residents of both those countries now have a lot less debt AND that the Netherlands is second behind Switzerland. So the conclusion is that according to this measure, of total debt to disposable income, we are pretty big debtors. Including from an international perspective.”

The development in Scandinavia does provide an indication that debt should not always be seen as a problem, Knaap continues. “A debt can be a choice, and if you have assets or a mortgage against it, it is not so bad.” To this end, he points to figures showing the correlation between debt and assets by country. “The great thing is that the Netherlands is also number two there. We also have the most assets after deducting our debts, after Belgium, scaled by disposable income.” It should be noted that the OECD does not consider pensions as assets. “If that were included, we might be the country with the largest net wealth among households. Although the reason Switzerland is missing from this list, might be its banking secrecy.”

Individual Dutch people

So much for the macro figures. Knaap: “As a society we have far more wealth than debt, and we could pay it all off tomorrow, so to speak.” But that does not apply to individual Dutchmen. “If we look at the debts of the median Dutch person (the one with the middle debt when all the debts of Dutch people are sorted from low to high, ed.), then, as the Netherlands, we are in the European middle. This does indicate that the debts we have in the Netherlands belong to a relatively small group, and this mainly concerns mortgage debts. Take those out, 61 percent of the Dutch have no debt at all. At the same time, 60 percent of the Dutch have a mortgage, the highest percentage in Europe.” This is mainly a result of the tax favoritism of homeowners. “Borrowing a lot for an expensive house does not have to be a problem, until the house suddenly becomes worth 20 percent less and is ‘under water,’” he says. This is why the Dutch Central Bank has long said that lending standards should be tightened and mortgage interest rates should be phased out. These kinds of measures will lead to the debt in the Netherlands declining. But it will be some time before we drop in the international debt rankings.”

Nibud figures show that the number of Dutch people with payment problems is not yet much higher than in previous years. “That is quite remarkable, soon after the Covid pandemic, and with current inflation,” Knaap says. “Although of course there was income support from the government during the Covid crisis, and the effects of the energy crisis are now cushioned by the price cap and tax cuts. Possibly many people had some savings in reserve that they now need to tap into. If so, more households may eventually run into debt, as the government expects.” According to Nibud, payment problems arise mainly when people’s income remains stable but expenses increase. Knaap: “That can be the case with people with a very low income but also with high incomes, who suddenly see their fixed expenses rise sharply. That is exactly what is happening now, with inflation.” 

Complex economy

The countries high in the OECD’s debt rankings, such as Denmark, Norway, Switzerland and the Netherlands, are among the most developed economies in the world. And that is no coincidence, Knaap explains. "In fact, it is related to the development and so-called financialization of a country. If an economy is unstable, debts are also lower. But that is not necessarily better than a developed economy where you can take out loans to buy a house or start a business. So the fact that the Netherlands has very high debts can also be seen as a sign that we are rich and successful. After all, we live in a very complex economy where a lot is possible: there are banks, you can buy on installment at Wehkamp, and companies are willing to provide credit. This is a consequence of the fact that we are a well-functioning society with relatively high levels of mutual trust. So we should not abolish debt, but we should be careful not to leave people with problematic debts.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Charles Kalshoven, macroeconomist at APG, on the economic benefits of the European Union for the Netherlands. “The power of the EU market is enormous.”

Three years ago, the United Kingdom left the EU. Brexit is now costing the British economy nearly 114 billion euros a year, Bloomberg news agency calculated. Their economy apparently has gone down by 4 percent since the Brits turned their backs on Europe. Jeremy Hunt, Britain’s finance minister, this week expressed his annoyance about the “gloom” over the economic outlook. He believes Brexit actually enables economic growth.

“Brussels effect”
For the Netherlands, the advantages of EU membership still clearly outweigh the disadvantages, Kalshoven argues. “The Netherlands is a small country with a limited domestic market. We therefore benefit from free trade and access to the EU market of 450 million potential consumers. Because of its size, the European internal market creates more trade and investment opportunities. This is partly a result of having one market for which the rules are harmonized. If, as a manufacturer, you produce a car or refrigerator that meets the Brussels standards, you can be sure that you can sell your product throughout the EU.” This is also where the so-called “Brussels effect” occurs. The EU internal market is so big, that it is beneficial for manufacturers to design their product to meet the -generally high- Brussels standards. They can then market their product not only in the EU, but also in other markets, such as the United States or China. “The power of the EU market is enormous. We are on a winning team.”

EU membership is also beneficial when it comes to entering into trade treaties, Kalshoven continued. “As a small country, you can say that you negotiate your own free trade treaties, but who are you, as the Netherlands?” The EU carries much more weight when negotiating a treaty, where individual member states do have a say in how it is implemented. “You have more influence when you are part of a major trading power than if you act on your own as a country, because then you can be played off against other countries.”

Trading nation
Kalshoven cites the classic book The Wealth of Nations, published by the Scotsman Adam Smith in 1776. “In it, he rails against all kinds of obstacles to free trade. And within the EU there is free trade. However, non-member countries that want to get their products into the European trading bloc can certainly run into trade barriers. British companies are noticing this now. For example, an English beer brewer was in the news recently, saying that a case of beer costs 20 pounds in England. If he wants to export that same case to the EU, the price would increase to 200 pounds because of all the (customs) formalities. That red tape at the border is anything but conducive to trade.”

If a country is not only a member of the EU but also belongs to the euro zone, not only trade is facilitated, but also payments. This allows citizens to pay with their currency in other euro countries as well, and companies need not fear that the exchange rate will suddenly change after sending their invoice.

The EU has thus reduced trade costs between member states, leading to more trade between them. For the Netherlands, as a relatively small trading nation, this means gross domestic product (GDP) is 3.1 percent higher, according to a calculation by the Netherlands Bureau for Economic Policy Analysis early last year. Few countries stand to gain even more from Brussels’ removal of trade barriers. Figures on how much the average Dutch person benefits from the EU range from 500 to 2,200 euros a year.

Disadvantages
Are there no economic disadvantages of the EU? Yes, there are some, Kalshoven states. “By becoming a member of the EU, as a country you give up partial sovereignty. That is true, at least in theory, but then I come back to my argument about small countries. How much sovereignty do you have as the Netherlands compared to say, America or China, ‘I want to make different agreements about our mutual trade’?” The same applies to countries belonging to the euro zone to a greater or lesser extent. “As a euro country, you can no longer tailor your monetary policy to what is best for your country. Instead, the European Central Bank looks at what is best for the euro zone as a whole. But again, you can ask how sovereign we were when we had the guilder. If the Bundesbank raised interest rates, we followed suit half an hour later. Not that the Germans forced us to do so, but it was much more advantageous for us to latch onto the Deutschmark than to chart our own course. We chose to give up our freedom. So, losing sovereignty by joining the euro is a disadvantage mainly in theory. We used to wait for a phone call from Frankfurt; now Klaas Knot (president of the Nederlandsche Bank) is one of the determining figures in monetary policy.”

In the Netherlands, the discussion also raged on for a long time about the fact that The Hague has been the largest net contributor to Brussels for years: we contribute more to the EU than comes back through subsidies. That is not a good way to look at the net benefit of EU membership, Kalshoven argues. For one thing, part of those remittances consists of customs duties on goods entering the EU in Rotterdam. Other EU countries are usually the final destination. So those payments should not really be seen as Dutch remittances to the EU. In addition, the economic benefits of the EU, as described above, are much broader than just EU funds, Kalshoven concludes.

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the pros and cons of a higher tax rate for wealthy people, called for at the World Economic Forum in Davos. “A higher tax rate for big fortunes can be an effective means of reducing wealth inequality and stimulating economic growth.”

“End the age of extreme wealth. Tax the ultra rich.” The open letter from The Patriotic Millionaires, a group of more than 200 American millionaires, left no mistake about the solution to the widening gap between rich and poor worldwide. The group pointed out that the ten richest men in the world doubled their wealth in the first two years of the pandemic, while 99 percent of the world’s population saw their income shrink. Their proposal: a progressive wealth tax worldwide - 2 percent for wealth over $5 million, 3 percent for wealth over $50 million and 5 percent for those who amassed more than a billion dollars.

Concentrated wealth
What is the effect of more taxes on big fortunes? Does The Patriotic Millionaires’ proposal make economic sense? In principle, yes, says Knaap. And that has a macroeconomic and a political reason. “First, it is important to ask: what do people do with their money? Those with large fortunes appear to save and invest a large part of their wealth and thus spend only a small part of it. An ECB survey of French families shows that this effect occurs starting from 181,000 euros in assets. The more wealth is concentrated in a small group, the greater the risk of an economic situation where too little is spent. In that case, economic growth is jeopardized because there is a lack of demand. Therefore, if you succeed in reducing wealth inequality, you can stimulate economic growth. After all, people with less wealth spend a relatively large portion of it. For a measurable macroeconomic effect, though, a broad measure is needed. Taxing only the ultra rich will not have the desired effect.”

Influence for sale
The second argument for taxing big fortunes more heavily, according to Knaap, lies in the fact that political influence can sometimes be bought.

“Particularly in the United States, very wealthy people are disproportionately able to influence the political process. That results in government policies that at least don't make the rich any less rich. And what is good for a minority does not necessarily benefit the majority.”

So, a higher tax rate on large fortunes can be an effective means of reducing wealth inequality and stimulating economic growth. But there are a number of caveats to that tax approach, says Knaap.

Monaco
“Multimillionaires are unlikely to work less hard if you tax their last million more heavily. But they are more likely to try to move those assets to Monaco, the British Virgin Islands or other places where tax authorities can't get to them. Incidentally, that has become a little more difficult by now. Thirty years ago, you could take a suitcase of money to Switzerland and then those assets were invisible. But more and more countries have converted in this respect. People who want to hide their wealth now have to go much further with it. Government pressure is increasing, partially because of the digital capabilities available today to track assets. But the higher the tax burden, the greater the incentive to get out from under it. People are inventive, and the really wealthy always have an army of tax experts to help them accommodate that wealth as favorably as possible from a tax perspective.”

Billions in assets
So, all in all, a progressive tax rate for very large assets is economically a good idea?

“Yes, but it will only be effective if that rate is applied not only to billion-dollar assets, but also to the group below that. Moreover, if you want this to happen it should be done globally, as much as possible, because wealth always finds its way to the place with the most favorable conditions. In any case, it seems that we are moving more and more in the direction of globally uniform rates. The same applies to the Netherlands. The positions of almost every political party reflect the need to increase tax revenues. And these are highest when opportunities to move assets to tax havens are limited.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Charles Kalshoven, macro economist at APG, on the question of whether the Netherlands really does have an increasing number of flex workers.

Since the end of the Covid crisis, the Dutch labor market has been able to produce impressive figures. At the end of the second quarter of last year, for example, there were 143 vacancies for every 100 unemployed, a record. With such a tight labor market, you would think that the number of permanent jobs would increase. After all, workers have something to choose from, and if they don’t like the working conditions, there are plenty of other jobs. Yet the Netherlands remains flex-addicted, nu.nl recently wrote. But is that really true? According to Kalshoven, the situation is more nuanced than that.

On-call workers

The number of flex workers in the Netherlands in the third quarter of last year was 2.7 million, down 97,000 from the second quarter. In addition, CBS figures show that the number of employees with permanent employment rose by 46,000 over the same period, to a total of 5.3 million. The number of permanent jobs has never been higher, Kalshoven notes. “The number of fixed-term contracts, usually for one or two years, has actually declined somewhat recently. Probably partly because it was easy to part with these workers during the Covid years.” Figures regarding the number of temporary workers also do not seem to support the claim of increased flexibilization. However, the number of on-call workers has risen sharply in recent years, especially in the hospitality industry.

Covid plays an important role in this, Kalshoven believes. “In a normal business cycle, when the economy comes out of a recession, employers are not sure whether economic growth is sustainable. Therefore, they prefer temporary workers. After all, they don’t want to risk being stuck with employees if the economy does slump again.” At some point the growth becomes steady and then employers do dare to hire people on a permanent basis. “The Covid crisis represented an interruption of the normal business cycle. Many sectors were forced into a kind of coma state and there was little investment. As a result, the need for temporary ‘hands’ was less. Now that the lockdowns are over, economic activity has returned. But the economic environment is uncertain: high inflation, rising interest rates and fears of recession. In sectors that have taken a hit, such as the hospitality industry, business owners are therefore paying extra close attention to costs. For example, by using on-call workers, so that you only incur costs when it is really necessary and there is turnover in return.” 

The self-employed

Not all flexibilization is a social problem, according to Kalshoven. “Some people actually choose flexibility and variety. And sometimes it just pays better. Being self-employed can also be seen as a form of flexible work.” The story of flex work versus permanent employment is also a story of power dynamics. “If a permanent contract is the highest that anyone aspires to, you would expect that in a tight labor market many more permanent contracts would be offered. The number of permanent jobs has now indeed increased, but so has the number of self-employed workers.” That number rose by 65,000 in the third quarter of last year to a total of 1.2 million. “Staff shortages also mean that there is less entrepreneurial risk for dentists, construction workers and healthcare staff who hire themselves out flexibly, for example.”

What does pose a problem is false independence. Kalshoven: “You don’t want people to actually have an employment relationship with the company they work for, but still be forced to work as self-employed.” That saves the employer premiums for pension and employee insurance, among other things, but costs the employee security. Another problem, pointed out by the Borstlap Commission two years ago, is that in the Dutch labor market, a permanent job is often too permanent, and flexible work is often too flexible. “People in permanent jobs are perhaps too well protected, and flex workers too little,” Kalshoven argues. “Actually, you want a convergence between the two, because if a permanent job and a flexible job are too far apart, you get the classic ‘insider-outsider’ problem. If you are lucky enough to have a permanent job, then you count as an insider: someone with access to all kinds of social services and, for example, the ability to buy a house. On the other hand, you have the outsiders, who go from annual contract to temp job. Then buying a house and accruing a good pension are often beyond their means. More security also promotes investment in ‘human capital’ and thus labor productivity. That is not superfluous luxury in a structurally tight labor market - think of the aging population.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Martijn Olthof, equity investor with a specialization in utilities, on why energy rates do not immediately fluctuate with the price of natural gas.

With the sharp drop in the price of natural gas in recent weeks, you would expect to see that drop reflected in the energy rates you pay. Especially since not only the price for short-term supply has dropped, but also that for supply over the next two years. But although the first energy suppliers have already started lowering rates, they are not immediately moving along with a falling - or rising - price of natural gas price. There are several reasons for that.

Notice period
“These things always take some time,” Olthof says. “When prices rose very sharply last year, a number of energy providers tried to raise rates quickly. However, those suppliers did not fare well, because a price increase should always be announced well in advance. That gives customers the opportunity to switch to another provider.” The fact that suppliers must observe the customer's notice period also causes them to be cautious about reducing their rates quickly. “They then run the risk that, in the event of rising gas prices, they will have to wait for the notice period before they are allowed to raise their rates again.”

Opportunism can also play a role, Olthof explains. “There are companies that take advantage of current inflation by raising their prices beyond their own costs because they know they can get away with it. This is also known as greedflation. Inflation causes people to lose their anchor points about what is a reasonable price. They are therefore more likely to accept price increases because everything is getting more expensive. Perhaps that is why some energy companies think: we will leave the high prices as they are for now.” 

China
The fact that natural gas prices are currently at their lowest level since February 2022 does not mean that they will stay that way. “Natural gas prices are currently low for several reasons. It is partly because factories could not afford the earlier higher prices and therefore shut down production - reducing the demand for natural gas. Another reason is that consumers are turning down their thermostat and taking shorter showers to save energy. The mild winter weather also plays an important role.” And then there is China, which has been buying less liquefied gas, better known as LNG, in recent years because of the lockdowns the country has been in. “If the Chinese economy reopens more and more and it still starts to get very cold here in Europe, there could suddenly be a shortage of natural gas in Europe. Therefore, it is premature to say right now: the natural gas shortage problem is gone, the natural gas price has dropped significantly so rates can go down again.” This uncertainty in the energy market also prevents suppliers from reducing their rates quickly. After all, they then run the risk of having to reverse the reduction a month later.

Olthof emphasizes that the energy market is currently in extraordinary circumstances. “That is also why the government intervenes with a price cap. But if there is scarcity of a certain product and more demand than supply, that product simply becomes expensive. That also applies to natural gas, because people don't want to be left out in the cold.” What does not help to keep the price of gas down permanently is that there is no way to create additional supply very quickly. “We can get LNG from Qatar or America, but that is not immediately available. So that additional supply can only contribute to lowering the price of natural gas in the longer term.” 

Sustainable energy
Natural gas reserves are now unprecedentedly high in Europe, which may help it get through next winter. At the same time, it is hoped that renewable energy will get off the ground even faster, Olthof says. “More solar and wind farms are being built every year, but it will be some time before renewable energy can really play a big role. In the longer term, natural gas, and thus the price of natural gas, will no longer be relevant. However, if you look at how much natural gas Europe imported from Russia in recent years, the threat of a shortage will continue to hang over the European market in the coming years. That threat can be reduced by a combination of three measures. Import natural gas from other countries, consume less natural gas and commit even more to renewable energy.” The energy market will remain volatile in the coming period, and it remains to be seen to what extent and especially how fast energy rates will fluctuate along with the price of gas.

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on whether the falling energy prices are helping to prevent the impending recession.

The price of natural gas in Europe has fallen sharply recently. While it was still 135 euros per megawatt hour in mid-December, on Wednesday the gas price fell below 70 euros. The price of natural gas has not been this low since February 2022. Assuming that rising energy prices are an important part of the current inflation, the question is to what extent falling energy prices carry over into a reduction in the price level. And - perhaps more importantly - whether falling energy prices can prevent the impending recession. A recession would mean that the Dutch economy had two consecutive quarters of negative economic growth. The third quarter of 2022 saw a small contraction, and for the fourth quarter that seems very likely as well. This makes a recession seem all but inevitable. This is true for a third of the world economy, incidentally, the International Monetary Fund (IMF) recently warned. 

Inflation

It is beyond dispute that the falling energy price will ensure that inflation remains limited, according to Knaap. “The question is to what extent and whether it is enough. In November, inflation in the euro zone was 10 percent. Of that, energy accounted for almost 4 percent. If energy prices were to fall year after year, you could eliminate almost half of inflation. The only problem is that inflation would still be 5 percent.” That percentage is mainly caused by the price increase of food (3 percent), and the rest by that of services and goods. “If you look at the price increases of energy and food that we had before 2008, when inflation was 2 percent (the target rate used by the European Central Bank, ed.), and add that to the current inflation rate for services and goods, you arrive at a total inflation rate of 4 percent. That means that not only energy and food have become much more expensive, but also services and goods. Why is that? Partly because of energy, because you need gas to grow tulips, for example, but also partly because of wages. And those are harder to limit than energy prices.” In short, the falling energy price is keeping inflation down. Yet inflation is still so high that the European Central Bank (ECB) is not yet inclined to stop its interest rate hikes.

With that tightening policy, the ECB is making life more expensive in the EU. This is because borrowing money is costing businesses and consumers more money at higher interest rates. But inflation also leads to loss of purchasing power in a direct sense, Knaap explains. “If you spend 100 euros more on energy, you have 100 euros less to spend in the supermarket. If the price of energy drops, purchasing power can partially recover. The dynamics that occur in a recession, where consumers spend less, companies get into trouble as a result and have to lay off employees, which causes people to spend even less, are slowed down when energy prices fall. And that does make a difference to the severity of the recession, since the price increases were substantial in the past year.” However, Knaap believes that falling energy prices will not be enough to avert the recession, as energy prices no longer sufficiently account for inflation.

Dynamics

A recession can be a self-reinforcing process that gets caught up in a turbo, so to speak, as happened during the 2008 financial crisis. “That dynamic is now happening to some degree, but despite the fact that we had a bad investment year, no banks are going bankrupt, the housing market is not on the verge of collapse and there is no threat of a layoff wave. Still, last year’s skyrocketing energy prices constituted a hefty economic blow, causing consumers to spend a larger portion of their income on energy. Something like that almost automatically causes a recession, because that money cannot be spent on anything else. And then there is the ECB’s policy on top of that.”

According to Knaap, the consensus is that it won’t be such a bad recession this time around, mainly because there are no mass layoffs and restructurings. “In that sense, falling energy prices are also good news, but not good enough. Incidentally, it could have been worse. Last year we consumed 25% less natural gas in the Netherlands, which is really a lot. Half of that can be attributed to the mild winter and the use of alternative energy sources, the other half is the price effect. Companies and consumers used less natural gas due to the high natural gas price. It is a positive discovery that we managed to consume substantially less natural gas without it really having much impact on our lives. For all we knew, despite our efforts to reduce our energy consumption, we could still have used the same amount of natural gas as before. Then we would be in a much worse situation now.”

Historic labor market tightness, sharply fluctuating stock prices and inflation reaching into the double digits. 2022 has been quite an eventful year economically. But what will 2023 bring us? In this series, Charles Kalshoven, macroeconomist and senior strategist at APG, explains what we can expect next year in terms of our purchasing power, the labor market and the housing market, among other things. Today part 4 (final): What 2023 will be like for investments?

Kalshoven does not want us to call this investment advice. That would have to be tailored to someone’s individual situation, which is not possible in an interview. But he can talk about possible changes in the world of investing. This year, for example, both stocks and bonds went down. “In a traditional portfolio, which is split between stocks and bonds, the idea is that when the economy is bad the bonds will do well.” That did not hold true this year, as central banks sought to combat unexpected inflation and raised interest rates. “That is directly bad for the value of bonds and indirectly bad for equities, as growth expectations decline.”

Recession
Because stock prices have fallen significantly since the beginning of the year, but corporate profits still look good, equity valuations are now lower. On that basis, expected medium-term returns have improved compared to last year, Kalshoven says. “With that said, I would note that 2023 is the year when many countries will face a recession, and that development does not seem to be fully reflected in stock prices yet.” Perhaps it will be a shallow recession with little impact on corporate profitability, but it could also lead to a self-reinforcing mechanism, the strategist said. “Suppose the economy and corporate sales fall by 1 percent - a mild recession - corporate profits will fall much harder than by that one percent. This is because companies have fixed costs, so their profits fall harder. Then the ratio of prices to profits will look a lot more unfavorable again. And a recession brings uncertainty, so investors want to be better rewarded for risk. In other words, then stock prices can take a hit.”

Can anything be said about stock returns in 2023? According to Kalshoven, stock prices are far too volatile to make statements about precise returns within a single calendar year. Moreover, it is important not to focus on a single year. “What the stock price does today or tomorrow is mere speculation. Over longer horizons, however, you can expect a certain return based on fundamental factors. Long-term investing is also not without risk, but it is one for which - on average - you are rewarded. So, rather than avoiding risks, you should diversify your portfolio. That continues to make sense, even in 2023.” And that diversification can be done in several ways. “Research shows that just a few stocks are responsible for most of the returns in the stock market. If you invest in a wide range of stocks, there is a good chance that the good stocks are among them. In addition, it is not only wise to diversify your assets over several stocks, but also over bonds and commodities, for example. Then your invested capital will be more resistant to different economic scenarios, such as the high, unexpected inflation this year or a recession next year.”

Diversifying over time
In addition to diversifying across breadth, it is possible to diversify over time. Even 2023 will have periods when stock prices rise and periods when they fall. Kalshoven: “Especially if you are in the accumulation phase of your portfolio and you set aside money every month or quarter, sometimes you will buy stocks when they are expensive, and sometimes when they are cheap. But because your purchases are spread out over time, the biggest outliers are averaged out.” This is also where so-called rebalancing comes into play, Kalshoven explains. “When you invest, your investment strategy is important. In it, based on your investment horizon and risk profile, among other things, you choose a certain percentage of stocks, bonds, commodities and cash, for example. Those categories book different returns, so you slowly drift away from the portfolio breakdown you had set out in your strategy.” To get back to that, you sell some of the categories that have done well, and buy in from those that have done poorly. “In the long run, that improves your risk-return profile. It makes sense to do that rebalancing at least once a year. The Christmas holidays might be a good opportunity for that.” 

Diversification does not have to be only about financial investments. “Actually, you have to look very broadly: the house you own is also part of your assets. Because of that consideration in real estate, you no longer need to invest extensively in real estate funds in the stock markets. What you can do next year is invest in solar panels or insulation material, for example. This will help you reduce your energy bill. And it can be seen as a form of green investment.” Your “human capital” - future labor income - can also be seen as part of your total assets. You can boost that by investing in your skills. “Maybe you can improve those by investing in an education that increases your chances in the job market. That too is a form of return.”

Taxes
Then there are the tax changes in 2023 that affect investments. “Next year, the Tax Department will assume a 0.3 percent return on savings and 6.18 percent on investments. On that 6.18 percent return, you pay 31 percent tax this year and 32 percent next year. That’s quite a lot, and it is also definitely something to consider.” Still, according to Kalshoven, don’t let this tax rate influence you too much. “In the long run, even after taxes, you can expect to make more returns with investments than with savings. And you can come up with all kinds of tricks to make the ‘investing’ box optically smaller - for example, by choosing more risky instruments like stock options instead of stocks - but that probably only distracts from your long-term strategy. For many people, incidentally, the tax will not apply, because in 2023 you pay no tax on the first 57,000 euros or - for tax partners - 114,000 euros of equity in box 3.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Peter Verbaken, Head of APG’s Commodities Team, on the feasibility of the EU plan to make citizens pay for their carbon emissions.

Currently, an emissions trading system already exists in the EU for large companies in a number of sectors. To be allowed to emit carbon, these companies need certificates issued by Brussels. Companies can buy the certificates and, if desired, trade them with other companies. By issuing fewer and fewer of such certificates, resulting in a rise in the carbon price, the EU hopes to reduce total emissions from industry each year. Incidentally, consumers themselves do not have to buy certificates to fill up their cars or heat their homes. That responsibility lies with gas stations and energy suppliers. Because they will most likely pass this on to their customers, European consumers are likely to pay more for fossil fuels for cars and heating from 2027 onwards.

Greening
“The EU is moderately leading the way in this, in the sense that a carbon tax is imposed on consumers. It is thus the first attempt to ‘green’ consumer behavior through policy in this way,” Verbaken explains. One difference with the existing emissions trading system is that with that there is always a concern about whether industries are not moving their economic activities to countries that do not tax carbon emissions. That makes implementing the system complex. “With this variant for consumers you don’t have that concern, because it applies to the whole EU and people here still have to take out an energy contract or fill up their car or charge it. What also improves the practicability is that it only involves energy companies and gas stations that have to buy the certificates and then pass the cost on to the customer. The number of participants is thus limited.”

With measures like this, it is important to offer people an alternative, Verbaken argues. “And those alternatives are there. To offset the carbon tax on home heating, consumers can insulate their homes or buy a heat pump. In addition, owning an electric car is becoming easier and more affordable, and thus increasingly an alternative to the combustion engine car.” The question, however, is whether these alternatives are feasible for everyone. “That should be evident from the details of implementation. The establishment of the Social Climate Fund, which is part of the legislation, should at least ensure that even consumers with the lowest incomes can go green. Because in the end, that’s what you want. If everyone keeps doing the same thing and just pays for the allowances, you won’t achieve much. By the way, the proceeds from the emission rights sold are used for innovation and sustainability. They’ve done a good job of that in Brussels.”

Sensitivity
What does it mean for consumers? “Fuel for the car and energy for heating the home will become slightly more expensive. However, there are some caveats built into the legislation so that the impact on consumers does not become too extreme. This is partly due to the high price of energy last year. That is why the law will not take effect until 2027. Should energy bills be exceptionally high by then, the plan can be postponed for a year. And then there is the Social Climate Fund. In addition, Brussels is keeping open the possibility of making additional carbon allowances available in the event of a very high carbon price, which could reduce the high price somewhat.”

A possible sensitivity involved in directly taxing consumers’ carbon emissions is that at the same time there are companies and entire sectors that are not yet or only partially covered by the emissions trading system. Verbaken: “That is a bit of a political discussion, but in any case, it also has to do with the question of how simple or complicated the feasibility of such a system is. With the carbon tax for industry, there is a concern that companies will move to a place where there is no carbon tax. Then by importing the final product of such a company you would still be contributing to carbon emissions. The new legislation also tries to address this by introducing a so-called Carbon Border Adjustment Mechanism (CBAM). This should ensure that products shipped to the EU will still have to pay for carbon emissions at the border if these emissions have not been taxed sufficiently in the country of origin. Because its implementation is complicated, a trial will be set up in the coming years to show whether the CABM is feasible. This is not an issue with the consumer carbon tax, which is both feasible and practicable.”

Historic labor market tightness, sharply fluctuating stock prices and inflation reaching into the double digits. 2022 has been quite an eventful year economically. But what will 2023 bring us? In this series, Charles Kalshoven, macroeconomist and senior strategist at APG, explains what we can expect in the coming year with respect to our purchasing power, the labor market and investments, among other things. Today part 3: What 2023 will be like for the housing market?

The overheated housing market of recent years tempted RTL to produce the TV program Kopen zonder kijken (Buying Site Unseen). People who had trouble finding a suitable home turned to that program to figure out how to be able to buy their own home. Kalshoven expects that in 2023, it would be better for this format to be changed to a variant where not buyers, but sellers are helped. After all, homes are getting cheaper, giving buyers more to choose from. On the other hand, the cost of living for an owner-occupied home is increasing due to increased interest rates. This makes it (even) more difficult to find a home, especially for first-time buyers.

Demands
A cooling housing market follows a set pattern, Kalshoven says. “Realtors first notice that the influx of viewers decreases, but still manage to sell homes at good prices. Then comes a period when houses are for sale for longer, which leads to an increase in supply. This is because sellers have a price in their heads and don’t want to drop it too quickly. The number of transactions then decreases, something you are already seeing. In recent years, potential buyers regularly waived all kinds of requirements, such as an architectural inspection, for fear of missing the boat. That period is over for now.”

Buyers may be getting more critical, but at the same time, mortgage costs are rising. “The rise in interest rates from roughly 1.5 percent at the beginning of this year to 4.5 percent now means that an annuity mortgage becomes almost 50 percent more expensive per month gross. Net, the difference is smaller. First, the lion’s share of monthly payments consisted of repayment. Now the bulk is interest - and you can deduct that from your taxes. In the first year, the net monthly costs are therefore ‘only’ 27 percent higher. But don’t forget that over time, a larger part of your monthly amount will be repayment and a smaller part will be interest. So, in the end, in year 30 - in which you almost only repay – you’ll be paying 50 percent more than before.” According to Kalshoven, falling house prices do not outweigh this: “According to the Central Bureau of Statistics, house prices in October were about 1.5 percent below the peak, the Dutch Association of Realtors saw prices fall by 6 percent in the third quarter. To end up with lower monthly costs, you need a drop of a quarter or more. I don’t see that happening any time soon.”

Jubelton
The increasing cost of housing is also reflected in technology company Calcasa’s affordability index. Kalshoven: “That index looks at average net wages and net housing costs. Right now, people are spending an average of 20 percent of their income on housing. Between 2014 and early this year that was less than 15 percent. Between 1999 and 2012, incidentally, it fluctuated between 20 and 27 percent.” Rising mortgage interest rates are also resulting in lower confidence in the housing market. The indicator that Vereniging Eigen Huis (Own Your Home Association) has for this is at its lowest point since September 2013. First-time buyers in particular, are affected by the rising interest rates. After all, they have no surplus value from a previous house. Also, the Jubelton (tax-free gift for buying a house) is disappearing. This year, parents can still give 106,671 euros tax-free to a child for the purchase of a house, next year it will be 28,947 euros. In 2024, the scheme will be abolished altogether.

Kalshoven expects house prices to fall by up to 5 percent next year. This is a far cry from the price declines after the 2008 credit crisis. “A few things are really different now. There is a long wait for a social rental house and rents in the free sector are high. This keeps it interesting to buy, even though people can now offer less because of higher interest rates. At the same time, new construction is stagnating, due to both the nitrogen problem and the construction labor shortage, and thus the housing supply.” Normally, the housing market only goes bad when many people have to sell their homes, for example, because they become unemployed. Because of the tightness in the labor market, however, that is unlikely, Kalshoven said. “In addition, homeowners are less likely to get into trouble now because the conditions for obtaining a mortgage have become stricter in recent years. You can’t borrow more than 100 percent and you start repaying right away. And then many homeowners still have excess value on their homes due to the sharp price increases of recent years.” Consequently, the housing market is in a much more solid position than it was in 2008.

The state of the housing market affects the economy, Kalshoven argues. “When house prices fall, people feel less wealthy. That results in them consuming less, but that doesn’t have to be a bad thing in this time of high inflation. It is also better for the planet. Some sectors may suffer to some extent from the fact that there are fewer transactions in the housing market. Examples include kitchen retailers and interior design stores. After all, a new house is often the time for a new kitchen or flooring.”

Outcome
Next year, we can expect a slight drop in home prices, which may encourage the buyers to be more critical than in the overheated housing market of recent years. However, the price decline will be limited to about 5 percent, due to the housing shortage and the fact that the labor market is in good shape. For first-time buyers, homeownership will remain difficult to achieve, as the decline in home prices is offset by increased mortgage interest rates and the elimination of the Jubelton. Looking at houses will be easier, as they are less likely to disappear from the market, but buying will put a greater strain on the wallet. Many a starter will opt for “looking without buying” in 2023 for that reason.

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the implications for global trade of the Inflation Reduction Act: the law passed by the US Congress in the summer of 2022 to curb inflation. “When multilateralism breaks down, it's actually always bad for investment and trade.”

As part of the Inflation Reduction Act, $391 billion is set aside for spending on energy security and climate change. Of that amount, $270 billion is earmarked for subsidies and tax breaks, including for electric cars and renewable energy. This is on the condition that key components come from the US and assembly is also done there. This goes against the grain of the EU, among others. Because by spending billions to protect American industries, America is violating international trade treaties and creating an uneven playing field that disadvantages companies that do not produce in the U.S. This one-sided way of operating by the U.S. fits a pattern that has been emerging for some time, says Knaap. 

Crossroads

“After World War II, we built an effective legal system for world trade. In it, the World Trade Organization - the WTO - and, to a lesser extent, the International Monetary Fund (IMF) and the World Bank can use arbitration in disputes between countries, where large countries have to play by the same rules as small countries. This has worked well and provided globalization since the 1940s-50s. However, Americans have become less and less compliant with this system, and this development has been going on for a long time.”

There is now a belief among Americans that this model is no longer suitable for the next century, Knaap says.

“This is particularly because China has always played by the rules, but in doing so has been able to grow into a dangerous adversary very quickly - using American technology and American capital. The U.S. wants to stop that advance, and they cannot do that other than by torpedoing the entire system. That already happened under President Trump, who declared all kinds of trade measures against China that were illegal under WTO rules. But Biden is continuing that policy and, in addition, has added new ‘Buy American’ measures. In the past, arbitration would then take place between Europe and the U.S., with a judge reviewing measures for compliance with the trade agreement. But America is increasingly unwilling to abide by the judgment of non-U.S. judges. This movement toward greater sovereignty, by the way, is not limited to the US. Brexit is another example, and it has also become almost impossible to conclude new trade treaties with the Netherlands.

Money taken away

This is a breakdown of the multilateral system between countries, and according to Knaap, this is not without risk.

“If the EU starts protecting its industries as well, the global economy as a whole becomes less efficient. In that case, overcapacity will arise and that is never useful from an economic perspective. It is also a setback for APG as an investor. As an investor, you want some kind of legal guarantee that money cannot simply be taken from you. You used to have more resources for that. Now you depend on whether a local court wants to comply with an international treaty. That makes investing in that country less secure, limiting the global opportunities for us to invest pension money.”

Advocates of free trade

The idea that Europe will “repay the U.S. in equal measure” and thus world trade will increasingly fall into a downward spiral of protectionism is not entirely inconceivable, according to Knaap.  

"France in particular likes to conduct industrial policy (government support and stimulation of national industries, ed.) and are not particularly fond of free trade. The British were always the leader of the free trade bloc, but now that the U.K. is no longer a member of the EU, the Netherlands and perhaps the Scandinavian countries should take that role. The voice of free trade advocates has therefore become less influential, so it is quite possible that Europe will take countermeasures.”

At the same time, according to Knaap, there is certainly still room for new agreements between Europe and the U.S.

Better marriage

“China and the U.S. don’t actually talk; both sides just publish trade measures.  In that respect, the US and Europe have a better marriage, which leaves more room to accommodate each other. There is also a deal to be made, because the Americans need us in certain areas - for example, they want us to stop supplying chips to China. But then you end up with bilateral treaties between large countries or blocs. Multilateralism slowly but surely breaks down this way and you end up in a world in which large geopolitical blocs thwart each other or make deals. This is actually always bad for investment and trade, because you never know who will be in charge somewhere next year and what rules will apply then.”

Historic labor market shortages, sharply fluctuating stock prices and inflation reaching into the double digits. 2022 has been quite an eventful year economically. But what will 2023 bring us? In this series, Charles Kalshoven, macroeconomist and senior strategist at APG, explains what we can expect regarding the housing market, our purchasing power, the economy and more, in the coming year. Today part 2: What 2023 will be like for the labor market?

The labor market broke three records in the first quarter of this year. There were 133 job openings for every 100 unemployed in the first quarter. The total number of job openings increased by 59,000 to reach 451,000. And the number of jobs rose sharply, by 127,000, reaching the record number of 11,244,000. Will the tightness in the labor market continue or will the upcoming recession throw sand in the wheels?

Job opening rate
There are still a lot of job openings: 121 for every 100 unemployed, CBS figures for the third quarter show. “And there is also another way of measuring that shows the tightness in the labor market. That is the job opening rate, also by CBS,” Kalshoven explained. “That one looks at the number of vacancies per 1,000 jobs, which is currently at 51. Only in the last quarter was that figure higher, at 54. If we look at the average vacancy rate over the past 25 years, you end up with 23. We are now at more than double that. That does indicate that, despite the approaching recession, it is still fairly easy to find a job.” Kalshoven expects the same to be true next year. “Of course, in a weaker economy, the number of ‘hands’ needed tapers off, but I think it translates mostly into less significant shortages. For many employers, conditions also have to get very bad before they want to part with staff that was recruited with great effort.”

There are four sectors where the vacancy rate is above average: construction, hospitality, information & communications and mineral extraction. “In construction, you could say that the number of openings might decrease somewhat if projects have to be postponed due to the nitrogen issue, but even in that case there would still be a lot of vacancies,” Kalshoven says. Remarkably, education has one of the lowest vacancy rates at 21 vacancies per 1,000 people in employment, even though the government is taking measures to combat the shortage in that sector. “However, if you compare it to the last 25 years, the current vacancy rate for education is also high. And of course, a class without a teacher is socially more drastic than a pub without a bartender.” 

Wage-price spiral
Rising employment opportunities, according to the Central Planning Bureau (CPB), will occur mainly among employees rather than among the self-employed who, on the contrary, showed stable growth during the Covid years. The fact that demand for workers remains high translates partly into more jobs and partly into higher wages (around 4 percent). Next year, that will yield an improvement in purchasing power. Still, Kalshoven doesn’t think there will be a wage-price spiral. “Wages are not following this year’s inflation, which is trending into the double digits. That reduces the chance that inflation will reinforce itself.” 

The CPB expects there to be more employed people in 2023, but also more unemployed. Kalshoven: “That seems contradictory, but what’s behind it is a rising labor force. This is partly because the population between the ages of 15 and 75 is growing, and partly because a larger part of that population wants to work. The estimate is that about 140 thousand more people will come forward, of which roughly two-thirds will find a job - and one-third will not.” The CPB assumes that unemployment will rise from 3.4 to 3.9 percent, or from 340,000 to 385,000 unemployed. A number that, Kalshoven says, is all within limits: “If you become unemployed it can be financially and personally devastating. In that sense, any increase is undesirable. At the same time, an unemployment rate of 3.9% is historically very low. Apart from this year, 2022, we have to go back to 1974 for that kind of rate. That was quite a long time ago: that year the world was just getting to know ABBA and Ike and Tina were still together.”

ICT is a sector with many job openings. Yet the number of vacancies is less above the long-term average than in other sectors. The sector excels less in relative growth. It is a trend that has been going on for some time in the United States, where many tech companies have recently laid off many employees. “ICT workers have less to choose from compared to the past, but their job prospects are still far from poor,” Kalshoven said. “Incidentally, you also often see that a recession leads to a realignment in the labor market and to new opportunities for the future. For example, Google started hiring after the dotcom bubble burst, when many techies were looking for new jobs, allowing the company to grow rapidly.”

Insanity
“The job vacancy rate is still very high, wages are up about 4 percent and the minimum wage is actually up 10 percent,” Kalshoven summarizes. “That means most jobs will pay better in 2023 than they did this year. This year, of course, the job market was very extreme. Just think of those ads where employers would come and ‘apply’ at an employee’s home. You also sometimes saw that you could apply via WhatsApp or snapchat or without a resume. That insanity will probably dissipate some by next year, but it’s still a good market to find a job.”

The latest iPhone. A bigger flat screen, with an even clearer picture. ‘Ultra-fast fashion’ with 52 collections in a year, made to be worn for a short time. As a consumer, it can be hard to resist temptation sometimes. And eager buying is good for the economy. But we are also increasingly running into the limits of our consumerism. What are those limits? And what does all that consuming get us? In this series, we invite people from various backgrounds to discuss these issues from their specific point of view. Episode 1: the economic perspective - explained by Charles Kalshoven, macroeconomist at APG. 

“Discounts of up to 90%”, “Bizarre” discounts, “Exclusive one-day deals!”. If there is one day when consumer temptations lurk, it is Black Friday. Some chains even stretch the concept into “Black Weeks”. How big an effect does Black Friday actually have on our economy? And how important is Black Friday to Dutch retail?

Kalshoven: “The fourth quarter is an important quarter for retail, because of the Sinterklaas and Christmas period, among others. In the third quarter, consumption growth stagnated this year. Consumption of durable goods, such as furniture and cars, even slumped, but this was disguised by the fact that demand for services held up. Black Friday may give sales a push in the right direction. In that sense, from a retail perspective, the phenomenon is important. Moreover, the sales on Black Friday provide an indication of what the rest of the fourth quarter will look like.”

How big do you expect the Black Friday effect to be this year?  

“In October, consumer confidence reached a record low of -59 (see box). In November, it reached -57. But that is still well below the average of -9 over the past 20 years and lower than around the time of the euro crisis or the credit crunch in 2007/2008. While this figure is based on consumers’ own judgement and expectations - which do not always match what they do - based on this, I don’t expect exceptionally exuberant consumption on Black Friday 2022. On the other hand, retailers should not be too gloomy either, as on average the outlook for purchasing power is good. After all, the much-needed government compensation measures are coming: the energy cost allowance in November and December, the energy cap as of January 1, 2023 and the minimum wage increase of more than 10 per cent on the same date. Plus, average wage growth in the Netherlands next year should be able to outpace the declining inflation rate.”

So, for the retail sector, you expect a modest positive impact from Black Friday. Does the same apply to the economy in general?

“We currently have high inflation and in the current situation, we are more likely to bring it down if we moderate our consumption for a while now. Energy is scarce at the moment, but so are materials and manpower. If we reduce our consumption for a while, this will dampen demand for all three, so that their prices will also moderate. That would also allow scarce energy to be used where it is most needed - for example, for the furnace of a poor family in a poorly insulated house. So from a macroeconomic perspective, taking our foot off the accelerator is not a bad thing at all.”

So we should get rid of Black Friday?

“We live in a market economy, and that includes stores that cater to all sorts of things. In that sense, Black Friday is nothing new. However, temporary discount promotions can tempt consumers to buy things they don’t actually need. That not only affects consumers in their wallets, it also ultimately impacts the planet. Although that doesn’t always have to be negative impact. For example, I saw that an outdoor sports store is using Black Friday to offer free shoe maintenance and clothing repair on that day. An action like that can create new sales later and thus still contribute to negative ecological impact. But if, as a result, a customer buys one quality jacket for a period when he would normally wear out three jackets of lesser quality, on balance it is better for the planet. So, the question is always: which consumption do you replace with a new purchase? By the way, you cannot leave the sustainability of the economic system entirely to companies. For that, you also need a government that takes a guiding role.”

Consuming fewer products, purchasing more services: is this how we can serve the interests of economic growth in the Netherlands and a livable planet at the same time?

“In principle, yes, although this also depends on the types of services that would replace that product consumption, of course. After all, air travel is also a service, but one with a considerable ecological footprint. For such a transition, a guiding government is needed, which, through taxation, ensures that the least polluting goods and services become more attractive compared to the most polluting ones. And by taxing raw materials more and labor less. Creating more immaterial growth instead of material growth under these conditions is a form of 'decluttering’. It makes less use of resources and more use of brainpower and creativity. These do not reach their limits as quickly, unlike raw materials, which will run out at some point.”

Is that a realistic scenario?

“In the Netherlands, carbon emissions have decreased while the economy has grown. Even if you look at the research done by Andrew McAfee, who wrote the book More from Less about that, you can see that the American economy is becoming less and less resource-intensive. And that’s not because more and more manufacturing has moved to China. Economic growth there is increasingly in added value based on services. One example is brand value, which you create with marketing. So yes, it is definitely possible to achieve economic growth that leans more on services and less on physical products and at the same time reduce the negative ecological impact.”

A historically tight labor market, sharply fluctuating stock prices and inflation reaching into the double digits. 2022 has been quite an eventful year, economically. But what will 2023 bring us? In this new series, Charles Kalshoven, macroeconomist and senior strategist at APG, tells us what we can expect from the housing market, the labor market and the stock market and more, in the coming year. Today part 1: What is 2023 going to be like for my wallet?

Whether wages will rise faster than the price of the so-called shopping cart, and whether the government will take measures to mitigate the effects of high inflation, are important things to know regarding the content of our wallets. Although there are still many uncertainties, particularly about inflation, Kalshoven does not see things looking bleak for the average Dutch person’s wallet in 2023. However, differences between individuals will be greater than in other years.

Wage increase
Looking at wages, the Central Planning Bureau (CPB), the Dutch Central Bank and others expect them to rise more than 4 percent next year. That may seem a bit meager with inflation at 14.3 percent in October. Consequently, the FNV demanded a 14.3 percent wage increase this month. Kalshoven believes that is not realistic. “Companies will also have higher energy bills and possibly higher rent, so that makes it hard for them to say ‘we’ll provide a raise of over 10 percent.’ They also often can’t fully pass on the increased costs to customers because then they’ll lose market share. A 4 percent wage increase may not seem like much when you look at inflation, but it is higher than we’ve experienced in years.”

Inflation
The question then becomes what prices will do. Inflation is expected to reach about 10 percent over 2022. The CPB now assumes that inflation will come in at 2.5 percent next year. “That would be a lot lower than the European Central Bank’s expectation of 5.5 percent for inflation across the euro zone. But in and of itself, this is not surprising. In fact, Dutch inflation is well above European inflation this year. Also, the energy ceiling agreed on at the last minute before Prince’s Day will suppress inflation.”

Good to know: the CBS inflation figure for this year is an overestimate of what people will really feel in their wallets. That’s because the basic premise of the masters of calculation is the fiction that every Dutch person signs a new energy contract every month, and thus has to deal with this year’s high variable tariffs. In reality, that only applies to a limited group, because many people have a fixed energy contract. “For next year, therefore, a price decrease will be incorporated into the inflation rate that not everyone will recognize.”

Energy ceiling
If wages actually do rise by 4 percent and inflation remains limited to 2.5 percent, the average person in the Netherlands need not fear a loss of purchasing power next year, especially since the government is assisting with temporary measures, such as the energy cap and an excise tax cut on gasoline. “However, there are big differences between Dutch people. Whereas the average wage increase is about 4 percent, the minimum wage, welfare benefits and the state pension will rise by 10 percent next year. It also makes quite a difference whether you live in a well-insulated house. If you do, you will be more likely to have low energy bills and the energy cap is not even necessary. In that case, you will benefit from wage growth and limited inflation. However, if you live in a poorly insulated house and your energy consumption exceeds the price ceiling, you will be worse off.”

There are ways to temper the effects of high energy prices on the wallet, though. Kalshoven: “When tariffs are low, we don’t pay as much attention to our energy consumption, but now many people are still turning down their heating, taking shorter showers or taking the car less often.”

Just as it matters quite a bit whether you live in a well-insulated house or not, there are other factors that can have a big impact on a person’s wallet. “Static purchasing power is the illusion that nothing changes in your situation, but this is far from true for everyone, of course. Major events in particular really take a bit out of it: for example, divorce, losing your job, or having a child. And renewing your mortgage has become a lot more expensive,” Kalshoven says. “There are also positive examples, of course: your wallet can benefit if you find a (new) job, and you save housing costs if you move in with your partner. These are much bigger effects than you see in the purchasing power charts.”

Slight plus
Despite the fact that we are going into a recession, Kalshoven is optimistic about 2023. “Unemployment will rise slightly, but because of the tightness in the labor market, it will be limited. Many workers can therefore expect a wage increase of more than 4 percent, and the minimums of as much as 10 percent. Inflation will probably end up being considerably lower, at 2 to 3 percent. Then there are the government measures, which help the purchasing power of the average person in the Netherlands, although there will be substantial differences.”

With inflation skyrocketing, the Dutch government has earmarked tens of billions for purchasing power repair - through the energy price cap, VAT reduction on energy and an energy surcharge for minimum incomes, among other measures. Far-reaching and costly measures were also taken in our neighboring countries to shore up purchasing power. What instruments have other countries chosen for this purpose and what are their advantages and disadvantages? In three articles, macroeconomist Charles Kalshoven (APG) shines a light on one European member state. Episode 1: Germany. 

To ease the burden in 2022 and 2023, the German government has allocated a total of nearly 200 billion. The purse strings have been tightened enormously there too, even though German inflation, at 10.4 percent (October), is a lot lower than Dutch inflation (16.8 percent according to the European definition). Part of that money is spent on various one-time benefits of limited amounts, which are mainly aimed at lower income groups: recipients of unemployment or social benefits, or rent allowance. Another portion is going to tax measures.

Maximum natural gas price
Measures that stand out are the reduction of the energy tax on fuels from June 1 to August 31, 2022 (29.55 cents/liter for gasoline and 14.04 cents/liter for diesel) and the temporary (until the end of March 2024) VAT reduction on gas from 19 to 7 percent. But also noteworthy is the introduction of a €49 public transport monthly pass that allows you to take unlimited (regional) trains, buses and subways. Last but not least, the Germans are introducing a maximum natural gas price for households as well as businesses.

Targeted measures, which can be taken quickly and have limited collateral damage for treasury or other policy goals. Kalshoven believes that that, in a nutshell, is what a government should strive for.

“Effectiveness is paramount. Is a measure hitting its target? There can also be a trade-off between those goals, meaning that the closer you want to get to goal A, the more you sacrifice on goal B and vice versa. Another criterion is efficiency. What costs do you have to incur to achieve the goal? These could be direct costs due to rising national debt, or indirect costs in the form of higher taxes in the future. And are better alternative measures conceivable? A third criterion is speed/feasibility. And finally, you can look at whether or not a measure will disrupt competition.”

Disrupting competition
Regarding the maximum natural gas price Germany has introduced for citizens and businesses, Kalshoven is critical in several respects.

“If you want to accelerate the energy transition, limiting the price is not a good idea. It does not provoke the behavioral response you want, because then there is no longer a price incentive to reduce natural gas consumption. What I like in the Netherlands is that the price cap only applies to average usage. But if you don’t tie such a price ceiling to a quota, it could cost the treasury a lot of money. In terms of poverty prevention, you may have achieved your goal, but in terms of accelerating the energy transition and saving energy, you haven’t. And that is a waste of money. Moreover, a maximum natural gas price like in Germany disrupts competition in the internal European market. After all, unlike in the Netherlands, that maximum also applies to companies and in this way, German companies are given an unfair advantage over their European competitors.”

Car use cheaper
About the promotion of public transport in Germany - the €49-monthly pass - Kalshoven is positive, but he says it does not form a happy combination with the excise tax reduction the Germans implemented for various fuels.

“You have offered people an alternative by making public transport cheaper, but then you should not also make car use cheaper. Germans also have a mileage allowance of 38 cents. That’s really hefty. What I like about the German public transport policy in itself is that it helps prevent poverty and at the same time is good for the energy transition. Namely, you ensure that existing infrastructure is better utilized. That way, road miles can decrease, and the miles you travel by public transport are what you were doing anyway. It may provoke extra travel, but on balance you save energy and, of course, carbon emissions, with that kind of public transport policy.”

Targeted pain relief
If possible, you want targeted pain relief. A dentist doesn’t put patients under anesthesia for drilling; at most, he gives a local freezing. For that reason, Kalshoven is positive about the subsidies and benefits introduced in Germany to ease the pain of inflation.

“Because German subsidies are aimed at low-income earners, they get to people who need it. That targeting is desirable, unlike the drastic remedies the German government has chosen elsewhere, such as excise tax cuts and maximum tariffs.” 

Because those drastic remedies cost the treasury a lot of money, they create a less desirable situation from a macroeconomic perspective. For with an aid package of 200 billion euros, Germany risks working against the monetary policy of the European Central Bank (ECB).

In opposition to each other
Kalshoven: “Germany’s gross domestic product is roughly 4,000 billion euros. An aid package of 200 billion euros amounts to 5 percent of GDP and that really is a lot of money. At a time like that, two policies - fiscal policy and monetary policy - start to work very much in opposition to each other. After all, the ECB wants to slow down the economy to curb inflation. But if governments offset all price increases, they are actually boosting the economy a bit. However, those higher prices are a national loss, even in Germany. It is an illusion to think that you can compensate those higher prices completely and for everyone.”

When you compare the support measures in the Netherlands and Germany, both countries are providing substantial support packages, Kalshoven said.

“In both countries, public finances are in good shape, which makes this kind of package possible. Germany is even more robust than the Netherlands. In our case, the package is about 25 billion euros, which could go up to 40 billion euros, or 4 percent of national income. In Germany, it could even reach 200 billion, or 5 percent of the economy.”

Nice problem
And although Germany, like the Netherlands, is struggling to take targeted measures, Kalshoven notes that the Germans are more successful at supporting lower incomes in a targeted way with one-time payments and specific subsidies. However, this does not apply to the maximum natural gas price in Germany.

“That is in fact not targeted, because it applies to everyone - citizens and companies. In the Netherlands, however, the allowance for energy of 190 euros in November and December is untargeted and price caps are limited. In practice, it proves very difficult to meet the ideal of measures that are both timely, effective and efficient.”

But ultimately that struggle is “a relatively nice problem to have,” Kalshoven says. “A total lack of room for compensation measures would force households to make very painful short-term adjustments.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on whether the full-time bonus will lead to more people working full-time. “You should always encourage a trial.”

Last year, 9.3 million people between the ages of 15 and 75 were employed in the Netherlands, Central Bureau of Statistics (CBS) figures show. Of that total labor force, 48 percent worked part-time, a percentage that has barely changed in recent years. Part-time is defined as a workweek of less than 35 hours. At 70 percent, the percentage of part-time workers among women is significantly higher than among men, 28 percent of whom work part-time. Health care, education and service professions have the highest rates of part-time workers. Because of the significant shortages in education, the government is starting a trial by introducing a full-time bonus in 10 schools. This means that teachers who want to work more will receive a bonus. But does such a financial incentive make sense?

Wedge

The Netherlands’ progressive tax system plays an important role in this question, Knaap explains. "The more you earn, the more tax you pay and the fewer allowances you get. That is fine in and of itself, but it means that the last day of the work week, whether you work three, four or five days, is taxed the most; on that day you earn the least, comparatively.” The economic term for this is the wedge, which represents the difference between the employer’s labor costs and the employee’s take-home pay. “That wedge can be as high as 70 percent for some people, which means that out of every euro you earn, you only get paid 30 cents. That’s because you are paying payroll taxes and, in addition, possibly losing benefits.”

The question is whether the full-time bonus is the right solution to solve the current labor shortage now. “This is being debated in the House of Representatives and the biggest ambiguity is the size of the wedge.” It is different for everyone and depends on several factors, Knaap explains. For example, on your marital status, whether you have a family and which municipality you live in. “A lot of people also don’t know themselves what their wedge is, some go to a tax consultant to ask what an extra day’s work will get them. So, it’s hard for me to imagine someone deciding to work more hours based on a full-time bonus, when most people don’t know exactly what kind of financial difference that will make for them.”

Homo economicus
This idea stems from the worldview that man is a rational homo economicus (economic man) who calculates the exact costs and benefits of every action. But other aspects besides the financial picture often come into play, Knaap emphasizes. “There are plenty of people who do not have the opportunity to work full-time, even if they wanted to. For example, because they provide informal care for someone close to them, they cannot find child care or an employer cannot offer them more hours. So how are you going to solve that with such a financial measure? It can be done, but I don’t see it as a very effective tool.” Moreover, there is a major drawback to the full-time bonus, the economist said. “It makes our tax system, which we already have little insight into and for which you have to go to a consultant to know what your wedge is, even more complicated.”

Even so, the fact remains that there is an acute labor shortage. “As a macroeconomist, I simply think: if we are all screaming for labor, wages have to go up. That happens naturally, because when there is a shortage in the labor market, wages naturally rise." In the third quarter of this year, collective bargaining wages rose 3.5 percent, according to CBS. Knaap: “And wages may still be raised more than that. We’ve had years when wages didn’t rise much at all. The wage share has certainly not increased in recent decades, so an increase in wages is not that surprising. And it has the advantage of not making the tax system even more complicated and fragile, whereas the full-time bonus does create that risk.”

Trial

Despite his impression that a measure like the full-time bonus will have little effect and complicate things further, Knaap welcomes the trial. “If it turns out to be hugely successful, I can adjust my opinion. But if such a trial is tested at your school with a lot of fanfare, you're more likely to have heard of it than if it constitutes yet another measure on your income tax. So it's hard to draw a conclusion based on one trial. Still, it's good that they are trying it first, because too many measures like this just get implemented. Trials like this should therefore always be encouraged.”

Has interest rate development reached its peak? That is a prediction APs chief economist Thijs Knaap does not want to make. As long as inflation is high, you will also see high interest rates. In terms of macroeconomic growth, however, things are against us, and when growth declines, interest rates often decline with it. So those two factors work against each other. Which one is stronger remains to be seen, Knaap thinks.

Other topics discussed during BNR Nieuwsradio’s investor panel included the decision by flash trading company Flow Traders to legally establish itself in Bermuda and the reorganization of Philips, which is cutting 4,000 jobs, including 400 forced layoffs in the Netherlands. The company is under pressure, due to a costly recall of its sleep apnea devices, but says it is also suffering from macro-economic developments.

Canary
Knaap: “We know that at some point, macroeconomic problems are going to affect corporate profits. So, the question is: Is Philips the proverbial canary in the coal mine? If you look more broadly at companies’ third-quarter results, you see that while sales are still rising, profits are falling, due to rising prices. This is especially true in Europe, and the decline is stronger than expected.”

As usual, the panelists were also asked about a recent investment transaction. Knaap: “We recently acquired a 49 percent stake on behalf of ABP in Gemini, a solar power project currently under development near Las Vegas. The project will provide energy for more than 400,000 households at peak times.”

Listen to the entire broadcast here (in Dutch).

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Alwin Oerlemans (Head of Product Management at APG Asset Management), on whether it is a good idea to temporarily give employees the option to reduce their pension contributions, so that in these times when everything has become more expensive, they can use that money to pay their bills.

Many Dutch people are really feeling the skyrocketing inflation, due in particular to increased energy prices, in their wallets. While the government has now allocated billions to mitigate the effects for citizens, it is not possible to fully compensate for the decline in purchasing power. This is a huge problem especially for low- and moderate-income households with less sustainable homes. Unions would therefore like to see wages rise to the point where there is full compensation. Because this risks sending the Netherlands into a wage-price spiral, - as it did in the 1970s - there are calls here and there to temporarily allow workers to put a reduced pension contribution - so they can use that money to pay their bills. Is that a good idea?

Shortsighted
No, says Oerlemans. First of all, because doing that could get people into financial trouble in the future.

“From the perspective of behavioral economics, we know that people value money now more highly than money later. If you give employees the option of a reduced pension contribution temporarily, it will be at the expense of their pension accrual. To see that this is a shortsighted idea, you need only look at Chile, for example. When the economy there stalled during the Covid crisis, Chileans were given the option to withdraw an advance on their pension money. As a result, Chile's pension pots seriously shrank. The government would have been better off helping the vulnerable instead, because it was mainly the small pension pots that were depleted by one-time withdrawals. It is not without reason that the recently released Mercer CFA Institute Global Pension Index 2022 warns against premature withdrawal of pension money.”

Cigar from your own box
According to Oerlemans, the option to temporarily reduce premiums is also not a good idea because for employees it is just a cigar from their own box. And now is not the time for that.

“Because reduced premium contributions result in a reduced pension accrual, - and thus less pension - employees end up paying for the purchasing power compensation themselves. Only they’re not paying now, but in the future. People should get a higher wage now, not a cigar from their own box. Because big companies’ profits did rise in recent years, and that is much less the case for employees’ wages. Unions are rightly making the case for higher wages. This gives workers a fair share of added value. This is how the ratio of wages to profits can shift.”

The Netherlands: an export country
Those higher wages are no luxury, because high inflation is here to stay for a while, Oerlemans expects.

 “Even before the war in Ukraine, inflation was rising, due to disruptions in production chains caused by Covid. The Russian invasion then led to a sharp rise in commodity prices and energy prices in particular. So, inflation will persist for now, especially with a continuing war.”

Oerlemans does not want an exporting country like the Netherlands to price itself out of the market with higher wages.

Australia
“This fear seems exaggerated to me. Because of the tightness in the labor market, there is room for higher wages. That is also good for the labor supply, because it makes more worthwhile to work. In Australia, when there was an impending wage-price spiral, that was when pension accrual increased. There, the pension system started in the 1990s, when there was an overheated economy and inflation. Employers then started pouring some of the extra pay into the new mandatory pension system.”

All in all, then, it is not a good idea to temporarily allow employees to reduce their pension contributions, even if it is, say, up to 50% of the contribution?

“No. There is nothing wrong with a little flexibility in the premium as part of the benefits package, but not to that extent. If you give employees the option to remove such a significant portion of their pension contributions, even if only temporarily, that’s still a cigar out of their own box.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof, on the European Commission's crisis plan to meet the challenges of exploding natural gas and electricity prices. “The developments in the energy markets are hurting consumers, no matter what and there is nothing you can do about that. All you can do is spread out the pain.”

As the effects of sharply increased natural gas and electricity prices become painfully obvious to more and more citizens and companies, the European Commission (EC) launched a plan on Sept. 14, 2022. The three main measures in this energy emergency plan: a price cap for fixed-cost electricity producers, an additional tax on the profits of oil and gas companies and a mandate for EU member states to consume less energy. 

The proposal contains market interventions that were not thought possible in Europe until recently. The question therefore arises: how effective are the intended measures really? Olthof goes through them one by one.

Price cap on power

“For electricity from nuclear power plants, hydropower plants, solar farms, wind farms and lignite-coal power plants, the European Commission wants to apply a maximum output of 180 euros per megawatt hour. Such a price cap is in itself a logical step, since the cost of generating this electricity has hardly gone up - unlike electricity from gas-fired or coal-fired power plants. Meanwhile, the price of electricity has gone through the roof ten times over, leaving producers with fixed costs making excessive profits. It is understandable that the EC is creating a mechanism to skim them off and use that money for users who need it most.”

Member states may also set a price cap lower than 180 euros. That would give more air to customers who need a lot of electricity for their production process, such as aluminum producers.

“For a producer of electricity not generated via gas or coal, 180 euros is still an extremely good price. But for customers who use a lot of electricity for their production process, such as aluminum producers, that rate is disastrous for competitiveness. So a lower price ceiling is preferable, but also not so low that it discourages producers of renewable energy from making new investments in, for example, wind turbines and solar parks. That is also the reason why the EC did not want to set it too low.”

Extra taxes for oil and gas companies
It’s not just fixed-cost power producers that are the lucky ones in today's electricity market. So are oil and gas companies. The second measure in the EC plan is therefore to have these companies pay a third of their profits as a “solidarity contribution” and use the proceeds to relieve citizens and other companies. But again, Olthof says the dosage is important.

“Oil and gas companies are making a lot of money right now. The gas they extract elsewhere in the world and bring to Europe is suddenly worth five times as much here now. As a result, it is fairly easy to say that they can afford the extra tax. To a certain extent, it is logical to skim off their profits. But to compensate for the loss of Russian natural gas supply, we will have to look for alternative natural gas supplies in addition to expanding wind and solar energy. If Europe skims off the profits of oil and gas companies too much, it will no longer be attractive for them to invest in this search. To drill new gas fields, companies like Shell or BP will then choose the U.S. rather than the North Sea. As a result, less gas will come to Europe, and we do need that gas.”

Following the plan announced in mid-September, the EC is looking at whether it can intervene further in the natural gas market. However, it is still remains to be seen how that will play out, Olthof says. 

“On the international market, the gas price is determined by LNG. That is liquefied gas, which can be traded worldwide and sent anywhere by ship. Basically, those ships go where the price is highest. In recent years, the price for LNG moved along with the price of gas in Europe. When the price in Europe was very low because of an overcapacity of gas in the world, the LNG price was also at that low level. Now there is scarcity in the world gas market. The European gas price is sky-high and so is the price on the international market for LNG. Available LNG now goes to Europe, because even now it is the highest bidder. Proponents of a price cap for natural gas in Europe assume that an artificial price cut in Europe is bound to lead to a similar movement in the international LNG price - which Europe can then still buy that liquid gas for.”

But it is questionable whether that is the case, Olthof says. “If other buyers of LNG, such as Japan or Korea, are willing to pay more than the maximum price in Europe, then Europe will not get this gas. There will still be LNG coming to Europe on long-term contracts, but the portion not yet sold will go to Asia. Southern Europe is in favor of a European maximum price for gas but Northern Europe is not, so there is still a lot of wrangling and debate about that.”

Consume less electricity
The third measure in the EC’s energy emergency plan focuses on reducing electricity demand. Member states are asked to reduce consumption by 5 percent at times of peak electricity demand and to reduce total consumption by 10 percent in the long term.

Olthof: “How they achieve that 5 percent reduction is up to member states to decide. In any case, they are given the option of offering financial compensation to energy-intensive companies to shut down production at peak times. But for achieving the 10 percent target, not very many tools, rules or details have been disclosed yet.”

So the effectiveness of the energy contingency plan depends mainly on the dosage that member states choose to use in utilizing the tools put in their hands for this purpose? 

Olthof: “Yes. The EC in itself has proposed good measures to deal with this crisis, but from the perspective of energy-intensive companies it is not yet sufficient. These companies will have to wait and see if individual member states will do more, and how they will distribute the skimmed-off profits. Either way, developments in energy markets are hurting consumers, and there’s nothing you can do about that. All you can do is spread out the pain – as best you can.”

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: macroeconomist and senior strategist Charles Kalshoven about the causes of the huge labor shortage.

Anyone who passes by a café can hardly fail to notice it: many catering establishments are trying to find staff with a poster in the window. But not only the hospitality industry is struggling with a lack of staff. The labor shortage is spread out across several sectors. What are the causes of this? And are there any solutions?

Covid and aging

Kalshoven believes there are two main causes. “The most obvious one is Covid. During the Covid crisis, many companies that would normally have gone bankrupt were kept afloat with government support. The number of bankruptcies is therefore much lower than normal. Employees are therefore still working at those companies, when they would otherwise be available for other jobs.” Covid not only affected the demand for personnel, but also caused a shift in the labor market. “In the hospitality industry and at Schiphol Airport there was temporarily less or no work. The people who worked there then started doing something else. Some of them found new work they enjoyed more or that paid better, so they decided to stay there.”

The other main cause is aging. “On the one hand, because of the aging population, the need for personnel in healthcare is increasing. If nothing changes in the coming years, 1 in 4 working people will be needed in care around 2040. You might expect that the aging of the population will also reduce the supply of labor, but for the time being this does not seem to be the case. Not only is the number of 20- to 70-year-olds still creeping up a bit, but the proportion of ‘active’ people is also rising. The labor force participation rate has never been higher since record-keeping of that began in 1969.”

Kalshoven points out that this is partly due to the increased retirement age, which means that more people over 65 are now working than before. “I think the changing age profile of society, with more older people and fewer young people - in the last decade the over-50s group grew substantially, but the over-40s group has fallen by 17 percent - is playing a role in the shortages in sectors that require a certain level of fitness. These include construction, the police, emergency rooms and baggage handlers at Schiphol Airport. And people who no longer can or wish to practice a profession at a later age will not always have the skills to find work elsewhere. A retiring police officer, for example, is not necessarily a good programmer.”

Solutions

Although the causes are obvious, the labor shortage is not easy to solve. “In the past, it might have been a little easier by using labor migration. At that time, the shortages here were filled by Filipino nurses or Polish construction workers. But because of the current housing shortage, you can’t house those migrants now. Just as absenteeism reinforces the labor shortage, the housing shortage contributes to the labor shortage.” Another solution could be for the government or a sector to try to interest young people in a specific study, for example in engineering. “But that too is not always easy. Because supervising trainees requires an investment of time. And if the workload is already too much, who will let the interns gain experience in the workplace?”

What can also help is to try to persuade people who are currently working part-time to work more. “This is also where practical objections often come into play, such as expensive or unavailable childcare. Through higher wages, a company can try to attract new people. You might be able to attract new entrants to the labor market, but you often see that people from another sector or company will switch to the better paid job. This mainly leads to a different distribution of labor between companies or sectors. In and of itself, incidentally, that is positive for the economy: workers end up in a place where they are apparently more productive.” When there is a major labor shortage, as there is now, employers often are less adamant about the job requirements when there are openings, Kalshoven argues. “You see vacancies now where it says you don’t have to have completed your education yet. There’s a word for that: green pickings. As an employer, you pick the fruits that are not yet ripe, as it were. But that creates a risk that young people will not complete their education after getting the job, which could affect them later in their career.”  

Automation

And then there is automation and robotics as a solution. “You can already see that ordering in the hospitality industry today is a lot faster than it used to be. Now the waitress passes your order to the bar on a smart phone, where someone can immediately start preparing your drink. That prevents mistakes and saves time.” And you can let people do more themselves. “Before, you went to the bank where someone counted out the guilders or dollars for you. Later, you had to take your debit card to a machine to withdraw money. Nowadays you pay with your phone at the cashier. In fact, often there isn’t even a cashier, because nowadays you pay for your groceries yourself. These kinds of technological solutions are also a partial solution to the labor shortage.”

And will a recession relieve some of the pressure on the labor market? “The labor market always reacts to the economy with a delay. The economy has to grow for a while first, before people are hired. An increase in wages often follows a bit later. If the economy crashes now, companies will wonder whether it will be short- or long-term. Regardless, the recession will ease the scarcity as more companies go out of business and others wait a while before expanding. I do think that the labor market will be structurally more restricted due to the aging of the population. There are a lot of professional groups where the average age is quite high and an outflow is imminent.”

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert gives a clear answer to the question of the week. This time: macroeconomist and senior strategist Charles Kalshoven on the positive flip side of massive consumer spending cuts. “The current situation, in which high inflation forces lower spending, has mainly shadow sides. But we cannot deny that there are also some bright spots.”

Particularly - but not only - due to the war in Ukraine, price levels have soared in the space of six months. Energy prices are at the top of the list and are prompting people in the Netherlands to drastically cut back on their spending. Total domestic consumption in June still showed an increase compared to the previous year, but the question is how long this growth will last. Inflation has risen further since then and it seems only a matter of time before consumer spending will decrease. Consumer confidence and willingness to buy fell to record lows in August.

Personnel leaving
For some, the increased price level is an inconvenience, but for others it can be the financial death blow, making a trip to the food bank unavoidable. Bad news for many businesses and consumers. But do consumer savings also offer advantages?  According to Kalshoven, they do, firstly because they prevent the economy from overheating, and secondly because the cause of those savings - mainly increased energy prices - can shift the energy transition into a higher gear. Moreover, high prices can introduce people to options they had never seriously considered before, and lead to more flexibility in dealing with future changes.

Kalshoven: “Macroeconomically, we are getting this inflation because the supply of some key products and services is not matching demand. Demand has recovered after Corona, but there is still a shortage of supply. This is due to the aftermath of lockdowns in China, for example, but also because staff in the hospitality industry or at Schiphol Airport have been leaving. But the most obvious reason is, of course, energy. Shortages - or the risk thereof - have caused prices to explode. If consumers save on energy, this will help to keep prices down. More generally, cutting spending will prevent the economy from overheating - and thus inflation - if there are bottlenecks on the supply side.”

Exorbitant loans
Less frequent visits to restaurants, for instance, may help to alleviate the shortage of hospitality staff - who left the sector in large numbers during the pandemic and did not return afterwards - becomes less acute, says Kalshoven. And there are other examples.

“The risk of a situation arising in which the demand for hospitality personnel far outstrips supply is reduced - and with it the risk of exorbitant wage increases. The same applies to the aviation sector. If people start flying less, the personnel shortage at Schiphol and other airports will also become less of a problem. But the biggest factor is, of course, energy. If people take shorter showers and lower the thermostat, the demand for energy drops. If those who can easily cope with the higher energy tariffs also reduce their consumption, they will help to replenish the gas reserves and keep the prices down. In so doing, they will be showing solidarity with the lower income groups, who simply cannot afford these high prices.”

Landlord

Lower energy consumption is obviously also better for the climate. High energy prices can also be a catalyst for the transition to sustainable energy. Part of this is really about saving energy, for example by insulating the house or taking a shower for a shorter period of time. 

Kalshoven: “This extremely expensive energy accelerates many people’s ambition to become more sustainable, provided they can afford it and it is possible in their home, for example. Not everyone has the means to invest in a heat pump or solar panels, for example, and for people who rent an old, draughty house from a landlord those options are not available anyway.”

The higher price level and less spending can also contribute to greater sustainability in another respect. 

“The fact that transport has also become more expensive can have a positive effect on the sale of seasonal and regional products, such as fruit and vegetables. A Dutch consumer, for example, may now be more inclined to opt for an apple grown in the Netherlands instead of one from New Zealand. And that in turn has a reducing effect on carbon emissions.”

“Mother of invention”
According to Kalshoven, the increased price level and lower spending pattern can also have a positive effect on your mind set.

“The fact that we are forced to change now makes us more flexible in the future. And necessity is the mother of invention. People who find themselves in deep financial difficulty because of rising prices are more likely to make biased choices. But for others, a need for change can also spur creativity and lead to choices that they will be happy with in retrospect. Large price increases can give someone just the push they need to try an alternative that they had never seriously considered before. If you have never cycled to work, you might try it now. And if it works out surprisingly well, you may find that you don’t want to go back to the old situation.”

Collective impoverishment
So we should see the high prices for energy and food, among other things, as a blessing in disguise? Kalshoven does not want to go that far.

“Whichever way you look at it, we are dealing with a collective impoverishment in the Netherlands. We used to be a gas-exporting country. But now we have to buy more gas from abroad, and because gas has become more expensive, that leads to a loss of terms of trade. At an individual level, the effects of this can be very dramatic. It is clear that the current situation, in which high inflation forces lower spending, has mainly downsides, but we cannot deny that there are also some bright spots.”

The first three stages of the Tour of Spain were held in the Netherlands this year. Total costs: almost 15 million euros. Will it be limited to those costs? And are the hotel and restaurant revenues the only benefits of the Vuelta for the Dutch start and finish locations? The benefits of organizing a major sporting event are often broader than the direct economic benefits. But the budgeted costs are also often higher. Charles Kalshoven, macroeconomist and senior strategist at APG, explains why.

Organizers of major sporting events often tell a narrative that paints a rosy picture of the economic benefits, Kalshoven knows. “But that can’t always be substantiated. If there are any benefits at all, they go to the hospitality sector, for example, and not to the municipality or government.” According to the economist, the fact that a sporting event does not always bring in money for the host city is no reason not to organize one. “It can also just be fun, and it´s okay for fun things to cost money sometimes.”

Barcelona

Kalshoven acknowledges that this is a tricky message in these times, “because many people are currently struggling to pay their energy bills, so should you be spending 15 million on the Vuelta?” Incidentally, one third of the expenditure is provided by private parties, so it costs the national and municipal governments “only” 10 million euros (for comparison, the total expenditure of the municipality of Utrecht this year is budgeted at over 1.5 billion). Nevertheless, partly due to the high costs of the energy crisis, Utrecht will not be organizing any more major sporting events for the time being, Mayor Dijksma announced in Trouw.

“If you look at it from a purely economic perspective, the organizers of major sporting events usually don’t end up in the black afterwards,” Kalshoven said. VAT and excise duty on the beer sold, for example, do not go to the municipality but to central government. But the benefits, he says, are also broader. “In Barcelona, for example, for the 1992 Olympics, they refurbished the whole neighborhood of Barceloneta and the beach and developed Port Olímpic as an entertainment area. So the Games were used there to kick-start urban development.” And there may be more such indirect benefits. “If, like Utrecht, you’ve hosted all three major cycling tours, you may be playing into the hands of conference organizers. And companies working in the sustainable mobility sector may see Utrecht as a suitable location. It may also generate more tourism. The aerial images of the Dom and the canals are a kind of ‘free’ advertising for the city. It is a way for a city to show its best-kept secrets to the world.”

Experience Economy

Costs incurred to organize a sporting event can also be seen as an investment in health or welfare policy. For example, Utrecht was recently named the most bicycle-friendly city in the world. “If people start cycling more often instead of taking the car or public transport, there will be fewer traffic jams. That saves society money. And perhaps in the longer term, healthcare costs as well, because a sporting event can encourage people to participate more in sport, thus keeping them healthier for longer,” Kalshoven says. “You shouldn’t exaggerate these indirect effects, but if you wait for scientific evidence of the economic benefits of a sporting event, you’ll never be able to organize anything.”

Kalshoven: “Organizing a sporting event also fits in with the trend that people prefer to spend money on immaterial rather than material things: so-called ‘de-cluttering’. If visitors spend 30 million euros during a sporting event, the question is: what else would they have done with that money? Perhaps they would have spent it anyway, in which case the economic effect is zero. But it is also possible that they would have spent it on, I don’t know, plastic toys from China. That’s not very sustainable and it also contributes very little to the Dutch economy.” Whereas the Vuelta is part of the experience economy, where people spend money on an experience rather than on stuff. “That’s more sustainable, because it requires fewer raw materials. People do have to get to Utrecht, of course, so there will definitely be some carbon emissions, but maybe many will come by train or bike.” The advertising caravan, which traditionally precedes the race, will at least have a sustainable character this Vuelta during the Dutch phases. The vehicles in this “Green Caravan” drive emission free and only hand out sustainable items to the public.

Olympic Games

Yet it seems that fewer and fewer cities are in favor of organizing a major sports event. This is particularly true of the Olympic Games, where there was only one candidate city for the 2024, 2028 and 2032 editions. Amsterdam toyed with the idea of standing as a candidate for 2028 for a while, but the government ultimately decided it was too expensive and withdrew its support for the plan in 2012. “Organizing an event like that does put a strain on collective resources,” Kalshoven continues. “There are the direct costs for the organization, but also indirect costs for the deployment of police, fire department and emergency services. What you see is that the economic benefits of the event itself are often negative. The profits end up somewhere else, for example with catering businesses.”

The fact that the budget is often out of control also does not contribute to the enthusiasm among the local population. Here, too, the Olympic Games are a good example. For instance, the costs of the so successful Games in Barcelona ended up 266 percent higher. In 1976, in Montreal, Canada, it was as much as 720 percent. What is the cause of this? “An important part is political. If you want to push through the organization of a tournament, you have to reduce the price tag. Large budgets would prevent surprises, but damage your chances. So, the organization pushes for low quotes from builders of stadiums and infrastructure, but the setbacks are being paid for dearly. The problem, of course, is also that the projects are always unique, because you never build the same stadium twice."  

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Whereas enthusiasm for hosting major sporting events seems to be waning in democratic countries, autocratic regimes are actually eager to welcome international tournaments. “There, the political benefits are often huge,” Kalshoven argues. “Russia, with the Sochi Winter Games, and China, where Beijing hosted both the Summer and Winter Games, were thrilled to be able to show the world that they were capable of hosting something like this. A good opening and closing ceremony is advertising to the outside world and also contributes to popular pride in the national regime. The political benefits outweigh the economic costs there. For Rutte it would be difficult to explain why there is money for the Olympics but not for, say, purchasing power measures. For Putin this is less of an issue. If he organizes such an event, he does not have to explain to his people why there is money for organizing the Winter Games but not for raising civil servants’ salaries.”

After the Russian invasion of Ukraine, it became a commonly used term. The country was the 'granary of Europe'. As a result of the conflict, the export of Ukrainian grain largely came to a standstill. After mediation by Turkey and the United Nations, it seems possible to get grain across the Black Sea from Ukraine again. How is Netherlands affected by this? And what are the prospects for the grain price? Time to ask Peter Verbaken, Head of the Raw Materials Team at APG, some questions about the grain trade.

Grain is a collective name for the seeds of grasses and includes rice, barley, wheat and maize. Ukraine mainly exports the latter two. The global annual production of wheat is about 780 million tons, according to figures published by the United States Department of Agriculture. Ukraine accounts for 30 million tons of this. The EU is the largest producer, with nearly 140 million tons, closely followed by China. 1,200 million tons of maize is produced annually, nearly a third of which comes from the United States. With an annual production of 40 million tons, Ukraine seems to be living up to its name as the granary of Europe when it comes to maize.

Is the Netherlands self-sufficient when it comes to grain?
"The Netherlands isn't self-sufficient. This is because the agricultural land here is more suitable for growing other crops. We therefore import more than 80% of the wheat we use here, mainly from Germany and France. Incidentally, only 40% of the wheat used in the Netherlands is intended for human consumption, the remaining 60% is intended for animal feed. For maize this is as high as 65%. About 20% is consumed by humans and 15% of the maize in the Netherlands is processed into biofuel."

France and Germany are safe countries with stable exports. So why is it that the Netherlands also has to deal with higher grain prices?
"Grains are globally tradeable commodities. If a major supplier drops out, as currently is temporarily the case with Ukraine, this will have an effect on the worldwide price of grains, and therefore also on the price we pay here in the Netherlands. That's how such a market works. You can't say: "My imports from France haven't been affected, so I pay the same low price as a year ago." The price of grain from countries such as Germany and France is also determined on the basis of the world price, because grain can in principle be shipped anywhere. Because we mainly get our wheat from France and Germany, we won't have a grain shortage here any time soon. But grain prices immediately rose here as well at the start of the war in Ukraine."

Normally, Ukrainian grain is mainly exported to North Africa and the Middle East. Can they breathe a sigh of relief now that Turkey and the UN mediate in the export?
"The agreement signed at the end of July has yet to prove its worth. There is still a lot of uncertainty as to whether the flow of ships will really get going to transport the grain from the Ukrainian ports across the Black Sea to the places of destination, without incident. That will become apparent in the next few months. It is very important this agreement is in place, but the situation still looks fragile. We had the explosions a few days ago at the Russian base in Crimea, for example. Turkey has a direct interest in the warring parties adhering to the agreement, because the country is one of the major importers of Ukrainian grain. So, like Egypt and other countries in the region, it really needs that grain."

Do you know anything about how the price of grain will develop in the coming months?
"Currently, the wheat price is in any case lower than before the Russian invasion. That's still relatively high, but not as extremely high as in the first phase of the war. The coming months will show whether the grain agreement will be implemented. Observers are hopeful, as a result of which the wheat price has already dropped considerably. However, should the conflict escalate again, the price will certainly rise again. The new harvest in the grain-producing countries in the northern hemisphere will take place shortly after the summer. It will then become clear to Ukraine to what extent the war has affected grain production. All grain producers are dependent on the weather for their harvest. In Europe, for example, it has been hot and dry for a long time now, which can have consequences for the harvest. For the time being, we're hearing positive reports from America about this summer's grain production. The weather has the potential to provide relief if it leads to a rich harvest, but can also pose a risk and lead to further shortages and higher prices."

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Climate Data Specialist Lucas Wouters talks about the impact of prolonged drought on investments.

Extreme drought in Italy’s Po Valley, forest fires throughout the Mediterranean and historically low water levels in the Rhine. All of Europe is suffering from a precipitation deficit this summer. And the drought is not incidental. “It’s not a question of if the drought will get worse than it is now, in the long- term; it’s a given that it will,” says Wouters. “About 20% of the carbon we are emitting now will still be in the air in a thousand years. So our current emissions will still have a long-lasting effect on future temperature increases, with all the consequences that will entail. Droughts will last longer and be more severe.” 

Agriculture

Climate change will lead to increasing droughts in certain parts of the world, which will affect water supplies, among other things, Wouters argues. “And that in turn has consequences for agricultural production, as well as for industries that depend on a stable water supply to produce consumer goods and materials, for example, and for the energy sector, which uses a lot of water to cool power plants or to generate energy with steam turbines or hydropower. Such impacts will in turn affect the entire economy, making the increasing drought a potential risk for investors.” According to a study done by the World Bank, drought could lead to a loss of 6 percent of gross domestic product in certain countries by 2050. That would involve water shortages and the consequences of that, such as crop failures. A long-term investor like APG therefore looks at the potential impact of climate factors, including drought, in all its investments, and analyzes the potential risks and returns.

A tangible example is investments in agriculture and forestry, grouped together at APG under the heading Private Natural Capital. “In agriculture, the presence of reliable water sources is a key indicator of a good harvest,” Wouters says. “That’s why, for potential investments, we assess whether there is enough capacity in the surrounding area to secure sufficient water for the intended operations. In addition, innovation with respect to irrigation is an important aspect in protecting the harvest. In Romania, we are investing in a project that involves working with local parties to repair, improve and expand irrigation networks, which often also save water and energy.

APG also urges managers of land that is invested in to cover any climate risks. “In agriculture, for example, this involves leaving land fallow as little as possible, thus preventing evaporation. This improves the quality of the soil, so that it can absorb more water. The crops to be grown are also determined by the water that is available in the longer term. In forestry we expect the managers to have fire extinguishing facilities in place, in case persistent drought leads to forest fires. We also want fire prevention to be taken into account in the management and layout of forests. We use climate scenarios to assess potential investments. We won’t take on investments in which the impact of climate change is too great.

Adaptation

To counteract the negative effects of drought on investments, APG encourages companies to do more to adapt. This can be done, for example, by creating on-site water reservoirs around properties and farms. APG also works with external data sources to monitor climate change and the consequences thereof. Wouters: “Our real estate team, for example, has developed a method that measures physical climate risks for our investments. In this way, we want to make the real estate we invest in more climate-resistant.” For its pension fund clients, APG invests in the American company Xylem. This company offers solutions that promote efficient water use and so prevent water scarcity. Examples include the transport, purification and reuse of water. Closer to home, APG invests in a number of green bonds issued by the Nederlandse Waterschapbank (Netherlands Water Boards Bank), which include water bonds. This sustainable water bank uses the proceeds to better prepare the Netherlands for the consequences of climate change by financing projects and companies that focus on flood risk, water management, water quality and biodiversity.

Water

Due to increasing drought, it is becoming increasingly important to conserve water. This offers interesting opportunities for investments in, for example, water technology companies and water treatment plants, Wouters explains. “In the Netherlands, we have high quality drinking water; in many other countries there is a shortage. Of all the water on earth, 97 percent is salty and most of the remaining water is frozen, as in glaciers. Technologies already exist to desalinate seawater, but the technology is still very expensive and the process still uses a lot of energy. If a company succeeded in converting part of that 97 percent salt water into drinking water more efficiently, it will have struck gold.”

There are also opportunities to invest in techniques that make water use in buildings more efficient. “APG invests in The Student Hotel, on behalf of our fund client ABP. The showers there have meters so that hotel guests can see exactly how much water they are using. This encourages guests to take shorter showers and thus use less water. That is a small contribution to the solution, of course, but it does indicate that there are opportunities to contribute to combating drought through our investments.”

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the question of how dependent on China the Dutch economy is. “An economic disconnection from China will have even greater consequences than the disconnection from Russia.”

Last week, Speaker of the U.S. House of Representatives Nancy Pelosi visited Taiwan. The controversial visit raised tensions between the US and China. A conflict of the two economic superpowers over Taiwan thus seems another step closer. “Open trade nations like the Netherlands, with the recent lessons from the Ukraine crisis, need to prepare for this new geopolitical reality faster,” Jonathan Holslag, a political scientist at the Free University of Brussels, argues in NRC. “We need to reduce our economic dependencies on China faster, or the price threatens to get even higher in the coming years.” But how dependent on China are we really, in the Netherlands?

Equity Blow

After Russia’s invasion of Ukraine, Western countries imposed hefty sanctions on Moscow. That move can serve as an example of what happens when the U.S. and the EU want to disengage economically from China, Knaap argues. “The example of Russia shows that there are different degrees of dependency. The first is ownership of - in this case - Western equity in Russia or China. Dutch investors have interests in Russian companies, and Russian companies and individuals have assets abroad. In other words, there are financial links. Is that dependence? Yes, because after the war broke out, it became clear to both Western investors and Russian oligarchs that their interests were not safe. If the West breaks off relations with Beijing tomorrow, so to speak, it is quite possible that an immense financial blow to both parties will follow. Although China’s share among Dutch investors is not huge, the amounts involved are substantial. And that loss will be instantaneous.”

The second form of dependence is trade relations, both of goods and of technology. Of everything we import into the Netherlands, 12.4 percent comes from China. A hefty portion, but it also masks the bigger picture, Knaap said. “The example of Russia really demonstrates very well the importance of the so-called second-order effects. For example, we are not that dependent on Russian gas, but the Germans are. And if they have a gas shortage, we will also have one. We can also see it in imports of, for example, fertilizer from Germany, because the chemical companies there need gas for their production. It is therefore very misleading to look only at the direct economic consequences for the Netherlands, because these days almost all production chains run through several countries. The indirect effects are therefore even greater.”

Corona crisis
“Whereas the severing of economic relations with Russia mainly shows how dependent Europe is on Russian fossil fuels, an economic disconnection from China will have even greater consequences," Knaap said. “You can already see that when you look at that Chinese share of 12.4 percent of Dutch imports. If imports were to shrink by such a percentage, that would be a huge economic blow. And that doesn't even include the fact that the other countries the Netherlands trades with also import a lot from China. At the time of the corona crisis, we noticed in Europe how dependent we were on Chinese products. Chinese ports were closed, and you couldn’t even get a bicycle in the Netherlands because we were out of parts. So, it’s very difficult to cut a country out of the supply chain, especially China.”

According to Holslag, in NRC, the Netherlands and other European countries need to become more self-sufficient so that we are prepared if things go wrong with China down the road. “That’s one way of looking at it,” Knaap responds. “For a very long time the prevailing thought was: as long as we have very strong economic ties, we can’t afford war. You can see that it works too, because despite the rhetorical arm-twisting between Beijing and Washington, the two countries are still doing plenty of trade. So that economic dependence is there, and that also applies to China. If the West stops buying Chinese products, they will have just as much of a problem there. So, it is costly for both sides to stop globalization.”

Yet companies seem more reluctant than before to invest in China. Causes are the strict lockdowns, particularly in Shanghai, and the somewhat disappointing growth figures. The tensions around Taiwan are also not going to increase enthusiasm about China among foreign investors. Knaap points to the “China+1” approach that some companies are taking. This means that they build one factory in China and one factory in another low-wage country such as Vietnam or India, which can then serve as a backup, should something go wrong in the (trade) relations with China.

Globalization
However, it is not an easy task to turn Europe into a manufacturing center again, like China is now, Knaap argues. “If we have to start manufacturing everything ourselves, the inflation we are seeing now is nothing compared to what we will be facing then. The downside of everyone earning well here is that it costs a lot to manufacture products here. Much of our prosperity is due to globalization. We got a little spoiled by getting lots of stuff for little money from low-wage countries. In recent decades they have become very good at manufacturing all kinds of products, while we have somewhat lost that art. It will therefore probably take years to set up a manufacturing industry here again.”

So, for the time being, the Dutch economy is largely dependent on China. There is the financial dependence, but especially the dependence on Chinese products, both directly and through trade with other countries that are also dependent on China. “The fact is that China has developed into an almost untouchably competitive manufacturing economy. They are more expensive than before but still not very expensive, super productive and they can deliver tomorrow if they have to. China's trade figures are only going up, right through all the economic crises. They know exactly what we want, and they sell it to us in large quantities.”

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert gives a clear answer to the question of the week. This time: Vincent Fokke, Head of Listed Real Estate Europe, on whether the European Central Bank’s (ECB) recent interest rate move will lead to a cooling of the Dutch housing market. “The housing market is not purely driven by rational investment decisions. Often, emotional considerations play a bigger role.”

In an attempt to suppress high inflation, on July 21, 2022, the European Central Bank raised the deposit rate - the interest rate banks receive when they deposit excess money with the ECB - from -0.5 percent to 0 percent. A significant step - in a historical sense, since the ECB had not raised interest rates for over a decade, but also because such an adjustment of 0.5 percentage point does not normally happen in one go. And, the ECB’s expectations for the coming months showed that the end of the rise does not seem to be in sight.  

Rejoice
Will those rising ECB interest rates also lead to higher mortgage rates, so that the Dutch housing market can finally cool down a bit after years of big price increases? According to Fokke, the people who are looking forward to this should not rejoice too soon. If only because the ECB interest rate is not the most decisive factor for the level of mortgage rates.

“With negative deposit rates, banks have a strong incentive to put out ‘excess’ money. That may contribute somewhat to a higher supply of mortgage loans, resulting in a depressing effect on mortgage rates. However, ultimately, mortgage rates are not so much related to the ECB rate, but to a greater extent to long-term capital market rates. The interest rate on government bonds - for example on Dutch government bonds with a maturity of ten or thirty years - is therefore a much more important reference point for the mortgage market than the ECB interest rate. That also explains why we have seen a strong upward movement in mortgage rates over the past seven months. Because from January to mid-June, capital market rates rose sharply, while the ECB rate hike had yet to take place at that time.”      

Quite dynamic
After mid-June, however, capital market rates dropped significantly again. So, can we now expect lower mortgage rates again? That seems a bit premature.

“Due to the current geopolitical situation and the reversal of monetary policy - the ECB has raised interest rates, but since July has also stopped net bond purchases to stimulate the economy - those capital market rates are currently quite dynamic. For example, the interest rate on a ten-year Dutch government bond had risen to 2.1 percent in mid-June, while now - at the end of July - it is only 1.3 percent. Because of this high volatility of capital market interest rates, banks are still somewhat reluctant to adjust their mortgage rates. After all, things can quickly go the other way again.”

Despite the recent volatility, however, we can see that capital market rates have started an upward trend, driven in part by the sharp rise in inflation, Fokke emphasizes.

“Of course, it’s not out of the question that in the shorter term mortgage rates will also come back down. But if you compare the capital market rates of today with those of five or seven years ago, you can see that the trajectory of those rates is up, even though they have fallen sharply in recent weeks. In the recent six months, mortgage rates have risen along with this market movement.”

Emotional considerations
And this brings us to the key question: can a possible continuation of this rise in capital market interest rates that has been going on for years cause the air to be let out of the Dutch housing market bubble? After all, based on economic theory, you would expect that when financing becomes more expensive, the demand for houses falls - and so does the price. But with the housing market, it’s all just a bit more nuanced, says Fokke.

“The housing market is not driven purely by rational investment decisions. People who are looking for a house do not see it only as an investment object. In fact, emotional considerations often play a bigger role. This makes it relatively difficult to predict how such a market will develop. For example, I think many an analyst would have expected house prices to fall during Covid times because of the increased economic uncertainty - after all, they had already risen considerably. But the opposite turned out to be the case, and that illustrates the different character of this market. On top of that, although mortgage rates have risen, they are still not at a shockingly high level.”

Detached houses

Moreover, you can’t really speak of “the housing market”, and that too complicates the relationship between mortgage rates and the housing market.

“The housing market is not only fragmented regionally, but also in terms of housing type. All those different markets have their own dynamics of supply and demand. And of all the factors that determine the direction of the market, that dynamic is the most important factor. Many sub-markets show tightness, but the extent varies. For example, in the case of detached houses in the higher segment, supply and demand are reasonably in line. In contrast, the tension between supply and demand is much greater in cities, due to urbanization.”

Another reason why higher mortgage rates do not necessarily lead to falling house prices, according to Fokke, is several developments on the supply side of the housing market.

Rent increases curbed
“I am seeing at least two developments that are having a major impact on housing supply. The first development is that many investors are withdrawing from the housing market as a result of the increasingly strict regulation of the free sector. For example, initiatives have been taken to limit rent increases or to require that a buyer of a house first occupy it himself for a number of years before it can be rented out. The second development is the enormous increase in construction costs. Many materials - wood, steel and cement, for example - have become considerably more expensive, resulting in fewer building projects.”

The ECB can exert limited influence on mortgage rates through adjusting deposit rates. But the effect of that is dwarfed by the effect that changes in capital market rates have on mortgage rates. Capital market rates have risen since seven years ago and, more recently, so have mortgage rates. But even rising mortgage rates do not necessarily lead to lower house prices. So now that the ECB is raising interest rates, this will not automatically lead to a cooling of the Dutch housing market.

On July 11, 2022, Russian state-owned gas company Gazprom shut down the Nord Stream 1 pipeline for its annual ten-day maintenance. At the time, serious consideration was given to the possibility that gas supplies to Europe would not resume after the maintenance period - with all the potential consequences that would entail. What are those potential consequences? How big is the potential economic impact, if Nord Stream 1 were to be completely shut down? Five questions for APG’s Peter Verbaken, Head of Commodities Team, and Gillis Björk Danielsen, Senior Portfolio Manager Commodities. “The impact on the European economy will be the least if Europe responds in a coordinated manner.”

When Gazprom announced to its European customers in mid-July that it could no longer guarantee the supply of natural gas, serious consideration was given to the possibility that Nord Stream 1 would not be restarted. Those fears turned out to be unjustified, to the extent that natural gas began flowing through the pipeline again on July 21. But the supply was still at the same low level as before the maintenance: 30 to 40 percent of the natural gas quantity that Gazprom supplied to Europe through Nord Stream 1 until early June (a few days later, Gazprom announced that it would cut flows through Nord Stream 1 on July 27th, to 20 percent of its capacity). Before that date, the full capacity of Nord Stream 1 was used. Then the gas flow began to decline, and hovered around 40 percent of full capacity around June 17. And with that, it remains a means of pressure with which Russia’s president, Vladimir Putin, is trying to get Europe to stop supplying weapons to Ukraine and/or to reduce the economic sanctions imposed on Russia after the invasion of Ukraine. After all, Europe depends on Nord Stream 1 for a third of its natural gas consumption, and to get through the winter, it needs to replenish its gas supplies in the summer.

What could be the reason that Nord Stream 1 has been restarted after this maintenance period after all?

Björk Danielsen: “If Gazprom completely stops the supply of gas to Europe, it would mean a significant loss of revenue for the Russian state, because it cannot sell that kind of quantity elsewhere. Revenues they need to finance the war against Ukraine. You could speculate that restarting Nord Stream 1 may be a way for Putin to test Europe's resolve and internal solidarity. By maximizing the unpredictability of Russian natural gas supplies to Europe, Russia makes it difficult for Europe to remain united and plan ahead to meet its energy needs. The fact that Russia has resumed gas supply may be a way to dissuade Europe from taking emergency measures now to function without Russian gas in the winter. This is most likely to create divisions within Europe in due course. And that is in Putin’s interest.”

What would a divided Europe look like, if the natural gas supply from Russia were to stop completely?

“Some countries may make separate agreements to keep receiving gas from Russia. In other cases, it can be competition over who gets access to the limited non-Russian gas. Theoretically, a number of countries, including the Netherlands, can secure the necessary natural gas for themselves by stopping supplies to other countries. For example, some of the natural gas pumped into Groningen is currently supplied to Germany. But the chances that those countries will actually cut off supplies to neighboring countries are slim. Politically, it’s a pretty impossible scenario. When the possibility of a Russian supply freeze became more and more real, European member states made agreements to share their gas supplies and help countries disproportionately affected when necessary.”

What would be the economic impact on Europe, if Nord Stream 1 were to be shut down completely?

Verbaken: “The impact on the European economy will be the least if Europe reacts in a coordinated manner. Such a response is indeed expected. But it is far from certain, given the unequal interests of Germany in particular on one side and countries like Hungary, Spain, and Italy on the other. The IMF recently calculated that Europe can significantly limit the economic impact of a full Russian supply freeze with a coordinated approach. Should Europe still respond in a ‘fragmented’ manner, the extent of the economic damage will vary from country to country. For the Netherlands individually, it makes relatively little difference whether Europe responds in a coordinated or fragmented manner. If you look at the IMF figures, the percentages that the Netherlands gives up on gross national product are relatively close - around two percent at most in both cases. But countries that are much more dependent on Russian gas, such as Hungary, will be hit hard in a scenario in which Europe does not respond as one. The GNP of the Hungarians would take a hit of 2.5 to 6.5 percent in that case, compared to 1 to 3.4 percent in a coordinated European response.” 

For how long would the Netherlands be able to get by on its current gas reserves, if it no longer gets gas from Russia and no measures are taken?

Verbaken: “That is an irrelevant question, really, because you cannot consider the Netherlands an isolated country in that respect. Given that the European member states have agreed to share the natural gas reserves, it is better to ask: how long can Europe endure without Russian gas? And that is a very difficult question to answer because it depends on so many different factors. For example, how much the industrial demand for gas will decrease as a result of higher gas prices, and of course how cold - and how long - the winter will be in Europe. It also depends on how much LNG - natural gas that has been liquefied and can thus be shipped around the world - Europe can buy on the world market to make up for a shortage of natural gas.”

So, we just have to wait and see when central heating systems and gas stoves stop working?

Björk Danielsen: “Modeling does produce estimates of the time it will take for European gas supplies to be depleted if Russia stops supplying gas completely. But the bottom line is that Europe will have to live according to its means if the gas supply from Russia is cut off completely. Demand will simply have to be lower to get through the winter. That’s why the European Commission has also asked all member states to reduce their natural gas consumption by 15 percent between August 1, 2022 and March 31, 2023. How they do this is up to all member states. Part of the reduction will have to be achieved by governments and companies, but households may also be asked to make adjustments. The European Commission's proposal in its current form is unlikely to be passed – or even get to a vote – so most likely it will be amended. But we probably won’t be sitting at home with frostbite during the winter. Europe will not let it get that far.”

The war in Ukraine has made inflation a global issue in 2022. Including in the Eurozone, with Estonia taking the crown with inflation of more than 20 percent in June. But apart from African countries, there is no country where money has lost value as rapidly as in Turkey. Why is this, what does it mean for the Turkish population and how big is the chance that inflation in the Netherlands and Europe will get out of hand just as badly? We asked Charles Kalshoven, Senior Strategist at APG.

In June 2022, inflation in Turkey reached a staggering 78.6 percent, a figure that has not been this high for more than two decades. By comparison, in the same month, European inflation stood at 8.6 percent. The main reason for the extremely high figure in Turkey lies in the way the country is economically managed, says Kalshoven. This is because Turkey's president, Recep Tayyip Erdogan, holds unconventional macroeconomic theories.

“Turkish inflation has been able to get so out of hand because Erdogan somehow hates interest rates. It is hard to know why, but in fact he reasons as follows: when interest rates are high, companies have to incur a lot of costs - financing is expensive - and because these have to be passed on to their products, prices rise. So, he argues, if you want to keep inflation low, you have to keep interest rates low.”

Not good for their careers
In doing so, he goes directly against the consensus among economists and central bankers, which is that you need to raise interest rates precisely to keep inflation down. 

“And the central bankers in Turkey know that too, but raising interest rates has not proven to be good for their careers. Erdogan has already kicked out a number of bank presidents in the past for that reason.”

With the Turkish people’s money depreciating so rapidly, many are taking their money and investing it in assets that are more stable in value, Kalshoven says.

Gold and jewelry
“Many goods are currently being purchased in the hope that they will retain their value, such as gold and jewelry, as well as, for example, used cars. The economy may get a boost from this for a while - but it will be relatively short-lived. If everyone is primarily concerned with protecting their assets from inflation, it will ultimately not be that productive. Besides, it can also cause a negative, self-reinforcing effect. Turks are buying more foreign currency, which has caused the Turkish Lira to go down. Last year, the Lira was still worth a dime in euro cents. Now it is fast approaching a penny. This also makes imports more expensive for Turkey, which in turn creates imported inflation.”

The sharp rise in energy and food prices also plays a role in Turkey's inflation rate, but a relatively limited one. Kalshoven: “We also have these higher prices for energy and food in Europe, but here we still have single-digit inflation figures, while the Turkish economy has been showing double-digit inflation for some time now.”

Traumatic experiences
Before inflation in the Netherlands and Europe rises as high as in Turkey, a lot has to happen. After all, the interest rate policy of the European Central Bank (ECB) is diametrically opposed to Turkey’s policy and cannot just be swept off the table.

“The ECB does not have inflation on a string either, but there are solid agreements between the member states on the mandate,” he says. Christine Lagarde (the president of the ECB, ed.) can’t just be fired, that’s institutionally better guaranteed than in Turkey. Theoretically, you could exert influence through the appointment of an ECB president who pursues a distinctly specific interest rate policy. But in practice, countries like Italy, Germany and the Netherlands would have to agree on such an appointment. The Germans have had traumatic experiences with hyperinflation. So, the chances of them allowing it are very low.”

Far-reaching effects
The fact that the central bank in Turkey has still not raised its interest rates has - in addition to high inflation - even more far-reaching consequences economically. Confidence in the Turkish economy is declining, in more ways than one.

“In an attempt to keep prices in check, the Turkish government is resorting to short-term solutions. For example, it has reduced the VAT on food from 8 percent to 1 percent. It helps for a while but in the end, it is nothing more than a stopgap measure. It is not good for government finances and, as a result, financial markets' confidence in Turkish government bonds is falling. And the banking sector also benefits if the government's housekeeping is in order, because then it has easier access to foreign capital.”

No band-air solutions
Turkish consumer confidence has taken a hit and investment prospects are poor, says Kalshoven.

“Partly because the confidence level, which has fallen due to the counterproductive interest rate policy, encourages capital flight. Normally, a central bank would raise interest rates to combat that capital flight, but instead Erdogan blames the foreign interest lobby.

According to Kalshoven, the Turkish economy does not need band-aid solutions, but structural reform.

“The labor force in Turkey is growing, you want to keep those people employed. To achieve that, the country needs more exporting industry. The economy now relies too much on the construction sector and on tourism. And the latter sector is being hit hard, now that a significant proportion of tourists - Russians and Ukrainians - are staying away as a result of the war.”

The seventies

The (constitutional) situation is therefore fundamentally different in Europe and the Netherlands, and makes an interest rate policy like Turkey’s impossible. However, this does not mean that double-digit inflation is impossible in the Netherlands and Europe, says Kalshoven.

“In the 1070s, we saw that it can be done, but even then it wasn’t about percentages like Turkey’s now. And while interest rates in Europe may also be too low for current inflation, the ratio is not as skewed as in Turkey. Look, even with us there are conceivable circumstances in which inflation gets out of hand. Suppose we have a recession in which unemployment rises but inflation declines only slightly because there are mechanisms by which wages are automatically adjusted to prices - as was the case in the 1970s. The price you pay for fighting inflation - even higher unemployment - then gets really high. The call for less social damage will then certainly increase, although that is no guarantee that central banks will then cave in.” 

In any case, this scenario is not on the agenda at the moment, says Kalshoven, because the labor market is currently tight.

Not following Turkey
“And if interest rates are raised and there is a recession, that tightness will probably disappear again. The fact that we are not going to follow Turkey’s lead can also be seen from the ECB inflation forecast. In June, inflation was 8.6 percent, for the whole of this year the ECB expects 6.8 percent, for 2023 3.5 percent and 2.1 percent in 2024. Barring any surprises, such as escalation in Ukraine or new Covid lockdowns, we think that inflation in the Eurozone will eventually return to the 2 percent target. Incidentally, such a rate has not occurred in Turkey in the past 50 years.”

The use of natural gas and nuclear energy to generate electricity may be labeled as sustainable as of January 1, 2023. However, this will be temporary and subject to certain conditions, as provided in the so-called EU taxonomy Regulation. Johan Barnard, Head of International Public Affairs at APG, regrets the European Commission's decision. But in his new column, he calls for the taxonomy not immediately to be regarded as unworkable.  

The so-called EU Taxonomy Regulation is the basis for a catalog of economic activities that may be called sustainable by financial institutions under certain conditions. Previously, the European Commission had already proposed that electricity generation from natural gas and nuclear energy under this taxonomy regulation be temporarily labeled as sustainable. Implementing arrangements of this kind can be rejected by the European Council of Ministers or the European Parliament for a limited period of time, but do not require the explicit consent of the Council or Parliament. However, a resolution in the European Commission to block this proposal was voted down on July 6. Which makes the decision final.

The result is that from January 1, 2023, investments in natural gas-fired power plants that replace coal-fired power plants may be called sustainable under the EU taxonomy, as may investments in new or existing nuclear power plants, where for nuclear power plants the main limitation is that there is a strict requirement for the storage of the nuclear waste.

If you start looking at the conditions in detail, they differ in several ways from the criteria used for all other sustainable economic activities. At the same time, the practical options are quite limited, however. Member states that want to make investments in natural gas plants sustainable will have to close coal plants. As far as we know, Poland, for example, has no intention of doing so. And even if you are planning to think about new nuclear power plants, it is difficult to bring them under the sustainable category. This is because the new rules stipulate, among other things, that a Member State must then have achieved final disposal of highly radioactive waste by 2050. Dutch policy is to work with temporary storage and the plan for final disposal was not until 2130 at the latest. France does meet all the requirements of the new decree for nuclear energy.

It is important to recognize that early last year, and thus well before the war in the Ukraine, it was clear that the EU Member States had very different opinions on the question of to what extent and for how long nuclear energy and natural gas should continue to play a role. France, in particular, insisted that nuclear power did not produce CO2 emissions, while Germany was working to get out of nuclear power entirely. Because the number of countries joining France was quite small, France and the European Commission thought about broadening the issue to gain more support. This was achieved with the story that replacing coal with natural gas would be good, especially when natural gas plants will soon be made suitable for hydrogen. With this, the German position began to wobble and Eastern European member states were willing to go along with it in the direction of nuclear energy. It is conceivable that the Commission's proposal was intended to support President Macron, just before the recent presidential elections, for fear of a victory by one of the Euro-skeptic candidates.

A cynical view of the additional delegated regulation to the Taxonomy Regulation may therefore be that it is largely of political symbolic value. And that in itself is objectionable, even if the practical consequences are not that great. It is precisely this point that the Dutch pensions industry has stressed several times in the run-up to the decision. The sector understands that, in the context of the climate transition, intermediate steps may have to be taken, which enables an economic activity being first made less harmful than it is now, only to be made climate-neutral at a later stage. It would be a good idea to introduce an “amber” category for this purpose, but it is confusing to start calling those kinds of activities that are not yet fully sustainable sustainable. too. Especially since you know that within a few decades you have to get rid of them again.

The usefulness of a taxonomy that defines which economic activities can be considered sustainable, rests first of all on a solid scientific basis. But also on a broad acceptability to a large group of stakeholders of the final classification. Given the strong opposition from a wide range of NGOs and the division in the European Parliament (and really also between member states - more on this later), it is clear that the credibility of the taxonomy as an instrument has been damaged.

NGOs Greenpeace and ClientEarth are considering legal action against the EU. And Luxembourg and Austria have even already announced the start of such a procedure at the European Court of Justice. It will be positive if there is indeed a review by the European courts. In particular, the question seems important to me whether the Commission's additional delegated act has remained within the powers entrusted to it under the Taxonomy Regulation, or whether real legislation and thus positive decisions by the Council and Parliament would actually have been required here. Incidentally: this positive majority probably does not exist in the Council.

Meanwhile, it is important not to throw the baby (the taxonomy) out with the bathwater. Institutional investors such as Dutch pension funds and pension administrators continue to need an uncontested language to speak to stakeholders about sustainable investments. The additional delegated act prescribes that reports on sustainable investments must indicate separately which part of these sustainable investments relates to natural gas and nuclear energy. It therefore remains possible to look at reliable figures without natural gas and nuclear power.

And even more fundamentally, the taxonomy does not affect the investment freedom of institutional investors. If the taxonomy regulation considers an economic activity to be sustainable, an institutional investor need not invest in it. That makes sense because, of course, the classic considerations of risk, return, and cost still play a role. And in the case of natural gas and nuclear energy, that you can be of the opinion that the taxonomy regulation sets the bar too low. If an economic activity is not sustainable according to the taxonomy, an institutional may continue to invest in it. This is hardly surprising, given that the vast majority of the economy is not yet sustainable enough to meet the requirements of the taxonomy regulation. What is not allowed is to call something sustainable that is not, according to the taxonomy regulation. The expectation is that institutional investors and their clients themselves will steer towards sustainability, in addition to the aforementioned classic considerations of risk, return and cost.

I regret that this decision has come about. At the same time, it is fortunately not going to make a difference to institutional investors who want to divest from fossil fuels, including natural gas. The ugly element added to the taxonomy thanks to the Commission also need not get in the way of better dialogue with stakeholders. After all, it remains visible to what extent, if any, nuclear power and natural gas are hiding among the investments that are sustainable according to the taxonomy regulation. However, efforts should now be made to prevent this kind of political intervention in the taxonomy or only allow it with the explicit consent of the Council and Parliament.

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question.

In this edition: Johan Barnard, Head International Public Affairs, on the question whether tax incentives are effective in the fight against climate change. “If the fuel prices stay at this high level for a prolonged period of time, people will start looking for ways to reduce the costs.”

In the beginning of July, the government announced that car drivers will pay more per kilometer driven starting 2030, instead of a fixed amount for owning a car - as currently is the case for the vehicle tax. It is one of the ways in which taxes can be utilized to encourage behavior leading to less CO2 emissions. And there are more buttons the government can push: the fuel taxes, the purchase tax (BPM), the vehicle tax, the maximum amount for an untaxed mileage allowance for employees and the fiscal addition for lease cars.

The question arises: how successful is that type of measures really?

Tobacco
According to Barnard that depends, among other things, on the price elasticity of demand: the degree to which the demand responds to a price change. “In case of elastic demand it responds to a large extent to a price change, in case of an inelastic demand that effect is relatively low. The latter applies to tobacco, for instance. For car fuels, the demand is also inelastic in the short term. Because oil is very expensive at the moment, the prices of petrol and diesel are also very high. Yet, this doesn't have a major effect on the number of cars on the road. But if the fuel prices stay at this high level for a prolonged period of time, people will start looking for ways to reduce the costs. For example by driving smaller, fuel-efficient cars or by getting rid of a second car. This means an increase of the taxes on fuel may therefore be an effective way in the long term to reduce the CO2 emissions.”

But the button of an increase of the fuel taxes also comes with some complications, Barnard says. For example, the border effects. “People in the border region can fuel their car in Belgium or Germany if its cheaper in those countries. There has been made an attempt once to eliminate that effect by means of a grant scheme for fuel station operators near the border. However, that attempt failed because it required more subsidy than allowed under the European state aid rules.”

Burning fingers
Moreover, most politicians don’t want to get their fingers burnt on an increase of the fuel taxes. “The government has now actually implemented a temporary decrease of the taxes. That is explicable in a political sense, but it does cause friction with the goals of the climate transition.”

The BPM – tax on the purchase of a new car or motorcycle – is also utilized as a means to reduce the emissions. No BPM is levied on electric cars, for example, and the BPM on a vehicle with a low emission level per kilometer is lower than on a vehicle with a higher emission level per kilometer. Yet, a decrease or abolition of the BPM could also be advantageous for the climate, Barnard says. “The advantage of a decrease or abolition of the BPM is that new cars will become cheaper, making it easier for people to switch to a more fuel-efficient car sooner. However, the downside is that the government in that case loses an instrument to encourage the purchase of electric cars, because the difference in BPM with fuel-driven cars no longer exists.”

Not stimulated
Barnard believes that, in addition to road pricing, other measures will be necessary. He outlines alternative possibilities that are targeting emission reduction utilizing a mixture of different existing fiscal instruments with a more focused approach.  “Only the vehicle tax is considered at the moment. That will be abolished and replaced with road pricing. But if it's really all about emission reduction, there are also possibilities to reach your goal through a combination of tax increases, a different fiscal treatment of lease cars and an increase of the maximum tax-free allowance for commuter traffic. The lease care driver is not stimulated right now to drive less kilometers. And this while the maximum allowance for commuting kilometers has not been sufficient for years already to cover the costs of that car use. Road pricing can be made more effective in a climate-related sense by levying less tax on kilometers driven with a clean car than on kilometers driven with a relatively polluting car. In addition, it can be used as an instrument to reduce traffic congestions by making road pricing per kilometer dependent on where and when those kilometers are driven.”

Vulnerable
When it comes to emission reduction through taxes, the aviation industry and maritime sector cannot be ignored. Aviation kerosene, for example, is currently tax-free.  Barnard: “Agreements have been made in this respect in international treaties on which airlines rely. If you want to implement tax on kerosene, it entails at least European and possibly even broader international alignment. The large airports compete with one other and no country wants to put its own airports at a disadvantage relative to competitors. Should the EU countries agree to implement tax on kerosene, the airports in these countries will become vulnerable to competition from Heathrow Airport and Zurich Airport. That vulnerability mainly applies to an airport such as Schiphol that, the same as Heathrow and Zurich, has a business model based on a hub function between transatlantic flights and short-distance flights within Europe.”

Also an increase of the flight tax or VAT on tickets can contribute to emission reduction, Barnard says. “The flight tax would have to be increased to such an extent that a level playing field arises between airplane and train for certain distances. That is definitely not the case yet. For that matter, the government could also utilize a price increase for the landing rights at Schiphol. Schiphol is a public company after all.”

Privileged position
The same as the aviation industry, also the maritime sector enjoys a privileged position: the fuel, usually diesel, is untaxed. “The arguments for this are comparable with the reasons why airplane fuel is tax-free. But one element in maritime shipping is catching the eye in a negative sense. Because shore power is taxed, ships continue to run their diesel engines in the ports to provide for their power needs. As a result, the emission of one single cruise ship in the port of Rotterdam or Amsterdam is higher than the emission reduction realized in that same time slot due to the establishment of low-emission zones. This is like fighting a losing battle. In order to avoid those kinds of perverse effects, the fiscal exceptional position in the maritime sector also has to be addressed.

Summarized: taxes can be effective in the fight against climate change if all transport sectors are treated equally and provide targeted incentives through a mixture of fiscal instruments.

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. In this edition: Thijs Knaap, Chief Economist at APG, on the benefits of the much-discussed hub function of Schiphol airport for the Dutch economy.

Personnel shortages, long queues, the cancellation of flights. Schiphol airport has been a hot topic in the news again lately. An element of discussion here is whether or not the airport should fulfil a hub function. For a significant portion of the passengers, Schiphol airport is not their starting point or final destination but they only use the airport to transfer flights. In 2019 this involved more than one third of the 71 million passengers calling in at Schiphol airport. Are all of those transfer passengers really that beneficial to the Netherlands?

Network effect
According to Knaap, two elements are of importance. “The first element are the transport costs, meaning how much it costs to travel from the Netherlands to a foreign destination and vice versa. When a country has a large airport, such as the Netherlands has with Schiphol, the transport costs to that country are low because there's a bigger chance of direct flights and several airlines are competing with one another. Good accessibility is an advantage, economically speaking. The second element are the so-called network effects. That network effect enables a city or country to attract activities. If you are the first or most important company somewhere, the rest will come to you. There's not a lot to gain from the transfer passengers themselves, but the hub function does ensure that many airplanes travel through Schiphol, meaning we are well accessible as a country. Thanks to that network effect, more companies settle in the Netherlands providing more growth. If that's the goal, good connections are essential.”

Goal
It's difficult to say what the gain of such hub function is in a direct sense, Knaap says. “The few euros you earn for each transferring passenger will not make the difference. You could say that accessibility is the gain that eventually ends up with, for example, companies that benefit from it, with the Dutch holidaymaker who flies abroad easily and quickly and with the government by means of extra tax income. A part of that gain can be attributed to an increase of prosperity and that is difficult to measure. That also brings us to the point that the many flights from and to Schiphol airport also contribute to environmental pollution and noise nuisance. Those arguments are mainly presented when it comes to the transfer passengers at Schiphol airport, because they don't generate money for the Dutch economy. That's why many people ask themselves: ‘What is the actual usefulness of the hub function?’ But the goal is not the people transferring flights, the goal is the fact that the airplane flies to Amsterdam. The fact that an airplane departing from America or Asia arrives in Amsterdam is what makes the transport costs lower for the Netherlands and that's what it's all about.”

The considerations in favor of and against a hub function are changing over time though, Knaap says. “Thirty years ago, the general tenor was: ‘Let's build yet another landing strip’. The argument used in the past to make Schiphol airport grow, more employment opportunities, is less powerful since there are enough jobs available in the Netherlands. At the same time, we are currently dealing with housing shortages and more attention is paid to the environmental pollution and noise nuisance caused by Schiphol airport. That can also be seen in the debates where the general tenor now is: Just have Schiphol airport shrink.”

Balance
The millions of transfer passengers at Schiphol airport are therefore not directly beneficial to the Dutch economy. The hub function does ensure low transport costs and a possible network effect, advantages that are difficult to quantify. A balance between, on the one hand, the desire to maintain the hub function and, on the other hand, to decrease the number of flights, is difficult, according to Knaap. “You cannot say that by cancelling 50 percent of the flights, you will still have half of your hub. It would mean the hub no longer exists, because you need a minimum number of transfer flights. But it continues to be a guess how many flights would be needed to maintain the hub function.”

On Thursday, the European Central Bank announced its first rate hike in 11 years. APG's Chief Economist Thijs Knaap spoke about it on Monday in the radio program BNR's Big Five.

The higher interest rate means in any case that the funding ratio of pension funds will rise. "That leaves more room to increase pensions," Thijs says in conversation with presenter Paul van Liempt. The question is whether this will be sufficient, because pensioners have to deal with rising prices. "The moment the funding ratio remains high long enough, the pension will also rise. Do rising prices and rising pensions cancel each other out altogether? If all goes well, yes, although it also depends on which pension fund you are with," says Thijs. He points out that the pension system is aimed at offering a good real pension, i.e. that the purchasing power of the pension is maintained as much as possible. "That system seems to be working, because we are now seeing the coverage ratios rise very quickly."

Caution
Compared to other major central banks, ECB President Christine Lagarde comes quite late with the announcement to raise interest rates. Thijs understands that caution. The economy is no longer the same as it was 11 years ago, "and you can't really know what the effect of the rate hike is until you do it. Then it is very wise to first raise the interest rate a little bit to see if it might have major consequences." Unlike the Federal Reserve, which is tasked with curbing inflation and combating possible unemployment, the ECB has only one explicit goal: to monitor price levels. Nevertheless, according to Knaap, they have a kind of shadow goal in Frankfurt, and that is not to cause too much damage to the economy when curbing inflation.

Listen to the entire broadcast here (Dutch). Also read ‘Five questions about the announced interest rate hike by the ECB’.

The European Central Bank (ECB) announced Thursday that it will raise interest rates next month. It is the first time in eleven years that this has happened. The aim is to curb high inflation. Five questions for APG's Chief Economist Thijs Knaap and Senior Strategist Charles Kalshoven.

Isn't the ECB a little late with this?

“In hindsight, certainly. Inflation has been way too high since last summer. Of course, it was not unreasonable for the ECB to initially estimate that inflation would fall again soon. A lot of inflation was related to startup problems after all the lockdowns. But yes, Ukraine has now been added, with a major impact on energy and food prices. There were also new lockdowns in a number of large production centers in China. It is clear that inflation will therefore remain high for longer. Other central banks have intervened before (such as the US and the UK) but you can argue that inflation in the Eurozone has so far been the result of external shocks, which the ECB cannot do much about.”

Why is the ECB taking the plunge now and not before?

“President Christine Lagarde herself previously indicated that the ECB would stop buying bonds in the third quarter. And that interest rate hikes would only come after that. To avoid unrest, the ECB wanted to be predictable and not to surprise the market. The disadvantage of this late intervention is that the interest rate will rise somewhat faster after this. Lagarde hinted that after a quarter of a percentage point hike in July, interest rates could rise by half a percentage point in September.”

Is there anything to say about how long it will take a rate hike to bring inflation back to the desired 2 percent?

“The ECB itself always talks about a pass-through of interest rate steps that is 'long and variable', one and a half to two years. But these are just the first steps now. Inflation is expected to remain high this year and next. The ECB itself thinks that inflation will be back at 2.1% in 2024. Market expectations based on traded inflation are somewhat above that. Where we arrive with the interest rate when inflation is stable is known among economists as the neutral rate. In a recent message on the ECB's website, Lagarde indicates that she expects the ECB to move slowly towards this neutral rate. But at the same time she indicates that no one knows exactly how high this interest is. So there is not much to say about it.”

Is this hold enough to bring inflation back?

“It will take a little more than just the announced interest rate steps of July and September. The ECB itself is also talking about the start of a process. It is true that the ECB can get help from a number of quarters. A recession would depress wages and energy prices. More pleasant – and less likely – would be: relaxation in the oil market due to rapid peace in Ukraine. Another possibility is that governments will interfere with prices. Think of subsidies or maximum prices. That is quite disruptive economically, so let's hope these weapons are not used too much. Ultimately, you also need some time to work inflation out of your system.”

It is the ECB's first rate hike in 11 years. How unique is this?

“Especially what you see in the rear-view mirror is unique. We have had ten years in which the ECB interest rate was zero or negative. The latter was not possible at all according to the economic textbooks. Mario Draghi was president of the ECB for eight years but never raised interest rates. His successor probably does. We're finally going back to normal. Borrowing money will cost money again, storing money will pay off again.”

Current issues in the field of economics, (responsible) investments, pension, and income: an APG expert gives a clear answer to the question of the week. This time: Marco van Eijkelenburg, Senior Portfolio Manager Commodities, on the question what the Netherlands will notice of Russian Gazprom discontinuing gas supplies to Dutch GasTerra.

The reason that the Russian state-owned gas company no longer delivers to the Dutch gas distributor as of June 1st is that it does not want to pay the bill in Rubles, something that President Putin is demanding. Poland, Bulgaria, and Finland have already been confronted with the Russian sanction. According to Environment Minister Rob Jetten, the decision by Gazprom will not have consequences for Dutch households. But not everyone is convinced of this. Mijnraad, an independent advisory body of the government warned that a gas shortage could have “very large social consequences”  The international energy agency IEA also warns for an energy ration.

Alternatives
Marco van Eijkelenburg points out that GasTerra already has alternatives for the Russian gas. “I therefore do not think that this action by Gazprom will have major consequences for the Dutch gas reserve, although GasTerra will have to pay more for those alternatives than for the Russian gas. With its gas roundabout [infrastructure interchange for transport and storage of natural gas], the Netherlands has a favorable position with respect to the gas supply. As a direct consequence of the Russian invasion in Ukraine, there will be an accelerated scale up of capacity to import liquid natural gas (LNG). Gasunie, the state-owned company that takes care of the Dutch natural gas transport has rented two floating LNG facilities to expand the new LNG terminal at Eemshaven.”

This terminal, with an annual capacity of 8 billion cubic meter, will become an important supply line, Van Eijkelenburg explains. “We use approximately 40 billion cubic meter natural gas in the Netherlands per year, of which approximately 15% comes from Russia. If needed, there is always the gas field below Groningen, although that is politically sensitive. If there is a shortage of gas this coming winter, the government will first disconnect large industrial users from gas so that the delivery certainty for households and specific essential social services, such as hospitals, can be guaranteed. So, the Dutch consumer does not have to worry about the delivery certainty; it does however have to worry about the gas price. Especially when there is a variable contract and a cold winter.”

However, that higher price is not specifically caused by Gazprom discontinuing its delivery to GasTerra, Van Eijkelenburg emphasizes. “The increased gas costs have more to do with the fact that the entire gas supply from Russia is decreasing, partly because European countries want to move away from Russian gas, and partly because Russia is demanding payments in Rubles. The developments surrounding GasTerra and Gazprom are therefore part of a wider trend that is happening, and that brings along a lot of uncertainty. And that uncertainty about future gas deliveries can already be felt in the price. Directly in the gas price, as well as indirectly in the prices of goods. If the situation in Ukraine escalates further, with all the associated consequences for the Russian gas deliveries to Europe, the gas price can increase even more.  But it is also possible that Gazprom will discontinue even more deliveries, but that there is a price decrease after all. Simply because the current price already accounts for a negative future scenario.”

Gas supply
So the relatively high price we currently pay for gas is partly because the future uncertainty is already included in the price. What is striking is that the Dutch gas reserves are filled less than 40 percent. The government wants to replenish this to 70 percent, but the Mijnraad advises to do this to 100 percent. According to Van Eijkelenburg it is indeed wise to replenish the Dutch gas reserves as much as possible in the coming months before winter starts. “You have to take into account the worst possible scenario where more Russian gas supplies to Europe are discontinued in the short term and that we will have a cold winter. If you have the option now to best prepare yourself for this, you should do that. Europe will only import less Russian gas in the coming years, so the extra natural gas that was purchased will come in handy.”

We should regard Gazprom’s discontinued gas delivery to GasTerra as a small step in the larger movement to move away from Russian gas. “By definition, such a sudden boycott is a disruptive process and will never be gradual. Because of this, the predictability of supply and demand will decrease, and the prices will increase because of the increased uncertainty. But the delivery of gas to consumers will not be compromised, partly because of the increased expansion of the Dutch capacity to import liquid natural gas.”

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert provides a clear answer to the question of the week. This time: Thijs Knaap, chief economist at APG, talks about the consequences of the strong dollar for Dutch consumers.

At the start of 2021, one euro would fetch 1.22 dollars. At the beginning of this year, it was still 1.14 dollars and now the exchange rate of the euro has fallen to around 1.07. This means the euro is still worth a little more than the U.S. currency, but the difference is pretty small. Just after the introduction of the euro, at the beginning of this century, was the last time that the dollar was stronger than the European currency. At that time, you’d get a paltry 83 cents for your euro. Around the credit crisis of 2008, however, the euro was very strong again and was worth 1.60 dollars. So, the exchange rate fluctuates considerably. What factors play a role in this? And what does the Dutch consumer notice about the more expensive dollar?

More expensive vacations

With an exchange rate, three things come into play, Knaap explains. “Dutch consumers immediately experience the first one. That is because American products that you have to pay for in dollars, for example on the internet, become more expensive. Vacations to America also become pricier.” In addition, there is an indirect consequence. “Very generally, you can say that there are two large economic blocs that compete in the world market: America and Europe. Our power as Europe to buy products such as gasoline on the world market at a competitive price, for example, depends very much on what the euro is worth against the dollar. Now that the euro is weaker, we have to bid against the stronger dollar on the world market. That leads to products currently becoming more expensive for us than for Americans.”

The second force that plays a role in the exchange rate is the financial markets. “There is always a need to put excess money away somewhere in the world, for example in a bank or by buying a government bond. Then it matters what the interest rate is, and it is now quite high in America and quite low in Europe. So, it is more attractive to put money away in America, which increases the demand for dollars and makes that currency more expensive. The current high interest rate in the US is therefore the biggest reason for the strong dollar. Because although the global flows of goods are big, the financial flows are even bigger. These therefore have the greatest impact on the dollar exchange rate. If the European Central Bank were to raise interest rates now, the euro would become somewhat stronger, but that does not have a one-to-one effect. Financial markets also take into account expectations about the U.S. and European economies. The European economy is somewhat weaker, for example due to the war in Ukraine. The rise in US interest rates will therefore be stronger than in the eurozone.”  

Safe haven

The fact that the dollar is still seen as a safe haven is the third factor influencing the exchange rate. “Anytime there is a calamity somewhere in the world, like right now the war in Ukraine, investors get scared and take their money to the U.S. and buy dollars. They do so because they have learned through trial and error that at the time of misfortune, the dollar rises in value. There is some debate as to whether the US really is that safe for investors anymore. Think of the period under President Trump, for example. But for now, Washington has nothing to worry about. Just look at the beginning of this year: Russia invades a country and boom, all the money goes to the US.”

There is also a reason to be happy with a cheap currency. After all, European products are now cheaper on the world market and will therefore be sold more, which in turn can lead to more employment, for example. In that sense, Europeans can benefit indirectly from a cheap European currency. This also applies to the Netherlands, although additional employment can currently also lead to a further tightening of the labor market. “Despite the fact that a large part of our exports remain within the euro zone, trade with non-euro countries still plays a major role in the Dutch economy. A cheap euro is therefore not only good for exports of German and French cars or Italian fashion, but also for Dutch exporters.”

Long term

So, possibly extra jobs for the Netherlands, but also more expensive American products and vacations. Those prices will only go down again when the exchange rate of the euro rises. What is needed for that? “In the short term, a higher interest rate,” Knaap says. “In the long run, it will work itself out: the cheaper euro will lead to so much trade that demand for euros will increase and demand for dollars will decrease. An end to the war in Ukraine will also make for a stronger euro.” For now, the U.S. currency will remain strong, Knaap expects. “In the US, they’re really raising interest rates, which will further shore up the dollar. I would venture to say that the dollar will be a lot weaker in five years, but next year it may well be stronger than it is now.” So, for the time being, American products and vacations will remain relatively expensive for Dutch consumers.

Current topics with regard to the economy, investment (responsible investment in particular), pensions, and income: Every week, an expert at APG provides a clear answer to the “Question of the week”. This time, macroeconomist and senior strategist Charles Kalshoven explains whether we’re right to be scared of a recession.

Although the economy rapidly recovered immediately after the pandemic, the current outlook for the global economy is worsening once again. The war in Ukraine and a new wave of COVID-19 in China, which has caused another partial lockdown of the country’s economy, are weighing on growth. Disrupted supply chains for energy and machine parts—or fears of disruption—are further pushing up prices. And inflation was sky-high even before all this. Central banks are now fast-tracking measures and, one after the other, raising interest rates. But won’t that put us into recession? Is the fear of a period of economic downturn—with the risk of more bankruptcies, higher unemployment, and falling tax revenues—the reason for the current stock market plunge?

Investors
“Almost every recession is preceded by a bad stock market performance. But this doesn’t work in reverse. Not every bear market, meaning a 20% decline in stock prices, is followed by a recession. It’s often a false alarm,” argues Kalshoven. “If you look at companies’ recent profit figures, they’re reasonably as expected. It’s also not the case that analysts have become more negative about next year’s profits. So, these factors don’t necessarily point towards a recession. Interest rates are the more likely cause of falling stock market prices. When interest rates rise, the present value of future profits falls. This in turn translates into lower stock market prices. A degree of uncertainty plays a role in this value, such as how exactly the tightening of monetary policy will affect the economy. Will we manage to contain inflation without causing excessive collateral damage to growth? The Bank of England, for example, has already warned that the British economy will enter recession later this year.”

Economic Shock
“There are enough other sources of uncertainty, whether about the developments themselves—the war in Ukraine or fresh lockdowns in fall—or their impact. The past years have been so eventful that we can’t really know for sure whether historic relations are still relevant. We’re coming out of the pandemic, which delivered an unparalleled economic shock. The response from central banks and governments, pulling out all the stops to bear the brunt of the impact, was unprecedented. The end of the pandemic led to a sudden recovery in demand. The pandemic had also caused gaps in the labor market, with people quitting their jobs en masse, leading to the current staff shortages. That’s another economic shock we’re having to deal with. And here, in the West, we’ve identified new Omicron variants from South Africa. Although these variants appear to be milder than previous ones, there are still many uncertainties. Predicting the future has always been a tricky business; that applies now more than ever. So, it’s hard to say whether there will be a recession.”

Excesses
Until recently, all economic indicators were positive. Does this mean that the consequences of a possible recession might not be so bad? “It won’t be a textbook recession, which is a result of economic overheating. A period of optimism eventually leads to excessive credit growth, which destabilizes house prices and stock market prices. If wages and prices grow too rapidly, central banks intervene by raising interest rates. But this isn’t a classic case of excesses. The pandemic meant consumers were unable to spend their money and instead accumulated a large stock of savings. There was also a huge degree of government support that kept companies afloat. And while the current mass staff shortages are driving up wages, the cause lies elsewhere. The pandemic shut down entire sectors of the economy, causing staff to get up and leave. A sudden swing in demand, from zero to full throttle, will doubtless create problems. The situation will resolve itself, possibly through higher wages, but that doesn’t mean it’s a classic wage-price spiral. A normal recession is needed to ‘cleanse’ the economy of excesses, but that’s not the case now. With that in mind, I don’t expect a drawn-out, exasperating recession—if there even is one.”

“Right now there is an economic regime change going on.” That is what APG's Thijs Knaap says in the business program Zakendoen on BNR Nieuwsradio, in response to the falling share prices of so-called 'corona winners' such as streaming services, meal deliverers and now also postal and parcel deliverer PostNL. “A company that does well in one economic regime, does poorly in another. That's not so strange. The question that you then have as an investor is whether all companies are doing badly. How is the average? And to my great relief I can see that the average is actually going quite well.”

Knaap, chief economist at APG, regularly joins the investor panel of Zakendoen. In Tuesday's broadcast, he also discusses the continuing turmoil in the financial markets as a result of the Federal Reserve's rate hike. “The Fed and the other central banks now have only one goal and that is to stop inflation as quickly as possible. So the rescue for the stock market is not going to come from them.” Meanwhile, gloomy clouds are looming on the economic horizon, in the form of the ongoing war in Ukraine and lockdowns in China. “That could just lead to things slowing down quite quickly, and then there is the risk that the central banks that are slowing down the economy will do so in a situation where the economy itself is actually slowing down.” With the danger that the economy will be slowed down too much. “And when that happens you have a recession and investors don't like that at all,” said Knaap in conversation with presenter Thomas van Zijl and Martijn Rozemuller, Head of Europe at VanEck.

Listen to the entire broadcast (Dutch) here.

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Chief Economist Thijs Knaap talks about the pension funds’ rising coverage ratios.

Many pension funds had good news on Thursday: their coverage ratio - which reflects the financial position of a fund - has risen in the past quarter. The actuarial interest rate is used to determine whether a fund’s current assets are sufficient to pay out pensions (the so-called liabilities) (in the future). The higher the interest rate, the less capital a fund needs to have and the higher the coverage ratio. It’s like saving for a vacation: the higher the interest, the less you have to put aside each month. Based on the coverage ratio, a pension fund decides whether to increase pensions. This is therefore an important percentage.

Returns
“It’s a bad economic time,” Knaap says. “There is a war in Ukraine, and there is a scarcity of personnel and goods because the economy suddenly started to run at full speed after Covid. On top of that, China is in lockdown after the last Covid outbreak there. This creates additional scarcity. The fact that the economy took a hit due to these factors is also reflected in pension fund returns for the past quarter. For example, the bond and share portfolios showed losses of around 5 to 6 percent. You don’t want to have quarters like that too often. In the past, there were quarters in which shares fell by 20 percent, but then you often had bonds that actually increased in value.”

Now the value of all investments is falling, with the exception of so-called alternatives such as commodities, private equity and infrastructure. “But you can’t make it with just good returns on those. Many funds are having negative returns and that has repercussions for their assets: they are falling. But the funny thing is that the coverage ratio is not only based on the assets of a pension fund, but also on the liabilities. This amount is calculated using interest rates and these are now rising so quickly that money is growing faster and less needs to be put aside by the funds to pay pensions. In other words, the liabilities are falling, so the coverage ratio is rising and has even reached a level that we haven’t seen in some funds since 2008, just before the credit crisis. What is going on with the funding ratio right now is quite curious: negative returns but a higher funding ratio. That’s exactly the opposite from the one we saw over the past decade. In those years, pension funds achieved excellent returns but their funding ratios fell. However high the returns were, the liabilities rose even more sharply as a result of the falling interest rates.”

Interest
The current higher funding ratios are due to increased interest rates. That raises the question of how long interest rates will remain high. "Since the 1980s, the credibility of central banks and their policies to curb inflation have become increasingly reliable. Now inflation is rising and the European Central Bank is still not doing anything, so there is a chance that the credibility of central banks will decline again. That could mean permanently higher interest rates because investors want to be compensated for the risk if inflation peaks again in the future."

However, there are also reasons to believe that interest rates will eventually fall again. “Right now, there is a lot of savings, both in the West among baby boomers, for example, and in emerging economies like China.” That pushes down interest rates, and the factors underlying the surplus of (savings) money still exist. “Although you can point to a few that are turning around a bit, such as low inflation expectations. Another one is the Chinese supply shock. Items from China, like TVs and cell phones kept getting cheaper and cheaper. Since Covid, the West has wanted to become less dependent on Chinese production. This could lead to less import of cheap products from China. Low-wage countries also want to earn more from their products, which therefore become more expensive. Moreover, China will also want to start spending more. The same can be said of the Western baby boomers, who are now retired. The supply and demand for money will then come more into balance, which could possibly reverse the trend of falling interest rates. But in my view, it is still far too early to say that we have definitively reached the end of the ever-decreasing interest rate.”

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Head of European real estate Robert-Jan Foortse talks about the question of whether housing can be made affordable again.

New homes threaten to become unaffordable for many people, warns the Home Owners Association (VEH) on Monday. The same day, the government says it wants to do something about the steep rise in rents in the free sector. The question arises whether housing can be made affordable again, and how. According to Foortse, there is only one solution, and that is to build more homes. A lot of homes. 

Rental Rates
“I think the solution is a bigger housing supply. Other measures may be counterproductive. One example of a counterproductive measure is limiting rent increases. After all, if rents are no longer allowed to rise, why would investors invest in Dutch homes? One consequence may be that large investors invest their capital in the housing market of the countries around us, where often the same problems apply as in the Netherlands. After all, part of the problem is partly the result of the monetary and fiscal policy pursued in recent years.”

When it comes to rental housing, corporations also play a role. “They could divest part of their rental housing in the free sector to institutional investors in order to focus entirely on social rental housing.” Foortse does not think that will send rental rates in the free sector through the roof. “Institutional investors generally invest in residential properties because they have a fairly low investment risk and are therefore a stable part of their portfolio. Residential investments have a somewhat lower return but if the rent increases are around the inflation level, I think it works well for investors. For this year, the largest Dutch investors, in consultation with IVBN and the Ministry of the Interior, have decided to limit the rent increase to 3.3%, despite higher inflation. A limited rent increase reduces competition because it makes private equity firms, which want to increase rent as much as possible in a short period of time, lose interest. Thus, you reduce the stress on the market and prices do not go through the roof. Long-term investors benefit most from a stable, predictable housing market.”

New buildings
The Dutch housing market now consists of 57 percent owner-occupied housing and 43 percent rental housing. Investments for new rental homes will have to come partly from investors, but the money for owner-occupied homes will have to be raised by private buyers. “Newly built homes are now in the 300 to 500,000s, but that is a price that few people can afford anymore, according to VEH. The question is how to build houses in the 200 to 250,000 range. They will either be much smaller than the current new construction, or they will be in places that are less desirable,” Foortse says. There are two major components in the price structure of a house that make it difficult to build much cheaper. “There are the construction and material costs, which are rising by the day due to high inflation, and there is the price of the site. That is often calculated by municipalities. It is difficult for them to offer the site cheaper, because then they are left with a hole in their budget and can no longer finance other projects.”

Last month, Housing Minister Hugo de Jonge did indicate that he can intervene with a so-called “designation” with local authorities to enable additional residential construction. To date, such a designation has rarely been used, and not without reason, Foortse believes. “That is considered a draconian measure in the Netherlands, because you touch the hierarchy that we have in this country with a national, provincial and municipal government. I understand that the cabinet wants to coordinate the solution to this problem centrally, but I can also understand if there is local resistance to new constructions projects here and there.

Finally, according to Foortse, the construction of new homes is not only hindered by the sharp increase in land and material costs, but also by the strict(er) laws and regulations regarding sustainability. Examples are regulations on insulation, on the disconnection of gas networks and on emissions of CO2 and nitrogen. "This limits the possibilities to designate new housing locations and often leads to higher construction costs. Institutional investors also have the task of investing heavily to make the existing housing portfolios more sustainable. The latter does contribute to lower energy costs for tenants."

Upgrading
There are several sides to the concept of affordability, Foortse explains. “For example, you can ask yourself for whom new construction should be affordable. If new houses are built for around 450,000, we can at least ensure that anyone currently living in a house valued at 200-300,000 could upgrade to a new house. This will create more supply in the lower segment for first-time buyers. In recent years, the supply in the 450,000-range lagged behind, which prevented people from advancing in the housing market. After all, if there are no better-quality new homes, why move? Traditionally, a person moves from a single to a double household and eventually to a family home. People generally look for more space in their next home.”

Building more is thus the long-term solution. There are, however, a number of concerns that Foortse believes should be taken into account. One is to ensure that the government does not scare off large investors by limiting rent increases. As far as new construction is concerned, consideration must be given to whom it is being built for: for those moving up to the higher segment or for first-time buyers. And in the case of new construction, it will be a balancing act for the government to remove any local resistance to new construction projects. "In the shorter term, we can investigate whether we could make better use of the existing housing stock, as was recently suggested by some economists. This could be done by further stimulating cohabitation, or at least not making it more financially unattractive. The number of single-person households has been rising for years. For the affordability of the housing market, it would be good if that trend could be stopped. In addition to affordability, institutional investors are also looking at accessibility for housing in the large(r) cities for so-called 'key workers', such as teachers and medical staff. This can be done by introducing priority arrangements."

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Peter Verbaken, Head of APG's Commodities Team, talks about the consequences of a boycott of Russian energy.

A gas and oil boycott is not part of the latest sanctions package against Russia, but it is a measure the EU is holding in reserve. According to a report by the Netherlands Bureau for Economic Policy Analysis, the Netherlands will be hit hard if Brussels imposes such a ban. Should we therefore be afraid of such a boycott? Or will the consequences not be as bad as expected, as professor of economics Sweder van Wijnbergen argues in de Volkskrant?

First of all, Verbaken says that the situation in Ukraine affects him. “It is terrible to see how the people of Ukraine are suffering from the violence of war and how the country seems to be slowly being devastated. I've been following it closely from the start, also partly because of the impact it has on my work, and I sincerely hope it ends soon."

Coal as an alternative
Because of Europe’s heavy dependence on Russian gas, a gas boycott will hit harder than an oil boycott, Verbaken argues. “In the Netherlands, we have been lucky with a mild winter. At the end of last year, even before the Russian invasion of Ukraine, there was already a huge increase in the price of gas because stocks were so low. The mild winter and an increase in Russian gas supplies enabled us to get through the winter. But now we need to replenish gas supplies in the summer. If a ban on Russian gas imports does not allow us to replenish stocks in time, an alternative plan will be needed. Van Wijnbergen mentions the use of coal as a solution. In theory, that is indeed possible, although it is, of course, contrary to current climate policy. But it cannot be ruled out that politicians might nevertheless decide to switch from gas to coal in this exceptional situation.”

The question is whether coal can make up for the loss of Russian gas. Verbaken does not think so. “In practice it will turn out that you also have to do something on the demand side. For example, there is already a government campaign called ‘Turn the Switch’, which aims to get households to turn the thermostat a degree lower. However, a third of the gas demand in the Netherlands comes from industry. In order to reduce this demand, it cannot be ruled out that large industrial gas consumers will be forced to use less gas. This is certainly conceivable if Dutch gas reserves are not to be topped up with Russian gas this summer. However, forcing industry to use less gas is a radical measure of the kind we haven't seen since the 1970s, with the oil crisis and car-free Sundays.”

Oil shortage
In the case of oil, it is a slightly different story. Should the EU no longer import oil from Russia, then China and India will buy up the Russian oil at steep discounts, Van Wijnbergen expects. As a result, both Asian powers will need to import less non-Russian oil from the world market and therefore there will be no oil shortage. In theory, Van Wijnbergen has a point, but in practice things may turn out more difficult, Verbaken believes. “It will certainly take Europe several months to switch from Russia to other oil suppliers. In addition, the West is putting pressure on China and India not to play Russia’s savior, especially after the latest news about the many civilian deaths in Ukraine. What also comes into play are the so-called letters of credit, the financing required to ship oil. Financial parties will be very cautious about issuing them due to the threat of sanctions and public opinion.” It therefore seems unlikely in the short term that an oil shortage can be avoided by China and India importing more Russian oil, leaving more non-Russian oil for the EU countries.    

Major interventions
Verbaken thinks that Van Wijnbergen’s view is a bit on the optimistic side when it comes to the consequences of the removal of Russian energy. “Among other things, he is missing the factors that make shifting oil flows complex, and that gas demand really needs to come down.” Most problematic remains the boycott of gas. “The elimination of Russian gas punches a hole in our supply. If it can't be replenished in the summer, the problem will become more and more critical,” Verbaken says. “It’s like driving towards a cliff. The gas supply can only be sufficiently replenished if sufficient coal-fired power stations can be started up, the demand for gas can be reduced, and the supply of LNG (liquefied natural gas) can be tapped here and there. At the moment all that is being asked of the population is to use gas more sparingly, but what if that proves insufficient? How far do you have to go to force industries to use less gas? And which industries do you start with? The crux of this situation is that the government cannot explain to the population that they will not be able to heat their homes next winter. Major interventions are needed to prevent that from happening. The concerns about the impact of a boycott of Russian gas and oil are therefore certainly justified as far as I am concerned. However, given the current situation, with all the suffering that Moscow causes, it would be a perfectly justifiable sanction against Russia. If it is actually implemented, the government, industry and the Dutch population will have to work hard together to minimize its impact on us.”   

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Head of European real estate Robert-Jan Foortse, about the future of the Dutch shopping street. “In the past, people mainly went there to buy things. Today, consumers want more.”

In the first year after opening, the Mall of the Netherlands, a shopping center in Leidschendam-Voorburg, attracted 13 million visitors, despite two lockdowns. That was more than expected. This tells us that big shopping malls seem to be faring well, but the Dutch shopping street, on the other hand, is struggling, and has been for some time, Foortse says. “Although it does make a difference whether you are talking about the Kalverstraat in Amsterdam or a shopping street in the somewhat smaller provincial town. The trend from physical to digital sales has been going on for a number of years, and Covid has accelerated that trend.” Still, Foortse sees opportunities for the shopping street, although it will require a transformation.

Fragmented

Investing in shopping streets to help them get back on their feet is not so easy. “The problem with shopping streets is that ownership is extremely fragmented. It is therefore very difficult to create a proposition for a shopping street because there are so many stakeholders and owners. For example, one owner may want to invest in his own property but not in the infrastructure, while another may not want to invest at all. Because of this fragmentation, APG, about fifteen years ago, chose to invest primarily in shopping malls and outlets, such as, for example, Batavia Stad Fashion Outlet. This is actually a replica of a Dutch shopping street. Because we have full ownership, this shopping street can be managed and controlled in the same way as a shopping mall. We have influence on the range of stores, the parking facilities and whether it is safe and well maintained. We don’t have that influence in an ordinary shopping street. Visitors in Batavia Stad notice that it is a pleasant environment for shopping, although the outlet discounts also play a role, of course.” 

Because the traditional shopping street has so many stakeholders with different interests, it takes a long time to find a new use for it, says Foortse. “This is primarily a problem that, in my opinion, lends itself to a public-private partnership. The various stakeholders must come together and design a joint vision of the shopping street of the future.” Because the function is changing. “In the past, people used to go there mainly to buy things. Today, consumers want more. I think people still want to go to the shopping street, but it’s more to buy something tasty from the deli or to visit a pop-up store. You have to create something that appeals to people, and that is no longer just offering items to buy. Experience may be a word that is being overused, but it really is about that. Post-Covid, we are once again noticing that people are social beings after all and like to go somewhere where there are other people.”

Transformation

Of all purchases, about 75 percent are still made in physical stores. The remaining 25 percent is done digitally; a percentage that will only get higher. The average shopping street of the near future will therefore need fewer square meters of retail space. “The shopping street still has quite a few qualities to offer, but we may have to reinvent it and find a new approach. One of those qualities is that they are often centrally located in a town. Also, there is often parking nearby. If flexible working becomes a permanent part of our lives, retail space can be converted into workplaces. People who don’t have a suitable workspace at home will then be able to go there, but they will still not want to have to deal with traffic jams to the office outside the city.” The location in the city center and the parking facilities also argue in favor of converting stores into homes, Foortse believes. “But it can easily take several years to get the zoning changed. That does take away the incentive to create something new in a shopping street. That’s where I see a role for politicians. They should ensure that this process can be accelerated.”  

It appears that the Dutch shopping street will be able to make a new start, but it will look very different in ten or twenty years than it does today, Foortse believes. “I think you’ll see much more of a mix of today’s traditional stores, places to eat and drink, offices where you can rent workplaces and residential spaces. That will be true for all cities, although there will be differences in emphasis. For example, Amsterdam’s Kalverstraat will remain primarily a shopping street while the shopping street in a smaller town will include more housing. A transformation of the shopping street is afoot, but it is happening slowly.”

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question.

In this edition: Sjacco Schouten, Head of Emerging Market Debt, about the consequences when a country such as Russia is no longer able to fulfil its payment obligations. “Also in an economic sense, it is a scenario with only losers.”

In the beginning of March, a number of credit rating agencies expressed the expectation that Russia would possibly no longer be able in the short term to fulfil its payment obligations (interest and redemption of the national debt) due to the Western sanctions. Russian government bonds were given a so-called ‘junk’ status, which more or less means that creditors deem it very likely that a large part of their money will not be repaid. This raises the question what happens to a country in case of such ‘bankruptcy’. In what case is this applicable? And what are the consequences?

The first question appears to be relatively easy to answer. Schouten: “The interest payment and redemption of government bonds usually takes place on pre-established dates. If a country misses such date, a grace period takes effect first during which the country is given the opportunity to still make the payment. When that doesn't happen, the country officially goes in default.”

Virtually zero

The answer to the second question – about the consequences of such default – is much more complicated as it entails quite some ifs and buts.

“When a country is officially in default, all kinds of processes are activated. A government will usually propose a restructuring to the bondholders and make agreements on ‘how to continue’. These agreements depend on the conditions of the bond and the legislation of the country where the bonds are issued. In the most extreme case, when a country is truly unwilling or unable to pay, the bondholders are possibly forced to fully write off their bonds, to virtually zero. The price will not be entirely zero, because you can never rule out for a hundred percent that some money will still be repaid at a certain time.”

Russia has not yet achieved that point. The country has not missed any payments until now. Should that be the case in the future, it will rather be due to the sanctions making payment transactions impossible or Russia's willingness to pay than its ability to fulfil the financial obligations. “Given Russia's oil revenues, the country should be more than capable to fulfil its obligations. Whether the country is also willing to do so in the long term, is a different issue. In that respect, a distinction in conditions could arise between investors who are willing to participate in restructuring and bondholders who are unwilling or unable to do as a result of the sanctions. This provides Russia with the opportunity to give ‘friendly’ countries more favorable conditions than ‘unfriendly’ countries.”

Preferential treatment

However, the pari passu principle applies to bondholders, meaning they should be treated equally. Schouten: “In principle, bondholders from a certain country cannot be given a preferential treatment. But the conditions of bonds issued under local legislation may differ from the conditions of government bonds issued under international legislation. In addition to the legislative aspect, many other factors play a role in a possible restructuring of the Russian national debt. For example, the currency in which a bond is issued - dollars or rubles. Moreover, for certain investors it is simply forbidden to still receive payments from Russia or to make payments to Russian entities. All of those factors combined make restructuring very complicated when it comes to Russia.”

Consequences

What are the consequences should Russia decide to no longer pay its bondholders?

“In that case, the country would become even more isolated and restricted in gaining access to the capital markets. In the short-term Russia is able to absorb a lot through its oil reserves and proceeds from oil and gas supplies. In broad lines, the country is still able to keep its economy running reasonably well. But in the months to come, the Russian economy is expected to shrink and the financial situation of the country will become more problematic. To what extent the country will then be able to hold back the economic contraction depends on the willingness of other countries to help Russia. That willingness cannot be excluded. Even if all Western countries - such as the US - ban Russian oil, Russia can still sell oil to other countries.”

‘Adding insult to injury’

Nevertheless, it looks like Russia will be facing a doomsday scenario in an economic sense. “In terms of food, Russia should for a large part be able to continue to be self-sufficient. But once the supply of everything the country imports stops - technology, computers, chips, and so on – large parts of the economy will come to a standstill. The average Russian will go back in time. He or she may possibly overcome the fact that a visit to McDonald’s is no longer possible, but access to technological knowledge and certain parts for instance, is of great importance to keep an economy running and developing.”

Adding insult to injury, that's what it comes down to should Russia become a defaulter. Schouten: “The sanctions are already causing damage to the economy. The population already prefers having dollars instead of rubles. In the event of a default, a major cycle is triggered after which the Russian economy is expected to end up in a deep recession with high inflation. Also in an economic sense, it is a scenario with only losers.”

"It's a time of volatile markets, which means we do a lot of trades at APG. If only to balance the portfolio over and over again." That is what APG's Thijs Knaap says in the program Zakendoen on BNR Nieuwsradio in a conversation about investments. "I wanted to highlight a transaction that we did in the context of ANET, the ABP Dutch Energy Transition Fund." ANET has taken an interest in the Groningen company enie.nl, which sells and rents solar panels. "Anyone who can calculate knows that the electricity price has become much higher. As a result, the payback period has become much shorter. That has not escaped most people, so there is a lot of demand for solar panels. Enie.nl can now expand with the money they get from ANET. This is good for the returns and good for the energy transition."

Knaap, chief economist at APG, regularly joins the investor panel of Zakendoen. In today's broadcast, he also discusses how APG had for a number of years taken into account an economic shock in which prices of raw materials would rise rapidly and a subsequent growth shock due to economic uncertainty. "We had put in place an investment policy to prepare us for that shock, but for years it was only one percent inflation and commodity prices fell. So basically it was the reverse of such a shock for a long time. But due to the current high commodity prices and the inflation that is skyrocketing, what we have set up is now doing great. Examples are investments in commodities, hedge funds and infrastructure. While with a portfolio with only shares and bonds you would have certainly be at a loss," says Knaap in conversation with presenter Thomas van Zijl and panel member Mary Pieterse-Bloem.

Listen to the entire broadcast here.

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof talks about the consequences of the high price of natural gas for the EU’s green ambitions.

The increase in the price of natural gas, which started last fall, due to increasing demand from industry, has become much more critical because of the war in Ukraine. The war and the high price of natural gas are reasons for the EU to quickly become less dependent on natural gas from Russia. Brussels therefore announced on Tuesday that the EU is going to have to be able to manage without natural gas from Russia before 2030. This REPowerEU plan is a tightening of the so-called Green Deal and the Fit for 55 plan, which aims to reduce carbon emissions by 55 percent by 2030. An even more ambitious climate plan, therefore, and a turning point in European energy policy.

“The Fit for 55 plan was already very ambitious, especially in these times of high energy prices, high inflation and a shortage of labor and materials,” Olthof said. So, is an even tighter target realistic? “It is realistic in the sense that the need is there, and need supersedes law. Such a tightening is also necessary because Moscow can decide to turn off the natural gas tap at any moment. The situation in Ukraine and the high natural gas prices are all the more reason to implement the Green Deal and the Fit for 55 plan more quickly and to focus even more on renewable energy.”

Investments
One of the concrete measures in the REPowerEU plan is to shorten procedures for the construction of wind farms and solar panels. A welcome measure, according to OIthof. “But this will only succeed if the bureaucracy around permits is reduced, because companies that want to invest in this often run into that. If, for example, a high-voltage cable has to be laid, especially on land, it often takes years before all the required procedures have been completed. In and of itself this is a good thing, because people do need to have a say in the matter and not everyone wants a high-voltage pylon in their backyard. But one way or the other, this type of infrastructure is necessary, especially if we want to move away from fossil fuels, and particularly from natural gas from Russia, even sooner. It is therefore important that, where possible, without losing sight of the interests of local residents, procedures of this kind are actually relaxed so that investments in the energy transition can get off the ground more easily.”

The REPowerEU plan increases the likelihood that the European Commission will achieve its green ambitions. But accelerating green ambitions alone will not get Europe off Russian natural gas this year. “That really requires emergency measures, and certainly to keep energy bills somewhat affordable,” Olthof argues. “For example, the plan provides for the coordinated and mandatory rapid replenishment of stocks in natural gas storage facilities in Western Europe. There is also talk of temporarily re-regulating energy prices. Countries could pay for this by imposing additional taxes on high profits of some electricity companies that are not dependent on natural gas. And by using the high revenues from the sale of carbon emission rights.”

Coal
Another emergency measure could be to keep a coal plant open longer, even though the intention is to close it down as soon as possible, Olthof says. “After all, the targets for reducing carbon emissions have to be met one way or another. If in Europe, we were to keep the coal plants open a year longer, the extra emissions would have to be compensated for in some other way in order to keep global warming to a maximum of 1.5 degrees. And that was already an ambitious goal before the war in Ukraine. In addition, 46 percent of Europe’s coal imports also comes from Russia, so that may not reduce our dependence either. So, the REPower EU plan does not explicitly provide for keeping coal plants open longer, nor does it propose an easing of the issue of emission allowances. So, it seems that the European Commission at least wants to prevent the short-term emergency plan from jeopardizing the green ambitions, in order to, at the same time, push the realization of the ambitions closer in the longer term.”

In conclusion, Olthof sees the high price of natural gas as a clear incentive for Europe’s green ambitions. “The fact that this sharp rise in the price of natural gas is partly the result of our dependence on Russia, naturally increases the urgency of getting rid of fossil fuels immensely. And particularly from Russia. That urgency is very clear. In the short term, with fairly distributed burdens, so as to avoid problems if Moscow turns off the tap. But also in the longer term, so that we will never again have to depend on Russia for our energy.” 

Investments of both funds already amounted to less than 0.1 percent of total invested assets

ABP and bpfBouw, APG’s largest clients, have decided to sell all their Russian investments. This makes them the first Dutch pension funds to do so in response to Russia’s invasion of Ukraine.  Both funds expect the selling of the investments to take some time due to the complicated market conditions in Russia.

In total, ABP still invests about 520 million euros in Russia, and bpfBouw about 58 million euros. This amounts to less than 0.1 percent of the total invested capital. As of recent, both funds have been rapidly reducing their investments in Russia. For example, no investments have been made in Russian government bonds that are on our exclusion list due to a binding EU weapons embargo.

Shocked

“ABP is shocked by the Russian invasion of Ukraine and the violence it has brought about. Our sympathies go out to all the people in Ukraine. ABP has closely been following developments, which has now resulted in selling all our remaining investments in Russian companies,” the fund stated on its website. bpfBouw calls its decision one ‘made on principles’.

Stock exchange remains closed

It is no easy task to act swiftly and sell all investments immediately, as the Moscow stock exchange is still closed. Also, Russia does not accept sell orders from foreign investors. Both funds announce that APG will sell their investments as soon as this is deemed responsible.  They also emphasise that they are closely monitoring developments. This includes keeping an eye on the consequences of the sanctions package imposed on Russia.

First in the Netherlands

As previously stated, the two funds are the first in the Netherlands to sell their investments in response to the Russian invasion. Other countries, including Denmark, Switzerland and Belgium, preceded the Netherlands with similar actions.

Current issues in the fields of the economy, (responsible) investment, pension and income: every week, an APG expert provides a clear answer to the question of the week. This time: macro-economist and senior strategist Charles Kalshoven about the end of corona support and its consequences. Doesn't the end come too soon?

As of April 1, the government will stop offering corona support. This means employers can no longer make use of, among other things, the Emergency Bridging Measure for Employment and deferral of tax payments. Apparently, they are no longer needed. After all, entrepreneurs can now do business without restrictions thanks to the relaxation of the corona measures and the positive economic outlook, the government reports in a news item. Kalshoven also believes that the abolition of the support packages comes at a good time from an economic point of view, although the situation in Ukraine makes the prospects somewhat more uncertain. "When you walk through the city, you see 'people wanted' signs everywhere. So the economy is doing well, resulting in major shortages in the labor market."

Zombie companies
According to the economist, reversing a measure is always difficult but in this case, it is necessary. "They say there's no measure as permanent as a temporary measure. Think, for example, of the French toll roads or Kok's quarter: measures that ultimately turned out to be more permanent than temporary. Significant measures were needed in this case to prevent corona from hitting the economy significantly. But at some point, those measures must be reversed. For example, the Netherlands Bureau for Economic Policy Analysis argued about a year ago to stop the support because it would prevent the transition of the economy. Instead of letting employees of financially unhealthy companies sit at home paid, you want them to work in more promising sectors. The so-called zombie companies then go insolvent while their employees can be more productive elsewhere. That's how it works in a normal recession. But this recession was abnormal. And there has been no transition due to the support measures."

The number of corporate insolvencies is therefore still very low. "That is partly thanks to the corona support, which was aimed at all employers, financially healthy or not," says Kalshoven. "In a normal recession, insolvencies skyrocket. But this was more of a kind of artificial coma of the economy, in order to fight corona. A year ago, we were still afraid of a wave of insolvencies but fortunately, this hasn't happened so far. This may also have to do with the fact that people have been able to save for a long time and now like to spend that money, for example in the catering industry."

Back to normal
Even if the number of insolvencies is not rising yet, investors are now clearly taking this more into account. The interest on corporate loans is rising faster than the interest paid by creditworthy governments. The difference is the credit spread, which is growing. And you can partly see that spread as an insurance premium, in the event no repayment is made or is made too late. Investors demand a fee for this. The rising credit spread is a worldwide trend, Kalshoven points out. "It was very low, and is now rising to normal values again. This means investors consider the chance that a company will not be able to repay a loan is more likely than before, and therefore demand more interest on corporate bonds." That's a direct result of stopping corona support. The higher credit risk spread also has a monetary cause. "Central banks are withdrawing from the bond market and announcing rate hikes. Those are signs we're going back to normal."

Consumer confidence
Could the war in Ukraine still affect the positive economic outlook? "That's very difficult to predict. If Russia turns off the gas tap or we say we no longer want Russian gas, energy prices will rise further and the availability of gas will be jeopardized. This could have consequences for greenhouse horticulture and industry, for example. And also for consumer confidence. If gas and petrol remain expensive or even rise in price, we will be hit in our wallets. Perhaps there will be economic support again, this time in the form of a war package." 

If such a support package is needed again, due to the conflict in Ukraine or a new corona outbreak, it is fairly easy to set up such a package again. "The bottleneck isn't whether you can implement it quickly, but whether you as a government have the resources. In the Netherlands, the national debt has increased as a result of the corona support packages, but it's still not that bad. In other countries, the national debt is much higher. Although you may also wonder what is high in this case. What matters is whether the market thinks a country can repay its debt. When corona struck, the European Commission bought up debt securities from EU Member States. This created market confidence in European bonds and more unity in Europe. That unit seems to have grown even larger by the Russian invasion of Ukraine. As a result, I think that a lot is still possible in terms of European support measures, if that turns out to be necessary."

APG and Vattenfall have signed a contract under which the energy company can use Geldvinder for three years. Thanks to the digital platform, the 2400 employees of Vattenfall Netherlands can get started with their personal financial goals for now and in the future. Gertjan Meijer (HR Services Vattenfall) and Richard Coonen (COO Geldvinder) tell about the value of Geldvinder.

The goal of Geldvinder is that employees can work on their financial fitness in an accessible and proactive way. This means that they get insight into and control over their finances.  According to Meijer, this fits in nicely with the other tools that Vattenfall offers its employees. "We have a package of five products that allow our employees to work on their financial fitness. For example, there is the personnel fund, which can offer a loan to an employee in special cases. In addition, in collaboration with Nibud, we publish a newspaper about financial issues. For financial insights, an employee can already talk to an advisor of EBC Netherlands and for pension questions he or she can contact ABP. And as a final addition, there is now Geldvinder. That has been used for the past two years by our youth organization Megawatt. Partly thanks to their positive reactions, we decided to offer Geldvinder to our entire organization. The participants think it is a nice addition to our existing package and are pleased with the user-friendliness and convenience of the tool."

Vattenfall pays a considerable amount of attention to the financial situation of its employees. Is there a specific reason for this?
"No, but as an employer we think it is important to take good care of our employees. Part of this is to make financial problems a topic which can be discussed openly. In addition, as an energy company, we have to deal with customers who, for example, have difficulty paying their bills. We are in discussion with Nibud and municipalities, among others, about how we can prevent debt problems or notice them in time so that we can help. That contact with those customers also plays a role in the attention we have for financial fitness as an organization."

What purpose does Vattenfall has with Geldvinder?
"When people have financial problems, this can lead to sick leave or they might no longer function optimally. It is therefore important to make it a topic which can be discussed and to support employees in this as much as possible. We see Geldvinder primarily as a tool with which employees gain insight into their financial situation. For example, what their expenses are, and what is needed to save for certain purposes, such as a house, children or a wedding. That was still missing in the other products we offer. Momentarily, Geldvinder supports our people mainly digitally. In the long run, it will also be possible to accompany the digital support with actual conversations, but we do not yet know whether that adds anything to what we already offer."

An employer can do quite a lot to point out to his employees the importance of financial fitness.  But isn't it ultimately the responsibility of the employee himself?
"In the end, it is indeed. But as an employer you can act as a facilitator and we do that in this way. As Vattenfall, for example, we also pay a lot of attention to vitality. For example, employees can have a preventive health examination carried out or undertake activities aimed at fitness with a discount. Safety is also important in our company. You have to realize that not everyone has an office function at Vattenfall, there are also colleagues working in the power plants and at the wind farms. That work has risks that we handle carefully. As an employer, we continuously listen to our employees to find out what their needs are. Just like we do with customers. And it doesn't stop at the financial fitness or health of our employees. We for instance also promote what we call sustainable employability by offering our employees the opportunity to grow in our company."

Through Geldvinder, Vattenfall can keep an eye on the financial fitness of its employees. Are there no privacy concerns?
"It's anonymous.  And that's a good thing, because we don't want that information to come to us via Geldvinder. We have other ways to do this, such as a conversation between an employee and a manager. At Geldvinder, it's really about an employee gaining insight into his or her financial situation. With inflation making many products more expensive, Geldvinder can also help them with ways to save money. That is more important to us as an employer than that certain scores roll out and we do something with them."