Belgian activity growth is expected to decline to 0.2 % in the first quarter of 2020

Business Cycle Monitor, March 2020

Belgian GDP growth would ease from 0,4% in the last quarter of 2019 to 0,2% in the first quarter of 2020. While business and housing investment should slow, private and public consumption are likely to remain resilient. Evaluating the economic effect of the Covid-19 is a difficult task as most available short-term indicators do not yet reflect the very recent outbreak in Europe. In the first quarter the negative growth impact is still assessed to be limited but it could worsen in the second quarter, in particular if severe containment measures are taken or if supply chain problems lead to production stops in the manufacturing industry.

Belgian real GDP growth remained stable at 0.4 % in the fourth quarter of 2019. This is well above the growth rate in the euro area as a whole, which declined to 0.1 %. Fourth-quarter growth was supported by positive contributions of private and public consumption as well as housing and business investment.

The outbreak and the recent global spread of the new coronavirus disease (Covid-19) could potentially strongly negatively affect economic activity in Belgium, via both supply- and demand-side channels. These include disruptions in global supply chains, a reduction in global growth, travel and tourism, a decline in business and consumer confidence and, especially, the economic impact of possible severe containment measures, such as school and company closures, the cancellation of mass events and quarantine measures. In this Business Cycle Monitor, it is however assumed that the Covid-19 incidence will still worsen but that no such containment measures will be taken in Belgium in the remaining weeks of the quarter.

We expect first-quarter private and government consumption growth to remain resilient as the survey indicators and purchasing power remain strong, while the negative impact of the recent Covid-19 developments on consumption would be partly offset by increased hoarding purchases and buoyant health care spending. Even though business sentiment further improved in the beginning of the year, business investment growth should moderate because of the Covid-19 related uncertainty and worsened global economic outlook, the reduced capacity utilisation and the discontinuation of the temporary increase in the tax allowance for investment for small businesses and self-employed. Housing investment growth should decline as well, after the surge in real estate transactions in the fourth quarter is likely to have been at least partly driven by the discontinuation of the so called ‘woonbonus’ in the Flemish Region. Finally, the contribution of net exports to GDP growth is expected to be negative again in the first quarter, as the recent Covid-19 developments will likely depress export growth.

All in all, an estimate of 0.2 % for the quarterly growth rate in the first quarter appears to be most plausible, but the uncertainty is high. The NBB nowcasting models ‘BREL’ and ‘R2D2’ predict a growth deceleration in the first quarter, to 0.3 % and 0.2 %, respectively, but the indicators used by these nowcasting models do not yet reflect the very recent spread of Covid-19 in Europe. While specific industries, such as tourism-related activities or companies that export to China, are facing reduced demand, the overall Covid-19 impact however seems to remain limited at the current juncture as global supply chain problems do not yet lead to interruptions of production in the manufacturing industry. Still, depending on the further developments, also as regards containment measures, the growth impact can be larger.

Finally, this Business Cycle Monitor was finalised on 6 March, i.e. before the Italian government announced further and unprecedented quarantine measures for a large part of the Italian economy in the weekend of 7 and 8 March. As Italy is Belgium’s sixth main trading partner directly accounting for close to 5 % of total exports, this is likely to further weigh on export demand and increases the downside risks for the first-quarter growth estimate. More importantly, it should be stressed that at the current juncture the outlook for the second quarter is much worse.