Belgian activity growth is expected to remain broadly constant at 0.2 % in the third quarter of 2019

Business Cycle Monitor, September 2019

Belgian GDP growth would remain at 0.2% in the third quarter. We expect notably the prospects of increasing purchasing power to support private consumption and the deteriorating business sentiment to weigh on investment and net exports. The NBB nowcasting models leading to mixed signals, uncertainty remains an important factor and GDP growth estimates come with downside risks.

In the second quarter of 2019, Belgian GDP growth edged down slightly to 0.2 % (q-o-q), according to the latest publication of the National Accounts Institute. This is equal to the growth rate in the euro area as a whole. A breakdown of the current data on the demand components of GDP shows that Belgian growth in the second quarter of 2019 was supported by positive contributions of private and public consumption, business and public investment and net exports. On the other hand, housing investment decreased, and changes in inventories contributed negatively to growth. Looking at the production side, the increase in value added was entirely driven by the business-related services, while output decreased in the manufacturing industry for the second quarter in a row.

According to our estimates, private consumption growth would remain broadly stable in the third quarter of 2019 as the signals coming from survey indicators are mixed, fundamentals remain relatively strong and car registrations have increased. Business investment growth, by contrast, would decrease in the third quarter as headline business confidence and demand expectations continued to deteriorate in the business services and, especially, the manufacturing industry. On the other hand, a rebound in housing investment is expected, as mortgage interest rates are at historically low levels, income prospects remain strong and confidence indicators in the building industry remained relatively stable at elevated levels. Finally, the contribution of net exports to GDP growth is expected to be negative in the third quarter, mainly due to worsened foreign demand indicators.

The NBB currently uses two nowcasting models to make short-term estimates for activity growth. The results for the third quarter of 2019 of these two models show an unusually large divergence. While the prediction of the NBB’s BREL nowcasting model suggests that GDP growth could increase marginally to 0.3 %, the NBB’s other nowcasting model (R2D2) is markedly more pessimistic and points to a contraction. However, the latter model is particularly sensitive to developments in manufacturing, that are usually indicators of turning points in overall GDP growth, while, according to the current statistics, the manufacturing recession still coincides with positive (albeit moderate) overall real GDP growth. The lasting resilience in the services industry and domestic demand can still be expected to shore up GDP growth in the third quarter as well, even if, looking further, the Belgian economy is likely to lose further steam and even contract if the dismal external environment and the situation in manufacturing industry do not improve. All in all, a growth rate of 0.2 % appears to be the most plausible estimate for the third quarter at the current juncture, even though it comes with clear downside risks.