Belgian economic growth gradually softens, but rising purchasing power supports household consumption

Brussels 17 December 2018 – In the years ahead, economic growth in Belgium will gradually fall back from 1.5 % in 2018 to 1.2 % in 2021 as the rate of expansion in business investment returns to normal and exports decelerate. However, private consumption is underpinned by rising purchasing power, although the still vigorous expansion of employment is steadily losing momentum. Inflation will peak this year, and then decline; the budget deficit, which is fairly low at present, will deteriorate again in the coming years.

International environment

In recent years world growth has been rather erratic, falling well short of expectations. In the advanced countries, however, growth clearly picked up from the spring, but that was due mainly to specific developments in certain countries, such as the expansionary fiscal policy in the United States. Nonetheless, it seems that thereafter the world economy has again lost some momentum, and the confidence and short-term indicators do currently not imply a strong recovery in the months ahead. World trade has declined steeply since the beginning of the year, against the backdrop of increasing trade barriers. Owing to the resulting uncertainty and the global interdependence of the production chains, protectionist measures often have a greater negative impact than just their direct effect on the countries and products concerned. In addition, the gradual rise in interest rates due to increasing inflation expectations in the United States is generating greater volatility on the financial markets. It also exacerbates the financing problems for various emerging economies with current deficits due to shifts in international asset positions resulting from relative changes in yields.

Euro area

In the euro area, too, activity has slowed sharply since the start of this year, mainly on account of weaker exports. Growth in 2018 would in the end amount to 1.9 %. Apart from the somewhat weaker world growth and the slowdown in trade, the more expensive euro may have been a factor here, in view of its appreciation up to the first quarter of this year. However, the further decline since the summer is probably attributable in part to temporary slowdowns in production in the (predominantly German) car industry, as a result of new test procedures for environmental standards. The disappearance of this factor should allow for growth to pick up again in the last quarter.  However, year-on-year growth would gradually decrease to 1.7 % in 2019 and 2020 and 1.5 % in 2021. The slowdown can largely be traced back to increasing tensions on the labour market and the fading impact of the budgetary easing in 2019 in certain countries. This year, inflation in the euro area has been driven up by energy prices, which rose steeply up to the beginning of October. After adjustment for this and other volatile components, core inflation will increase throughout the projection period as a result of rising domestic cost pressure, to reach 1.8 % by the end of 2021.

Belgium

For Belgium, growth this year comes to 1.5%, in line with the previous estimate, but the forecasts for 2019 have again been adjusted downwards slightly in relation to the spring projections on account of the somewhat reduced dynamism of domestic expenditure. The declining pace of growth over the projection period is due to the cooling of the business investment cycle – in accordance with the fundamental determinants – and the weakening of export growth due to the waning impact of the recent gains in cost competitiveness. That is only partly offset by the stronger expansion of household consumption resulting from the rise in purchasing power. The negative growth gap which has existed between Belgium and the euro area since 2015 does diminish slightly but does not disappear altogether during the projection period.

Over the projection period as a whole, domestic employment increases by 150 000 units. However, the still quite vigorous employment growth gradually weakens because lower GDP growth depresses demand for labour, the forecasts take into account a further rise in labour costs, and the persistent labour market shortages will make it increasingly difficult to fill vacancies. The harmonised unemployment rate has stabilised at an exceptionally low level, not seen this century except in 2001. Since the further rise in the labour force roughly equals job creation, the unemployment rate will remain extremely low throughout the projection period.

Inflation will come to 2.4 % this year and then decline, in line with the movement in energy prices. In 2021 inflation is estimated at 1.8 %. Core inflation edges up throughout the projection period, but as in the past, the steep rise in labour costs will not be entirely passed on in prices, and instead will lead to narrower profit margins. In past years, profit margins have risen substantially, but will drop back to just above their long-term average by 2021.

Turning to public finances, the budget deficit will drop to 0.8% of GDP in 2018. Once again, that is due mainly to the surge in advance payments by companies in the light of the further rise in the rate charged if those advance payments are insufficient. However, this is a temporary factor which will lead to lower assessments when corporation tax is settled. It should be noted that estimates of the exact size of this temporary effect are uncertain. In this connection, the estimate by the EC and in the federal government budget is smaller than that of the Bank. Taking into account the latter and despite the further reduction in interest payments on the debt, the budget deficit will deteriorate again over the projection period, reaching 2.0% of GDP at the end of that period. The public debt is set to fall, but will still exceed GDP in 2021.

We would like to point out that, in accordance with the Eurosystem rules for these projection exercises, account is only taken of measures which, on the cut-off date for the estimates, the government has already specified in sufficient detail and has formally approved or is very likely to do so. In addition, the estimates of the impact on the budget of certain measures, such as those to combat fraud, may deviate from the amounts included in the budget.

 

2017

2018e

2019e

2020e

2021e

GROWTH (calendar adjusted data)

 

 

 

 

 

Real GDP

1.7

1.5

1.4

1.3

1.2

Contributions to growth:

 

 

 

 

 

- Domestic expenditure, excluding change in inventories

1.1

1.1

1.5

1.5

1.4

- Net exports of goods and services

0.6

0.8

0.0

-0.2

-0.2

- Change in inventories

0.0

-0.4

-0.2

0.0

0.0

 

 

 

 

 

 

PRICES AND COSTS

 

 

 

 

 

Harmonised index of consumer prices

2.2

2.4

2.0

1.6

1.8

Health index

1.8

1.8

2.1

1.6

1.9

GDP deflator

1.7

1.1

1.9

1.5

1.7

Terms of trade

-0.9

-1.7

-0.3

0.0

0.0

Unit labour costs in the private sector(1)

1.5

2.0

2.5

1.9

2.2

Hourly labour costs in the private sector(1)

1.4

1.8

3.0

2.5

2.9

Hourly productivity in the private sector

0.0

-0.2

0.6

0.7

0.7

 

 

 

 

 

 

LABOUR MARKET

 

 

 

 

 

Domestic employment (annual average change, in thousands of persons)

64.5

57.9

40.2

30.4

24.3

Total volume of labour(2)

1.5

1.4

0.9

0.7

0.5

Harmonised unemployment rate (in % of the labour force aged 15 or over)

7.1

6.3

6.3

6.3

6.3

 

 

 

 

 

 

INCOMES

 

 

 

 

 

Real disposable income of individuals

1.4

1.2

2.1

1.4

1.5

Savings ratio of individuals (in % of disposable income)

11.5

11.7

12.2

12.0

12.0

 

 

 

 

 

 

PUBLIC FINANCES

 

 

 

 

 

Primary balance (in % of GDP)

1.6

1.5

0.6

0.4

0.0

Overall balance (in % of GDP)

-0.9

-0.8

-1.6

-1.7

-2.0

Public debt (in % of GDP)

103.4

102.3

101.4

100.9

100.5

 

 

 

 

 

 

CURRENT ACCOUNT

(according to the balance of payments, in % of GDP)

0.7

-0.1

-0.4

-0.6

-1.0

Sources: DGS, EC, NAI, NBB.

(1) Including wage subsidies (mainly reductions in payroll tax) and targeted reductions in social contributions.

(2) Total number of hours worked in the economy.