The Belgian economy is expected to contract slightly by 0.2 % in the third quarter of 2022

In line with expectations, Belgian economic growth clearly decelerated in the second quarter of 2022. According to the latest statistics released by the NAI, GDP still expanded by 0.2 % QoQ. This is slightly better than our estimate in the June 2022 Business Cycle Monitor (0.0 %). Given the deterioration of the external environment in the second quarter, the slightly positive growth suggests that the post-pandemic recovery dynamics in the services industry continued to support growth and outweighed the headwinds coming from, in particular, the spike in energy prices. However, in our view this is unlikely be repeated in the third quarter, while headwinds have increased. As a result, we expect economic activity to contract by 0.2 % in the third quarter.

Belgian real GDP increased by 0.2 % in the second quarter of 2022; while this constitutes a clear slowdown compared to the first quarter, this is slightly better than our estimate of zero growth in the previous Business Cycle Monitor.

GDP growth benefitted from a marked further expansion of private consumption and services in particular. However, the sharp increase in energy prices and lagging indexation mechanisms are at least temporarily reducing household purchasing power while consumer confidence remains low. This should lead to a decline of private consumption in the third quarter of 2022. Fundamentals remain sound, however, and household consumption is likely to pick up beyond the near term as price pressures soften and the indexation mechanisms push up nominal incomes.

Escalating production costs and the uncertain economic outlook have led to a contraction of business investment in the second quarter. Business sentiment remains on a gradual downward trend and demand expectations are worsening further, even though these are now around their pre-pandemic levels. Hence, we expect business investment to decline again in the third quarter. Housing investment is expected to edge further down as well.

Government consumption should continue to grow moderately in the third quarter, while the roll-out of investment plans should boost government investment. The growth contribution of net exports should remain close to zero in the third quarter as exports and imports are likely to decline to roughly the same extent.

The NBB nowcasting model “BREL” currently estimates quarterly growth in the third quarter at about -0.4 %, while the “R2D2” model is clearly much more optimistic with a growth rate of 1.5 %. The uncertainty of these nowcasting models remains exceptionally large as the massive shocks since the start of the COVID-19 crisis constitute a challenge for the estimation of standard time-series models. Additional elements should be taken into account, such as the potentially increasing production cuts in certain industries that are hit hard by the high energy prices.

All in all, we currently expect economic activity to contract by 0.2 % in the third quarter. This is in line with median of the one-indicator models and towards the more pessimistic end of the range provided by the two model nowcasts. It should again be stressed that the uncertainty of this nowcast is high. Given the recent positive surprises coming from household consumption and the strong labour market, a more positive outcome is definitely possible. At the same time, the economic situation is likely to worsen further if the current energy price pressures persist or intensify.