The Belgian economy slows down gradually over the coming years while the budget deficit rises sharply

Brussels, 16 December 2019 – Over the next three years, growth of economic activity in Belgium is projected to fall back from 1.3 % in 2019 to 1 % in 2022. Rising per capita purchasing power, which is projected to be 5 % higher by 2022, thanks largely to more buoyant wage growth, should lead to a relatively strong increase in household consumption. However, the pace of expansion of business investment is projected to drop back and net exports should weigh on growth over the whole projection period. Rising wages will lead to a steady increase in core inflation, to 1.8 % in 2022. The budget deficit is set to deteriorate further over the next few years so considerable efforts will still need to be made if a structural budget balance is to be reached.

In 2019, the Belgian economy has been clearly more robust than the average for the euro area. Against a backdrop of trade disputes, a sluggish manufacturing industry and considerably higher (policy) uncertainty, GDP growth is still projected to reach 1.3 % this year and should only gradually drop back to 1 % in 2022. These growth estimates are almost unchanged from the spring projections. The impact of the less favourable external environment is broadly offset by the slightly stronger-than-expected recent activity growth and by the slight upward revision of public spending.

Private consumption has already picked up considerably in the course of 2019, on the back of the rise in purchasing power. However, it can not fully compensate, over the projection horizon, for the slowing pace of business investment. In addition, net exports are projected to continue to make a negative contribution to growth: according to the Eurosystem common assumptions, relevant export markets for Belgium are projected to recover, but export growth is dampened by a further loss of market share.

Between 2019 and 2022, around 170 000 extra jobs are expected to be created. The hitherto vigorous labour market should gradually run out of steam over the next few years owing to the slowdown in GDP growth and growing labour cost pressure, as well as persistent tightness in some segments. Economic activity should be gradually more sustained by productivity gains. The harmonised unemployment rate is now at a historical low and is projected to hold steady in the coming years, with the continued expansion of the working population growing at roughly the same pace as job creation.

Underlying inflation is set to rise steadily towards 1.8 %, under the influence of rising wage costs. In the past, Belgian firms have been frequently seen to absorb part of the rise in costs in their profit margins. In that sense, the current projections indicate that margins should remain fairly stable over the next few years and higher wages would only be passed onto prices with some time lag. Headline inflation is projected to be increasingly driven by underlying inflation, while energy prices should have hardly any influence on inflation over the projection period.

With no change of policy, the budget deficit is set to deteriorate sharply to reach 2.8 % of GDP in 2022 despite the further decline in interest charges. That is due to a drop in public revenue, but above all to the net increase in primary expenditure, notably because of population ageing. Government debt should therefore rise to 100.5 % of GDP by 2022.

 

2018

2019e

2020e

2021e

2022e

Growth (calendar adjusted data)

 

 

 

 

 

Real GDP

1.5

1.3

1.2

1.1

1.0

Contributions to growth:

 

 

 

 

 

- Domestic expenditure, excluding change in inventories

1.9

2.0

1.7

1.5

1.3

- Net exports of goods and services

-0.7

-0.2

-0.4

-0.4

-0.3

- Change in inventories

0.3

-0.5

0.0

0.0

0.0

 

 

 

 

 

 

Prices and costs

 

 

 

 

 

Harmonised index of consumer prices

2.3

1.3

1.3

1.5

1.7

Health index

1.8

1.5

1.3

1.6

1.7

Core inflation

1.3

1.5

1.5

1.7

1.8

GDP deflator

1.5

1.6

1.5

1.6

1.6

Terms of trade

-1.0

-0.2

0.2

0.2

0.1

Unit labour costs in the private sector1

0.8

2.4

0.8

1.5

1.9

Hourly labour costs in the private sector1

1.5

2.4

1.2

2.1

2.5

Hourly productivity in the private sector

0.6

0.0

0.5

0.6

0.6

 

 

 

 

 

 

Labour market

 

 

 

 

 

Domestic employment (annual average change in thousands of persons)

65.7

67.2

47.0

30.4

24.8

Total volume of labour2

0.9

1.3

0.8

0.5

0.5

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

6.0

5.5

5.4

5.4

5.4

 

 

 

 

 

 

Income

 

 

 

 

 

Real disposable income of individuals

1.3

2.7

1.5

1.4

1.2

Savings ratio of individuals (in % of disposable income)

11.9

13.2

12.8

12.8

12.6

 

 

 

 

 

 

PUBLIC FINANCES

 

 

 

 

 

Primary balance (in % of GDP)

1.4

0.3

-0.4

-0.9

-1.2

Budget balance (in % of GDP)

-0.7

-1.6

-2.1

-2.6

-2.8

Public debt (in % of GDP)

100.0

99.1

99.2

99.8

100.5

 

 

 

 

 

 

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

-1.0

-1.4

-2.0

-2.1

-2.3

Sources: EC, NAI, Statbel, 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.