The Belgian economy’s recovery from the coronavirus crisis will be difficult, and the budget deficit in 2022 will still be twice as large as before the crisis

This year, economic activity in Belgium is down by 9 % as a result of the restrictions imposed to prevent the spread of the Covid-19 pandemic. As these restrictions are eased, the economy should gradually recover. In the first instance, the revival of household consumption will be underpinned by pent-up demand, but there will also be more structural support from purchasing power, which will continue to rise during the projection period. Conversely, business investment will take somewhat longer to recover and net exports will continue to drag down growth throughout the projection period. Real GDP is expected to recover, with a year-on-year growth of 6.4 % in 2021 and 2.3 % in 2022. Nevertheless, even at the end of 2022 GDP will still be around 4 % below the level that was projected before the crisis and the Belgian economy will thus suffer permanent damage from the health crisis. Public finances will likewise be hard hit: the budget deficit will climb to more than 10 % of GDP in 2020. More importantly, even after that the deficit will remain structurally high, at more than twice the level that would have been reached without the crisis.

The eruption of the Covid-19 pandemic triggered public health measures worldwide to prevent the further spread of the virus. Consequently, global GDP and world trade will both see a sharp drop in 2020, exceeding the decline at the time of the 2009 financial crisis.

In Belgium, substantial parts of the economy were closed down in the course of March, and restrictions were imposed on the population. At the same time, measures were taken to minimise the income loss for many economic players during the acute phase of the crisis. It is only recently that the gradual, phased easing of the restrictions began, and the situation is certainly not entirely back to normal as yet. Surveys indicate that private sector output was down by as much as a third for a number of weeks from mid-March to mid-May.

Against that backdrop, economic activity is set to fall by 9 % this year, with an unprecedentedly severe decline in the first half of the year, and the recovery is expected to be only gradual and partial. That will wipe out income amounting to almost € 50 billion this year. On an annual basis, real GDP is expected to grow by 6.4 % in 2021 and 2.3 % in 2022. However, the strength of the recovery is still highly uncertain and the figures suggested here could be particularly susceptible to further downside risks if domestic and foreign demand picks up more slowly than expected in the coming quarters, or if the health situation necessitates additional restrictions. In such a scenario, the economy could contract by as much as 13 % in 2020, and the subsequent recovery will be even more difficult.

From mid-March, household consumption was of course significantly disrupted by the restrictions, with the protracted closure of not just physical non-food stores but also accommodation and food service establishments. The limited consumption opportunities during that period led to a temporary (involuntary) rise in savings. However, the current projections assume a gradual recovery in household consumption: in the first instance, certain purchases of items such as durable goods that had to be postponed will proceed as soon as that becomes possible again. Apart from this pent-up demand, the trend in purchasing power will also provide more structural support for consumption. Although households are, on average, suffering a clear loss compared to the income growth that was assumed before the crisis, their per capita purchasing power will remain unchanged this year compared to 2019, thanks to, among other factors, the operation of the automatic stabilisers, such as the system of temporary unemployment which has, moreover, been extended. In the following two years, per capita purchasing power will pick up again by just over 1 % per annum, on average.

This year, the loss of income is greater for businesses, and – with the additional factor of the continuing uncertainty over the recovery of demand – that will prompt them to postpone or cancel their investment plans. The recovery will therefore be much more difficult for business investment than for household consumption. Furthermore, net exports will continue to make a negative contribution to growth: exports will be down by slightly more than imports in 2020 and will take somewhat longer to recover thereafter.

In the short term, the impact of the decline in economic activity on the labour market will be largely absorbed by the measures taken, including the extension of the system of temporary unemployment, but also the support measures for the self-employed. Nonetheless, there will be a large number of job losses, particularly as of the second quarter of this year. Since the labour force is continuing to expand, the number of unemployed persons (excluding those in temporary unemployment) is expected to rise sharply, by 100 000 during the projection period, with the peak of almost 190 000 additional unemployed persons in the last three quarters of 2020. The harmonised unemployment rate, which was still at a historically low level last year, will therefore rise to over 8 % next year, after which there should be a slight fall.

Core inflation will increase very little, from 1.6 % this year to 1.7 % in 2022. Rising labour costs and the additional expense of restarting activities in a safe way will generate inflationary pressure. However, the increase is likely to be small, since rising costs are typically passed on only partially and after some delay in prices, and because the lower demand has a persistent downward impact. Total inflation will show a bigger rise, from 0.3 % in 2020 to 1.8 % in 2022, but that is due mainly to the unusually low figure for this year resulting from the steep decline in oil prices.

The budget deficit will be up sharply this year, to 10.6 % of GDP, owing to the fall in GDP which automatically leads to higher expenditure and lower revenue, but also as a result of the measures to support the economy. Those measures are mainly temporary, and the deficit should therefore diminish in subsequent years, though it will still come to around 6 % of GDP. That is more than twice the level that would have been reached without the crisis, the main reason being the said permanent loss of output. The public debt will rise to around 120 % of GDP, and at the end of the projection period – with a large budget deficit and taking account of average GDP growth – it will be on a rapidly escalating trend, despite the historically low interest rate.

 

 

 

2018

2019

2020e

2021e

2022e

GROWTH (calendar adjusted data)

 

 

 

 

 

Real GDP

1.5

1.4

-9.0

6.4

2.3

Contributions to growth:

 

 

 

 

 

- Domestic expenditure, excluding change in inventories

1.9

1.7

-7.7

6.8

2.5

- Net exports of goods and services

-0.7

0.1

-0.4

-0.4

-0.2

- Change in inventories

0.3

-0.4

-0.9

0.0

0.0

PRICES AND COSTS

 

 

 

 

 

Harmonised index of consumer prices

2.3

1.2

0.3

1.4

1.8

Health index

1.8

1.5

1.0

1.1

1.7

Core inflation

1.3

1.5

1.6

1.6

1.7

GDP deflator

1.5

1.5

1.4

0.9

1.2

Terms of trade

-1.0

0.3

2.4

0.2

-0.4

Unit labour costs in the private sector1

1.8

2.2

3.5

-0.1

1.0

Hourly labour costs in the private sector1

1.4

2.2

0.9

1.5

2.2

Hourly productivity in the private sector

-0.4

0.0

-2.6

1.6

1.2

LABOUR MARKET

 

 

 

 

 

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

65.7

76.8

-66.7

-22.7

60.6

Total volume of labour2

1.7

1.3

-7.1

4.9

1.3

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

6.0

5.4

7.3

8.3

7.6

INCOMES

 

 

 

 

 

Real disposable income of individuals

1.1

2.6

0.5

1.1

2.2

Savings ratio of individuals (in % of disposable income)

11.8

13.1

20.2

13.8

14.0

PUBLIC FINANCES

 

 

 

 

 

Primary balance (in % of GDP)

1.3

0.1

-8.6

-4.1

-4.2

Overall balance (in % of GDP)

-0.8

-1.9

-10.6

-6.0

-5.9

Public debt (in % of GDP)

99.9

98.7

118.1

116.5

119.0

CURRENT ACCOUNT

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

-1.4

-1.2

-0.3

-0.4

-0.7

Sources: EC, NAI, Statbel, NBB.

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

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