RaboResearch - Economic Research

Belgium: a bumpy road to recovery

Economic Update

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In 13Q2, GDP growth turned positive after stagnation in 13Q1. Going forward, the recovery is expected to continue, but at a fairly slow pace and subject to downside risks. On the upside, exports might benefit from improving eurozone economic conditions. Furthermore, rising producer and consumer confidence, low inflation, and loosened credit conditions for Belgian firms may support domestic demand. That said, the sentiment series are volatile so we should be cautious about reading too much into them. Moreover, credit conditions are still tight and credit demand is weak. All in all, even if a recovery takes hold, it will probably take some time before the unemployment rate starts to fall.

Year-on-year change in %

Source: Reuters EcoWin, Rabobank

Minor GDP growth in 13Q2

The GDP growth figure in 13Q1 has been adjusted downwards to 0.0% q-o-q. The expenditure breakdown shows that fixed investment acted as the main drag on growth while private consumption made the largest positive contribution. The first estimate of 13Q2 growth revealed that the Belgian GDP expanded marginally (0.1% q-o-q). The expenditure breakdown is not available yet for 13Q2. Going forward, improving eurozone economic conditions bodes well for the export sector, provided that sentiment does not take a turn for the worse. That said, Belgium’s fairly poor competitiveness amid years of strong wage growth hampers the export sector to fully benefit from a pick-up in external demand. 

GDP growth and contributions of expenditure components

Source: Reuters EcoWin

Sentiment continues to improve

In July, the Economic Sentiment Indicator (ESI) rose for the third consecutive month to 92.9, slightly above the euro area’s average (92.5). Both Belgian producers and consumers were less downbeat compared to the previous month, according to the NBB survey. The business confidence index increased from -12.8 to -12.0 and the consumer confidence index (-16) rose for the fourth consecutive month. Note that both indices are still below their long-term averages. Given the volatility of this series, we would caution against reading too much into the recent improvement of sentiment. Moreover, the required extra budgetary cuts to be specified in September might also have a negative effect.

Confidence index

Source: Reuters EcoWin

Credit demand to stay weak

According to the ECB’s Bank Lending Survey, corporate credit conditions in Belgium slightly improved in 13Q2. While welcome, the loosening is unlikely to boost credit growth given the already high level of debt in the private sector. This is supported by the reported fall in credit demand. For 13Q3, banks expect credit conditions to remain unchanged and demand to fall further. Another reason for weak credit demand is low capacity utilisation rates in the manufacturing sector, which implies that businesses are in no rush to expand existing production capacity through extra borrowing. The upshot is that we have to wait a bit longer for fixed investment to contribute positively to growth.

Total non-financial private sector credit Q4 2012

Source: BIS, IMF

Slight acceleration of inflation

With the consumer price index rising from 1.1% in May to 1.6% in July, the recent decline in inflation came to an end. The increase was largely caused by base effects, reflecting last year’s energy price falls, as well as rising food prices. Going forward, we expect inflation to decrease again owing to favourable base effects and weak demand conditions. Lower inflation will not necessarily have a significant impact on households’ purchasing power as loans are coupled to inflation (excluding prices of alcohol, tobacco and petrol). The calculation, however, differs between sectors. As a result, public sector employees will stand to benefit more this year than many of their private sector counterparts.

Slight acceleration of inflation

Source: Reuters EcoWin

Be patient for labour market recovery

The unemployment rate reached 8.7% in June. The increase in unemployment during 13Q2 was caused both by an increase in the labour force and a decrease in employment. Looking ahead, consumers are less downbeat about the unemployment outlook according to the NBB survey. We do not expect a robust labour market recovery before the end of the year, however, due to the historic time lag between economic growth and employment growth. That said, if activity recovers in line with our expectations, more profound job creation is likely from the start of next year. This should benefit consumer spending, especially because it reduces job uncertainty. 

Unemployment rate

Source: Reuters EcoWin

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