RaboResearch - Economic Research

Belgium: Good things come to those who wait

Economic Update

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The economic recovery carries on as growth of domestic demand increases. Fiscal policy will be less distortive next year and inflation remains low. However, high unemployment and also wage moderation still limit private consumption growth.

Economic recovery carries on

In 13Q3, GDP grew 0.3% q-o-q, up from 0.2% in the previous quarter, on the back of private consumption, net exports and fixed investment (figure 1). Like in 13Q2, inventory formation acted as a drag on growth and government consumption broadly stagnated.

Figure 1: Contribution domestic demand increases
Figure 1: Contribution domestic demand increasesSource: Reuters EcoWin
Table 1: Forecast table Belgium
Table 1: Forecast table BelgiumSource: Reuters EcoWin, Rabobank

The increased quarterly growth of domestic demand is encouraging. Timely indicators also feed optimism regarding the outlook, as both consumer and producer confidence indices are above their respective long-term averages for the first time since the summer of 2011 (figure 2). With respect to the latter, improving sentiment in the manufacturing sector has been most sustained in recent months, which bodes well for industrial production going forward. Furthermore, producers have indicated that the capacity utilisation rate is to increase with almost two percentage points in 13Q4. This suggests that there is now room for increasing investment to expand production capacity in 2014 (figure 3). We should emphasise that the Belgian economic recovery is still in its initial phase, as several headwinds are still to be overcome. Nevertheless, for both 2013 and 2014 we have revised our annual growth forecasts upwards by 0.25 percentage points to 0.25% and 1.25%, respectively. Consequently, in our base case scenario Belgium will be one of the best performing eurozone countries next year if downside risks do not materialise. Among these risks are highly unfavourable outcomes of the ECB’s Asset Quality Review and stress tests for Belgian banks, a substantial growth slowdown in Belgium’s main trading partners (France, the US, Germany and the UK), a return of the eurozone debt crisis and significant fiscal slippages.

Figure 2: Confidence on the rise
Figure 2: Confidence on the riseSource: Reuters EcoWin, National Bank of Belgium
Figure 3: Capacity utilisation rate increases
Figure 3: Capacity utilisation rate increasesSource: Reuters EcoWin

Growth benefits from fiscal stance

Belgium’s Excessive Deficit Procedure (EDP) is expected to be closed next year, which should give the government some more breathing space, going forward. Moreover, the recently presented Budget draft 2014 includes less structural budget measures than in 2013, while it fulfils the deficit (maximum 3%-GDP) and public debt (making sufficient progress towards 60% of GDP ratio) criteria of the Stability and Growth Pact, according to estimates of the European Commission. Against this backdrop, domestic demand is likely to contribute more to GDP growth in the coming quarters. That said, the ending of the EDP does not give the government full rein, as it is obliged to make sufficient progress towards a structurally balanced budget in the medium term as from 2014. For next year, the Commission does foresee a slight deviation from the adjustment path, but as the error is expected to be only very small, additional austerity measures will likely not be required, barring no further slippages occur and sufficient progress is made in 2015.

Headwinds put a lid on private consumption growth

Consumer spending is hampered by the highest unemployment rate since the start of the 2000’s (9% in October, figure 4). Note that employment increased for the third quarter in a row in 13Q3, but it could not keep up with the pace of labour force growth, which is why the rate of unemployment is still on the rise. Looking forward, as vacancies are increasing and the economic environment is expected to improve, we believe job creation will continue on its upward trend in the coming quarters. Note that producers’ employment expectations are rising (European Commission). As an aside, wage moderation is ongoing, which acts a drag on the growth of consumer spending. Wage growth has been slowing due to the fact that a non-negligible part of all salaries is indexed to inflation, which, despite the increase in November (1%), remains very low. Furthermore, real wages are frozen in 2013 and 2014, which implies nominal wage growth is limited to inflation indexation and wage drift. On a positive note, low inflation does benefit households’ purchasing power, especially with hourly wage growth still larger than price increases (figure 5).

Figure 4: Higher unemployment rate despite job creation
Figure 4: Higher unemployment rate despite job creationSource: Reuters EcoWin
Figure 5: Wage moderation and low inflation
Figure 5: Wage moderation and low inflationSource: Reuters EcoWin
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