RaboResearch - Economic Research

Belgium: Recovery on its way, but patience is warranted

Economic Update

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In 13Q2, the Belgian economy climbed out of recession. The recovery is expected to continue at a gradual pace on the back of stronger external demand. It will probably take a while until the labour market starts to recover. 

Sentiment improvement bodes well for recovery

After four quarters of recession, the Belgian GDP grew again in 13Q2 (0.2% q-o-q, revised upward from 0.1%). The expenditure breakdown shows that inventory formation and fixed investment pulled down growth while net exports and private consumption contributed positively to the headline figure. Once again, government consumption broadly stagnated on a quarterly basis amid tighter fiscal policy.

Going forward, improving sentiment indicators indicate the recovery is set to continue, albeit at a slow pace. Consumer confidence increased sharply in August, reaching its highest level since the summer of 2012. Furthermore, the Economic Sentiment Indicator (ESI) released in August showed that confidence in the manufacturing sector surpassed its long-term average, which bodes well for industrial production. Though the above is encouraging, we would caution against expecting an acceleration of domestic demand growth in the near future. One reason is that sentiment indicators are still well below their long-term averages. Moreover, pessimism about household’s own financial situation, which correlates better with private consumption than the other sub-components of consumer confidence index, decreased only minimally. Besides, the upcoming fiscal consolidation measures, to be announced before the end of September, will act as an extra headwind for households and firms. 

Figure 1. Recession ended in 13Q2
Figure 1. Recession ended in 13Q2Source: Reuters EcoWin
Figure 2. Consumer sentiment on the rise
Figure 2.  Consumer sentiment on the riseSource: National Bank of Belgium

Labour market not yet on the mend

Turning to hard data, we do not expect a significant improvement in the labour market in the short-term due to the time lag between higher GDP growth and job creation. The pace of decline of the historically high unemployment rate (8.9% in August) will also be slow because discouraged workers will start looking for jobs when activity picks up. Not to mention that older workers will stay longer in employment due to the 2012 pension reform, which also pushes up the labour force. The weaker labour market will surely act as a brake on consumer spending.  

At least, a piece of good news for households is that inflation is falling. After increasing during the previous two months, inflation decreased again in August (to 1.1%) on the back of lower food and energy prices.  Looking forward, inflation is expected to remain subdued until the end of the year unless there is a commodity price shock. Lower inflation should allow Belgian consumers to continue to make a minor positive contribution to growth in the second half of 2013.  

Figure 3. Labour market not recovering yet
Figure 3. Labour market not recovering yetSource: Reuters EcoWin
Figure 4. Inflation resumes downward trajectory
Figure 4. Inflation resumes downward trajectorySource: Reuters EcoWin

Net exports have to pull the economy

Since domestic demand is expected to remain subdued for the rest of the year, the pace of recovery will still depend to a large extent on export growth. In this respect, the improvement in economic conditions of the most important trading partners of Belgium (the US, Germany, and the UK) is welcome news for exporters. Therefore, we expect the economy to continue on its recovery path mostly on the back of stronger external demand.

Figure 5. Total value added is largest on exports to the US
Figure 5. Total value added is largest on exports to the USSource: OECD
Table 1: Forecasts
Table 1: ForecastsSource: Reuters EcoWin, Rabobank
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