RaboResearch - Economic Research

Country Report Belgium

Country Report


Belgium flag

Despite the recovery of the economy, it has lost competitiveness due to higher labour cost and lower productivity growth than European countries. The government deficit decreased below 3% of GDP but the government debt level remains high. 

Strengths (+) and weaknesses (-)

(+) Solid financial position of the households and banking sector

The household balances remain healthy and the banking sector’s restructuring has not influenced the credit flow to the economy. Low interest rates might stimulate private sector investments.

(+) Strong institutions

Even during periods of political uncertainty, strong institutions have led to policy continuity. Furthermore, Belgium has an excellent primary and higher education system, with good math and science education.   

(-) High government debt and aging population

Without additional reforms, government’s spending on pensions and healthcare will rise substantially due to the aging society, which will further deteriorate the already high government debt.

(-) Low competitiveness growth

If left unchecked, the remaining structural labour market rigidities and unfavourable trends in the labour cost gap could threaten macroeconomic stability and economic growth.


Key developments

1. Exports and domestic demand drove GDP growth

Belgium’s GDP volume has proven its resilience to the economic and financial crisis since 2008. The strong balance sheets of the private sector and the integration of Belgian firms within supply chains of German pharmaceutical, automobile and chemical industries reduced the effect of the crisis. However, the recovery from the 2012 recession is proceeding slowly with real GDP growth being 0.2 in 2013. This was driven by a significant contribution from net exports and private consumption. The recovery is expected to strengthen, as growth for 2014 is projected at 1.3%. Furthermore, the Belgian economy possesses a strong net external asset position. That said, Belgium still faces some challenges, as unemployment (8.5%, February) remains high and though inflation is low, this will not substantially contribute to households’ purchasing power because of automatic wage indexation. Since the Belgian economy relies heavily on export, economic volatility in Belgium’s main trading partners is a serious risk to its economy.

Figure 1: GDP growth
Figure 1: GDP growthSource: NBB
Figure 2: Nominal unit labour costs
Figure 2: Nominal unit labour costs Source: Eurostat

2. The economy has been losing competitiveness

Rising unit labour costs point to a gradual loss of cost competitiveness since 2005 due to higher labour cost and lower productivity growth than the average of European countries. The government has taken measures to close the wage gap, such as freezing real wages in 2013-2014 and altering the price index which lowered wage growth through automatic indexation. In addition, labour taxes and the VAT rate on electricity will be reduced. Nevertheless, these measures are unlikely to significantly improve exports competitiveness without additional changes. And since exports account for around 35% of GDP, a further deterioration in price competitiveness could endanger potential growth. A broader set of structural reforms is therefore needed. However, the large government debt ratio combined with the weak growth outlook diminishes the available resources, such as tax incentives or growth enhancing public spending. 

3. Public finances are under repair

Belgium made progress in putting its public finances on a more sustainable footing. The government’s fiscal policy helped reduce the general government deficit below 3% of GDP in 2013. We expect the deficit to remain below this threshold in 2014-2015, which would enable Belgium to exit the Excessive Deficit Procedure (EDP). The debt ratio remained just below 100% of GDP in 2013, due to the sale of the government’s 25% share in BNP Paribas Fortis and its favourable financing conditions. Furthermore, reduced contingent liabilities from banks weakened the nexus between the government and the banking sector. But it is not all good news, as projections show an increase of the debt ratio above 100% in 2014-2015. Next to it, the government’s plans to achieve a budgetary surplus from 2016, to help finance pensions in the long term, will be difficult to achieve. Because the government’s fiscal plans (stability Program 2013-2016) are predicted on strong growth assumptions, the risk is that, with lower growth and without further austerity, Belgium’s government debt could remain on an unsustainable path. Whether additional cuts will be made depends on the outcome of the upcoming elections. Also, because the credit ratings (both Moody’s and S&P) were raised in February this year, the government may argue that this reduces the urgency to reduce debt and therefore play down the need to further fiscal consolidation. Achieving higher economic growth would help to keep public debt sustainable. It is therefore essential to reverse the deterioration of Belgian firm’s competitiveness, since exports are an important driver of GDP growth.

4. Receding risks from the banking sector

Over the past few years, Belgium has made progress in strengthening its banking sector. The banking assets shrunk to 2.6x GDP 2013Q2, down from 4.7x at the peak in 2007. The bank deleveraging did not harm the domestic economy, as the efforts centred mainly on external markets. Moreover, the bank’s liquidity has improved significantly and most banks already comply with the BaselIII Liquidity Cover Ratio. As short-term borrowing and central bank funding decreased and customer deposits base remains strong, Belgian banks are now more resilient to market shocks compared to other eurozone banking systems. That said, banks’ profitability remains weak owing to the combination of low interest rates and high operating costs. The ability of banks to maintain sufficient capital buffers remains therefore hard. 

Factsheet of Belgium
Factsheet of BelgiumSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.


Background information

Belgium is a small, open, and private-enterprise-based economy with a GDP of 369,616 million EUR and around 11 million inhabitants. The economy has benefited from its central geographic location combined with a good transport network and excellent education systems. Its diversified industry base is mainly concentrated in Flanders in the north. As Belgium has few natural resources, it imports a large number of raw materials and exports significant quantities of manufactured goods (partly for re-exports), exposing its economy to volatility in world markets. Most of Belgium’s trade, around three-quarters, is with other EU countries. Although Belgian banks were damaged by the 2008 financial crisis, they recovered substantially in 2013. The financial position of the private sector is one of the healthiest in Europe, due to very high household savings and only moderate net debt levels of firms. As a result of measures promoting partial employment and the design of the pension and unemployment benefit systems, early departure from the Belgian labour force is encouraged. This has led to a structurally low participation rate. The government has paved the way to reform social benefits to encourage activation, but more needs to be done. Low employment rates compounded by challenges originated by the aging population will endanger the economy’s growth potential over the medium-to-long term. Tensions between the Flemings and Walloons have led in recent years to constitutional amendments granting these regions formal recognition and autonomy. This, and wide social and economic differences between Flemings and Walloons impede agreement on necessary reforms. 

Economic indicators of Belgium
Economic indicators of BelgiumSource: EIU
Carlijn Prins
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO

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