RaboResearch - Economic Research

Belgium: softening domestic demand in 2015

Economic Update

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  • Economic growth in the third quarter of 2014 was 0.3% q-o-q and was mainly supported by private investments and private consumption.
  • Looking forward, domestic demand growth is likely to soften. 

Growth for the sixth consecutive quarter

Economic growth in the third quarter of 2014 was 0.3% q-o-q, after 0.1% q-o-q in the second quarter (figure 1). This was mainly supported by business investments (+2.8% q-o-q), private consumption (+0.6% q-o-q) and household investments (+2.6% q-o-q). Both public consumption (-0.2% q-o-q) and public investment (-0.4% q-o-q) contributed negatively to GDP growth. Export increased by 0.8% q-o-q and import increased even faster, namely by 1.4% q-o-q, resulting in a negative contribution of net exports to the headline growth figure (-0.5% q-o-q).

Going forward, we expect that economic growth in 2015 will be around 1% y-o-y, like in 2014 (table 1). Although it will be still supported by domestic demand, the outlook for private consumption, private investment and public spending growth has worsened somewhat. The latter is due to a cut in public spending amounting to EUR 2.5 billion in 2015, and the former two are discussed more in detail below. 

Figure 1: Quarterly Belgian GDP growth
Figure 1: Quarterly Belgian GDP growth Source: Macrobond
Table 1: Forecast table
Table 1: forecast tableSource: Rabobank

Investment growth will weaken…

Total investment will record high volume growth in 2014 (3½% y-o-y) but the growth rate will diminish slightly in 2015 (2½% y-o-y). The high growth figure in 2014 is due to one-off major purchases of ships by a shipping company. The slow improvement in construction activity and the softening of domestic demand is weighing on investment growth in the near term. 

There are also a couple factors that support investment growth. First, in line with the European Commission, we expect the capacity utilisation rate in the manufacturing sector to increase in the fourth quarter of 2014. It is approaching its historical average, which bodes well for investments as business are likely to seek to expand their production capacity (figure 2). Second, producer sentiment improved slightly in recent months and is currently near its long-term average (figure 3). 

Figure 2: Capacity utilisation rate increased again
Figure 2: capacity utilisation rate increased againSource: Macrobond
Figure 3: Producer confidence near long-term difference, while consumer confidence slips away
Figure 3: Producer confidence near long-term difference, while consumer confidence slips awaySource: Macrobond

Third, being the first centre-right government in power since 25 years, Charles Michel’s government has plans to address the urgent need for reforms in Belgium. Among other things, the government wants to restore competitiveness of Belgian firms and therefor lower labour costs. It has promised to shift taxes away from labour towards capital over the next few years and to delay the much criticised indexation of wages in relation to prices in 2015. As limited wage growth will enhance the competitiveness of Belgian firms and/ or their profit margins, it will likely result in an increase in investments. At the same time, the effects are expected to be limited, since inflation is expected to remain low during 2015.

… as will private consumption growth

Compared to 2014, private consumption growth is expected to slow down during 2015 (1% y-o-y in 2015 versus 1¼% y-o-y in 2014). Private consumption growth is supported by a muted improvement of the labour market. Employment increased by 0.1% in the third quarter, after growing 0.2% in the second quarter of 2014. Employment is expected to increase only moderately during 2015, as job creation in the private sector is partly offset by substantial reductions in public employment. As the labour force will increase further at the start of 2015, the unemployment rate (8.6% in October) will remain elevated during 2015 (around 8½% y-o-y in 2015), though. The expected labour force increase is the result of the fact that elderly unemployed, who are now exempt from job search, will be added to the labour force from 1 January 2015 onwards.  

Figure 4: Wage growth above inflation rate
Figure 4: wage growth above inflation rateSource: Macrobond

Private consumption is held back by expected public spending cuts planned for 2015 and afterwards, which will weigh on households’ disposable income. Moreover, weakened consumer sentiment suppresses private consumption growth (figure 3). Furthermore, the already mentioned delay in wage indexation will negatively influence households’ disposable income and therefore household consumption. But as for now, wage growth (0.9% in the second quarter of 2014) is still slightly above the inflation rate (0.3% in October, figure 4).

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