RaboResearch - Economic Research

Belgium: economic acceleration in first quarter driven by domestic demand

Economic Update


Recent data show that the economic recovery remains in place as GDP volume grew 0.4% q-o-q on the back of private consumption and fixed investment. Going forward, the newly to be formed government is likely to pursue more pro-business policy measures. 

Domestic demand drove growth in first quarter

In the first quarter of 2014 GDP volume grew 0.4% q-o-q, up from 0.3% q-o-q in the previous quarter (figure 1). The breakdown shows that GDP growth is mainly driven by domestic demand, as private consumption and fixed investment grew 0.4% and 1.9% q-o-q respectively. Together they contributed 0.6%-point to GDP growth. Net exports contributed negatively to growth, as exports (-1.5% q-o-q) decreased more heavily than imports (-1.3% q-o-q).

Figure 1: Domestic demand driven growth in 14Q1
Figure 1: Domestic demand driven growth in 14Q1Source: Reuters EcoWin
Table 1: Forecast table
Table 1: Forecast tableSource: Reuters EcoWin, Rabobank

Booming business investments in the first quarter

In the first quarter of 2014 business investments increased by 2.2% q-o-q, compared to 0.9% q-o-q in last quarter of 2013. However, after the strong figure of the first quarter several factors point to slightly weaker business investments in this quarter. First, the manufacturing capacity utilization rate decreased slightly and is currently just below its long term average (figure 2). Second, producer sentiment slightly weakened in recent months, especially in the trade-sector (figure 3). Third, after the loosening of credit conditions as applied to loans to non-financial corporations in 13Q4, they did not change in 14Q1. Hence, credit supply is expected to remain a restrictive factor going forward. In short, due to the above mentioned factors, we expect growth of business investment to fall back slightly in 14Q2 (but still positive) after the strong figure in 14Q1. For 2014 as a whole we expect business investment to strengthen mainly on the back of a gradual rise of the capacity utilisation rate driven by a further recovery of domestic and external demand.

Figure 2: Stagnating capacity utilisation rate
Figure 2: Stagnating capacity utilisation rateSource: Reuters EcoWin
Figure 3: Weaker producer confidence in May
Figure 3: Weaker producer confidence in MaySource: Reuters EcoWin

Outlook for private consumption remains bright

Increasing private consumption (+0.3% q-o-q) is in line with the improved consumer sentiment since early 2013 and there are reasons for more optimism going forward. First, the ongoing low rate of inflation (0.9% in April) and the VAT reduction on private electricity consumption introduced in April feeds households’ purchasing power, especially as hourly wage growth is still larger than inflation (figure 4). Note however that low inflation delays wage indexation and therefor suppresses wage growth and purchasing power on the medium term. Second, the unemployment rate stabilized at 8.5% in April and is expected to decrease next year. Employment increased again in the first quarter (figure 5). Job creation takes place especially in the services sector, while industry and construction jobs are still waning. The latter is related to the wave of bankruptcies in those sectors. Sentiment indicators underline this as producers’ employment expectations in the services sector are rising but are still declining in the manufacturing and construction sector. However, as vacancies are increasing and the economic environment is expected to improve, we believe job creation will continue its upward trend in the coming quarters. But as the labour force is still increasing, a decline of the unemployment rate is not expected until the start of 2015.

Figure 4: Wage moderation and low inflation
Figure 4: Wage moderation and low inflationSource: Reuters EcoWin
Figure 5: Job creation, increasing labour supply, stabilizing unemployment
Figure 5: Job creation, increasing labour supply, stabilizing unemploymentSource: Reuters EcoWin

Probably more pro-business policy with new government

The EC announced in June that Belgium is allowed to leave the Excessive Deficit Procedure (EDP), which should give the government some more breathing space going forward. That said, the ending of the EDP does not give the government full rein and we expect austerity to continue on a moderate pace for two reasons. First, Belgium is obliged to make sufficient progress towards a structurally balanced budget and to bring down the debt-GDP ratio to 60% in the medium term. Second, as a result of the federal elections in May 2014, it is likely a more right leaning government will be formed within a few months. Such a government is expected to lower payroll and income taxes to boost employment, investment and export. It will likely compensate for that via deeper spending cuts and/or rises in other taxes.


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