RaboResearch - Economic Research

Belgium: Economic recovery pushes through

Economic Update

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In the final quarter of 2013, GDP volume rose with 0.5% q-o-q. Looking forward, the economic recovery is expected to push through as the economy faces fewer headwinds. Nevertheless, a full revival of economic growth and the labour market needs time.

GDP volume grew with 0.5% q-o-q in 13Q4

In 13Q4, GDP in volume terms rose for the third consecutive quarter (0.5% q-o-q, figure 1). This implies that GDP volume grew with 0.2% y-o-y in 2013 after having shrunk with 0.1% y-o-y in 2012. In the final quarter of 2013, private consumption was the main growth driver with a contribution of 0.3%-points, followed by fixed investment and net exports which contributed 0.15%-points and 0.14%-points, respectively. Quarterly government consumption growth remained flat again and inventory formation knocked 0.14%-points off the GDP growth figure. Note that the positive contribution of net international trade was only due to the fact that imports shrank more than exports. The decrease in export volume surprised us, especially as world trade and GDP growth in most of Belgium’s major trading partners did pick up. Looking forward, we expect exports to bounce back in the coming quarters as growth remains in Belgium’s main trading partners.

Figure 1: GDP growth of 0.5% q-o-q in 13Q4
Figure 1: GDP growth of 0.5% q-o-q in 13Q4Source: Reuters EcoWin
Table 1: Forecast table Belgium
Table 1: Forecast table BelgiumSource: Reuters EcoWin, Rabobank

Sentiment points towards further growth

Sentiment indicators make believe that the economic recovery will gradually continue. In February, the Economic Sentiment Indicator (ESI) of the European Commission reached its highest stance for Belgium since the summer of 2011. With the index at 107.2, it is both substantially above its long-term average (100) and one of the highest among eurozone member states (figure 2). The increase from 103.4 in January is fed by improved producer sentiment, while consumers got slightly more pessimistic. Nevertheless, the increased indicated willingness of consumers to spend money on big-ticket items and the (very) positive producers’ judgement of demand in the service sector and present business situation in the retail sector bode well for private consumption growth going forward.

Figure 2: Belgian sentiment trending upwards
Figure 2: Belgian sentiment trending upwardsSource: Reuters EcoWin
Figure 3: Real household disposable income is gradually picking up
Figure 3: Real household disposable income is gradually picking upSource: Federal Reserve Bank of Dallas

The drag on consumption (slowly) diminishes

As a result of data revisions, the unemployment rate turned out to be lower in recent months than reported previously. Because of that, it didn’t reach the record-high stance of 9% in October 2013 as mentioned in our previous economic update. Instead, it stood at 8.4% and slightly increased to 8.5% in November to remain stable until January of this year. This is still the highest rate since the summer of 2010, though. Looking forward, in our base case scenario, job creation will only gradually pick up during 2014, alongside an expanding labour force. As a result, the unemployment rate is not expected to come down substantially in 2014, but real household disposable income will surely benefit. The latter has been steadily increasing since the start of last year, although at the end of 2013 it was still about 2% below its peak in 09Q2 (figure 3). Real disposable income growth is unlikely to accelerate in 2014, as wage moderation is ongoing. Until the end of 2014, nominal wages are only allowed to increase with scale increments and when the national health index passes a certain level. The health index is the consumer price index (CPI) excluding unhealthy products (alcohol, tobacco, gasoline and diesel) and when it reaches a certain threshold, a large share of wages, pension and social benefits will surge with 2%. Accordingly, the benefits of the currently low inflation (1% in February) are limited in Belgium. It does boost households’ purchasing power, but it also lengthens the period before the health index passes the threshold.

A brighter outlook for investment

The improving economic stance paves the way for higher fixed investment growth in the coming quarters. In Belgium, business investments make up for the largest share of total fixed investment (almost 65%). The willingness of businesses to invest will increase with growing private consumption and external demand. Moreover, in 14Q1, the capacity utilisation rate in the manufacturing sector reached its long-term average, which bodes well for business investment to expand capacity in 2014 (figure 4). In addition, credit conditions as applied to the approval of loans to non-financial corporations (NFCs) slightly loosened again in 13Q4 (bank lending survey of the ECB) and loans outstanding to NFCs increased (figure 5). As the corporations are largely dependent on banking loans for investment both support investment growth going forward.

Figure 4: Capacity utilisation rate reaches long-term average
Figure 4: Capacity utilisation rate reaches long-term averageSource: Reuters EcoWin
Figure 5: Credit growth will support investment
Figure 5: Credit growth will support investmentSource: Reuters EcoWin
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