Belgium: recovery slows in second quarter of 2014
Recent data shows that the Belgian economic recovery remained in place, but weakened in the second quarter of 2014. Going forward, we expect the recovery of the Belgian economy to continue in the second half of 2014, but the pace is likely to be sluggish.
Economic growth fell back in the second quarter of 2014
The Belgian GDP volume rose by 0.1% q-o-q in the second quarter of 2014, after a 0.4% increase in the first quarter of 2014 (figure 1). The breakdown showed a mixed picture. On one hand, both fixed investments (+1.9% q-o-q) and private consumption (+0.3% q-o-q) contributed positively to economic growth. On the other hand, the contribution of net export was negative, due to the even higher growth of imports (3.2% q-o-q) than the increase in export volume (2.6% q-o-q).
Going forward, we expect the recovery of the Belgian economy to continue in the second half of 2014, but the pace is likely to be sluggish. We expect GDP growth to be around 1% this year (table 1). Economic growth is expected to strengthen somewhat in 2015 (around 1½% y-o-y) on the back of private consumption and export. The latter will rise along with the expected strengthening of the eurozone economy in 2015. With respect to the public sector, we expect the newly to be formed government to be more right leaning and implement a more business friendly policy. This likely includes cuts in payroll taxes and public spending. This should increase the competitiveness of Belgian firms and support growth in the long run but might suppress growth in the short run.
Still a bright outlook for investment
In the second quarter of 2014 business investments increased by 2.9% q-o-q, after +2.2% q-o-q in the first quarter of 2014. After the strong figures of the first half of 2014, several factors point to a continuation of this trend for the third quarter. The development of the manufacturing capacity utilization rate supports a further increase of business investment, since it increased slightly in the second quarter of 2014 (figure 2). Furthermore, producer sentiment is around its long term average (figure 3). It seems that Belgian producer sentiment is not yet affected by the tensions in East-Ukraine, as producer sentiment increased in August (which was the first month with Russian trade sanctions). That said, a continuation or escalation of the conflict in East-Ukraine forms a downside risk for the steady but slow recovery of the Belgian economy.
Private consumption remains a growth driver
Together with business investments, private consumption will support economic growth in the second half of 2014 and during 2015. We expect private consumption to grow further in the next quarters, albeit on a modest pace (around 1¼% y-o-y in 2014 and 1½% y-o-y in 2015, table 1). Two reasons support this view. First, since wage growth (1.0% y-o-y in the first quarter of 2014, figure 4) is still above inflation (0.4% in August), purchasing power benefits. However, the gap between wage growth and inflation has a negative impact on the competitiveness of Belgian firms, economic growth and the demand for labour. Second, employment is increasing. As a result, the unemployment rate is expected to fall from the third quarter onwards. This is translated in a strengthening of sentiment about job expectations and might therefore positively affect consumption (figure 5). That said, total consumer confidence recently deteriorated and is still below its long term average and might therefore remain a drag on consumption growth.
Besides, it should be noted that the underlying figures of the increase in total employment are less optimistic. An important part of the job creation is namely due to the public sector, while employment creation in construction and manufacturing stays behind.