RaboResearch - Economic Research

Belgium: slow economic growth continues

Economic Update

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  • The Belgian economy grew by 0.1% in the fourth quarter of 2014 compared to the third quarter of 2014
  • We expect the economy to grow by around 1¼% in 2015. Household consumption and exports will pick up slightly in 2015
  • There will be further economic growth (1½%) in 2016, driven by the global economy and investment. Consumption growth will then ease to some extent

High investment distorted by one-off purchases

During the forecast period, business investment will be supported by the recent easing of lending conditions, increasing profit margins and the higher level of industrial capacity utilisation. Capacity utilisation is currently around its long-term average, and an increasing number of businesses are expected to invest in order to expand (figure 1). Profit margins are supported by low oil prices, low wages and the government’s business-friendly policy.

A large purchase of ships by a maritime business and the purchase of an important license in the third quarter of 2014 has distorted the growth figures for investment in 2014 and 2015. Partly due to these purchases, business investment noted growth of 14.3% year-on-year in the third quarter of 2014 (figure 1). Since the ships and license concerned will come from abroad, imports have risen by the same amount and the effect on GDP growth is nil (figure 2). These one-off business investments will continue to affect imports and investment figures in 2015.

Figure 1: Capacity utilisation reaches long-term average
Figure 1: Capacity utilisation reaches long-term averageSource: European Commission, Belgostat
Figure 2: Large one-off investment in 2014Q3
Figure 2: Large one-off investment in 2014Q3Source: NBB

Wage restraint slows household consumption

We expect growth in private consumption to pick up slightly in 2015 (1¼ % y-o-y) and then ease slightly in 2016 (1% y-o-y). Low oil prices are supporting household purchasing power in 2015, and therefore consumption. The very slow pick-up in employment is also having a modest positive effect. Moreover, higher deduction of business costs from income tax will support family incomes in 2015. But from 2016 onwards, austerity measures will put pressure on income growth from 2016 onwards.

While consumption was still supported by higher wages in real terms in 2014 (figure 3), we expect this effect to disappear in 2015 and 2016. Nominal wage increases in Belgium are namely linked to inflation. Since we expect inflation to remain very low in 2015 and 2016 (table 1), there is little likelihood of wage increases before early 2016. And because the government has decided not to implement the next round of wage indexation, we are forecasting a lengthy period of wage restraint in real terms. In addition, the real wage freeze implemented by the government in 2013applies until 2016. Accordingly, we do not expect any wage growth in real terms until 2017. Wage moderation will put a brake on growth in household consumption during 2015 and 2016. We expect the factors still supporting household consumption in 2015 to disappear to some extent in 2016. This would undermine growth in household consumption in 2016, and possibly lead to a contraction.

Consumer confidence supports our view of moderate growth in household consumption. The index is moving in the right direction and was slightly above its long-term average in February (figure 4), but remains weak. The latter is partly due to the austerity and reform measures announced by the new government. Compared to other eurozone Member States, Belgium still has to achieve relatively large cuts and families therefore fear that their incomes will fall.

Figure 3: Low inflation positive for disposable income
Figure 3: Low inflation positive for disposable incomeSource: OECD
Figure 4: Consumer confidence slightly above the long-term average
Figure 4: Consumer confidence slightly above the long-term averageSource: European Commission

International demand is picking up

The Belgian economy will be supported by external factors in 2015 and 2016. The economies of its major trading partners inside and outside the eurozone are improving. The weak euro is also a positive factor for trade outside the eurozone (figure 5). Exports will be further boosted in 2016 as a result of the improved international competitiveness of Belgian companies. This will be achieved by wage restraint and an easing of taxation on labour.

Figure 5: Belgium has important trading partners outside the eurozone (2009 values)
Figure 5: Belgium has important trading partners outside the eurozone (2009 values)Source: OECD
Table 1: Forecast table Belgium
Table 1: Forecast table BelgiumSource: Rabobank
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