RaboResearch - Economic Research

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Belgium: steady if unspectacular growth

Economic Update

  • The Belgian economy grew by 0.4% in the second quarter of 2015 compared to the previous quarter
  • We expect to see economic growth of around 1¼% in 2015, driven mainly by an increase in private consumption
  • Economic growth will pick up further in 2016, to 1½%. This will be mainly due to a strong improvement in the net contribution from trade, while the growth of private consumption will slow 

Growth forecasts

For 2015 and 2016 we expect to see steady but not especially exuberant growth in the Belgian economy of 1¼% and 1½% respectively (see Table 1). Leading indicators, including consumer confidence and the Economic Sentiment Indicator (ESI), point to further economic growth in 2015 (see Figure 1).

We expect unemployment to remain high for the time being, at 8½% in 2015 and 8¼% in 2016. In addition to accommodating the expected increase in the working population, the growth in employment will not be enough to bring about a significant decrease in unemployment.

Table 1: Key figures Belgium
Table 1: Key figures BelgiumSource: Rabobank
Figure 1: Economic sentiment points to further growth
Figure 1: Economic sentiment points to further growthSource: Macrobond

Suspended automatic indexation to slow consumption but boost exports

Economic growth in 2015 is mainly driven by higher private consumption, which in turn is helped to some extent by low commodity prices. We expect the contribution of private consumption to decline somewhat in 2016, since real disposable household income will increase only to a limited extent. This is partly due to the adoption of a parliamentary bill at the end of April, whereby the system of automatic indexation of pay and benefits in line with inflation (up to 2%) will be temporarily suspended. This so-called ‘index jump’ is intended  to help lower Belgium’s  significantly increased unit labour costs (see figure 2) to levels that correspond to those in neighbouring countries.

Figure 2: Belgium has lost competitiveness due to strong increase in labour costs
Figure 2: Belgium has lost competitiveness due to strong increase in labour costsSource: Macrobond

Against the decline in private consumption, there is an extensive package of government measures designed to reduce business costs and ensure that Belgian businesses become more competitive.[1] We expect this to boost exports in 2016, especially since economic growth outlook of Belgium’s important trading partners[2] the UK and the US are promising and Belgium will benefit additionally from the weak euro. Ultimately we expect this to lead to an improvement in the net trade contribution from -½% in 2015 to +¾% in 2016.

Moderately positive forecast for investment growth

Investment policy in Belgium has recently featured predominantly one-off purchases. This was the case in the third quarter of last year (see Eurozone uitgelicht), and there was also strong growth in investment in the first quarter of this year, because the Belgian branch of the British pharma group GSK took over the production of vaccines from Novartis of Switzerland (see Figure 3). Since it concerns foreign patents, imports have increased by the same amount as investments and the effect on GDP growth was nil.

The expected ¼% contraction in investments in 2016 is mainly due to the very negative spill-over effects of the contraction in investments in the second quarter of this year.[3] Adjusted for this effect, the average investment growth in 2016 will amount to around 2½%. Our moderately positive forecast for investments is based, among other things, on the expected improvement in the competitiveness of Belgian businesses as a result of the reforms already mentioned, the return of capacity utilisation levels in manufacturing to their long-term averages and a positive development in the number of orders (Figure 4). The downside risk is that the growth in industrial production is still somewhat hesitant.

Figure 3: Investments characterised by incidental purchases
Figure 3: Investments characterised by incidental purchasesSource: Macrobond
Figure 4: Positive development in number of orders
Figure 4: Positive development in number of ordersSource: Macrobond

Public finances still a cause for concern

The state of the Belgian government’s finances are another cause for concern. Government debt is expected to remain stable at 106½% of GDP due to strong austerity measures by the Michel administration that are affecting all layers of government, however low inflation and modest economic growth will prevent any significant reduction in the debt position. The government will have to continue to exercise restraint in the coming period, and there is thus little potential for growth of government spending and investment.

Hugo Erken
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2223 1650

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