RaboResearch - Economic Research

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Belgium: growth is picking up, but structural problems remain

Economic Update

  • Generally good start to the year puts forecast of 1% growth for this year under pressure
  • The economy is expected to return to slower growth in 2017
  • High inflation and public debt are structural risks for economic growth in the medium to longer term

Economic growth recovers after attacks

After a poor first quarter in which the economy grew only 0.2% (q-o-q), surprised positively in the second quarter with growth of 0.5%. The slower growth in the first quarter was not surprising. The decline in exports and the sizeable fall in consumer confidence in the first three months meant that these components made no contribution to GDP growth (figure 1). The fall in confidence in March was due to the announcement that extra austerity measures would be needed, and confidence took a further dive in April after the attacks in Brussels on 22 March. The direct effect of the attacks on economic activity was limited. The NBB estimates that the attacks reduced growth in the first quarter by 0.05 or at most 0.1 of a percentage point. The drivers behind the positive growth in the second quarter are not known at this time. We do know that production rose in the energy sector, which could point to a positive contribution from exports.

Figure 1: Growth mainly driven by investment (in construction)
Figure 1: Growth mainly driven by investment (in construction)Source: NBB, Rabobank
Table 1: Key figures Belgium
Table 1: Key figures BelgiumSource: NiGEM, Rabobank

The outlook for this year is positive ...

Since the economic effects of the attacks are waning, we think that the ultimate impact on real GDP growth over the whole of 2016 will be limited (table 1). The policy interventions of the various Belgian governments, including wage moderation, the tax shift and labour market reforms, are moreover having a more visible positive effect on the economy. Incomes in real terms are also rising: the increase in salaries from indexation and lower income tax rates are offsetting the negative effect of high inflation on purchasing power. The low level of interest rates means that demand for mortgages from families and also for loans by businesses continues to be strong, so that investment in construction and business investment is still rising. These developments suggest that our estimate of 1% GDP growth for this year could be on the low side.

… but there are many risks to growth next year

We expect economic activity to pick up further to 1½% in 2017 (table 1). The Belgian economy is however particularly exposed to the recent Brexit vote, since a relatively high proportion of total exports (nearly 9%) goes to the UK. This could mean that we will have to downwardly adjust our growth forecast for Belgium. There are also negative domestic risks. The combination of much higher inflation compared to the eurozone average (figure 2) and the automatic indexation of wages[1] mean that the improved competitiveness of Belgian companies will once again be an issue. Lastly, there is still the question over whether the further consolidation of the public finances will put too much of a brake on economic growth. The government is sticking to its decision to achieve a balanced budget by 2018, meaning that it faces a tall order in the coming years (figure 3). At the same time, heavy budget cuts and social-economic reforms could encounter determined public resistance (in the form of strikes), making the government’s ambitions difficult to realise.

Figure 2: Inflation in Belgium is much higher than in the eurozone and other neighbouring countries
Figure 2: Inflation in Belgium is much higher than in the eurozone and other neighbouring countriesSource: Eurostat
Figure 3: Government budget deficit is slowly declining
Figure 3: Government budget deficit is slowly decliningSource: Eurostat

[1] This automatic indexation applies to the wages of all government personnel and all employees in the private sector falling under a joint collective agreement committee. Since almost all employees fall under a joint collective committee, automatic indexation applies to virtually all employees in the private sector.

Structural problems

The wage indexation referred to above could have contributed to the fact that Belgium has emerged from the financial crisis in relatively good shape, with consumption remaining at a decent level (figure 4). Wage indexation has however pressured the country’s competitive position since 2010 (figure 5). From an economics point of view, it would be advisable to completely scrap wage indexation so that the development of wages would be brought in line with labour productivity growth. This could also contribute to reducing the stubbornly high level of unemployment. The substantial variations in labour productivity, employment and income between the various regions of Belgium are also factors that limit growth. These structural weaknesses are reflected in the country’s low potential growth[2] of only 1%. The government’s policy priority should therefore be on measures that increase potential growth. This would also substantially improve the sustainability of the country’s public debt.

Figure 4: Belgium has emerged from the 2008-2009 financial crisis in relatively good shape …
Figure 4: Belgium has emerged from the 2008-2009 financial crisis in relatively good shape …Source: Eurostat, Rabobank
Figure 5: … but its competitive position relative to its peers has weakened significantly
Figure 5: … but its competitive position relative to its peers has weakened significantlySource: Eurostat, Rabobank

[2] Potential growth is the sustainable level of production that can be achieved given the country’s economic structure, the status of technology and the quantity of production factors.

Daniel van Schoot
RaboResearch Netherlands Rabobank KEO
+31 30 21 62666

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