Economic Perspectives for Belgium

Firming demand, supply shortages and surging energy prices have fuelled an acceleration in inflation throughout Europe. Belgium saw an upswing in inflation too, but in contrast to most other EU countries its harmonised rate (HICP) has been very volatile over the summer due to the base effect caused by last years’ shift of the sales from July to August. This explains why Belgium’s HICP inflation went down sharply from 4.7% in August to 3.8% in September. National CPI inflation (NCPI) was running at 2.9% in September, slightly higher than the 2.7% reading of August. It has continuously been rising from the low level of 0.3% in January (see figure BE1).

The divergence between the HICP and NCPI inflation results from various methodological differences (e.g. the effect of sales is spread over 6 months in the NCPI but is included in the respective months in the HICP). Remarkably, the NCPI inflation rise throughout 2021 has almost entirely been driven by the contribution of the energy-sensitive components ‘transport’ and ‘housing, water, electricity, gas and other fuels’ (see figure BE2).

Inflation is set to remain high during the autumn, with peaks well above 3%, on the back of the recent surge in gas and electricity prices. There remains a huge degree of uncertainty however on how much higher inflation can actually rise in the coming months and on how long this higher inflation will persist. We think that energy prices will ease back, preventing runaway inflation. In our scenario, monthly inflation figures will remain above 2.5% till late spring 2022 but will then fall back to close to 1% by the end of the year. All in all, we have raised our annual inflation forecast for Belgium only moderately, from 2.1% to 2.4% in 2021 and from 1.8% to 2.0% in 2022. There is a risk, though, that the energy crisis lasts longer with the price rises feeding through into higher wages resulting into second-round effects. In such an alternative scenario, higher inflation could become more entrenched. 

Could it derail the recovery?

Rising energy prices may start to weigh on consumer demand, particularly considering the impact on poorer households.  If so, this would come on top of the slowdown in growth momentum already seen in recent months. The NBB business barometer contracted for the second consecutive month in September, albeit remaining at a high level. The weakening was due largely to supply-side bottlenecks (a shortage in equipment and personnel) which are putting a brake on activity. Meanwhile, demand remained strong, as witnessed by consumer confidence. Its rise in September wiped out previous month’s slight fall. In the coming months, confidence could be affected by the energy crisis, but the impact will not be permanent in our scenario as we assume the energy price surge only to be a temporary shock. We believe that the current energy crisis could take a bit steam out of the recovery but should not derail it. Accordingly, we have lowered our 2021 growth forecast for the Belgian economy only marginally from 5.6% to 5.5%. The growth outlook for 2022 is kept unchanged.

According to Eurostat’s harmonised price index, price dynamics on the Belgian housing market strengthened to 7.4% yoy in Q2 2021, from 6.9% in Q1 2021 and 5.7% in Q4 2020. Belgium is among the large group of 21 EU member states where house prices rose by more 5% yoy in Q2. Low interest rates and the appetite of investors continued to be key drivers of prices. We have upgraded our forecast for Belgian house prices in 2021 to 6.0% to reflect the strong dynamics in the first half of the year. After a still buoyant market in 2021, prices dynamics are expected to slow in 2022 (+3.0%) following slower GDP growth and rising interest rates. There is a risk however that prices would continue to rise sharper than we expect. If so, the overvaluation (currently estimated at 10 to 15%) would build up further, with the risk of house prices correcting somewhere in the medium term. 

Economic forecasts October 2021

National accounts (real yearly change, in %)

              2020 2021 2022
Private consumption -8.7 4.0 4.2
Public consumption 0.6 5.7 3.1
Investment in fixed capital -6.9 10.8 3.4
Corporate investment -7.8 11.3 4.1
Public investment -1.4 8.7 4.4
Residential building investment -6.9 10.3 3.0
Final domestic demand (excl. changes in inventories) -6.1 6.1 3.7
Change in inventories (contribution to growth) 0.1 -1.1 0.8
Exports of goods and services -4.6 7.1 7.1
Imports of goods and services -4.3 6.4 8.3
Gross domestic product (GDP) -6.3 5.5 3.6
Household disposable income 1.4 1.0 1.5
Household savings rate (% of disposable income) 21.7 18.7 14.5

Equilibrium indicators 

              2020 2021 2022
Inflation (average yearly change, in %)      
Consumer prices (harmonised CPI) 0.4 2.4 2.0
Health index (national CPI) 1.0 1.7 2.0
Labour market      
Domestic employment (yearly change, in '000, year end) -13.0 72.2 75.0
Unemployment rate (in % of labour force, end of year, Eurostat definition) 6.0 6.3 5.8
Public finances (in % of GDP, on unchanged policy)      
Overall balance -9.4 -7.3 -4.0
Public debt 114.1 113.0 112.5
Current account balance (in % of GDP) 0.9 0.4 -1.0
House prices (average yearly change in %, existing and new dwellings, Eurostat definition) 4.2 6.0 3.0

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Central and Eastern Europe

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