Economic update - June 2021
The preliminary estimate of Belgium’s Q1 2021 real GDP growth was revised significantly higher from 0.6% to 1.0%, making the start of the year even better than initially thought. The good figure contrasts with GDP growth in the euro area, which contracted further by 0.3%. Belgian qoq growth in the first quarter was driven by both final domestic demand (i.e. excluding inventories) and net exports. All components of domestic demand picked up, indicating that the ongoing recovery is broad-based. The growth in business investment (+2.2%) surprised on the upside, as firms polled by the Economic Risk Management Group (ERMG) have continued to expect the coronavirus crisis to reduce their planned investments. Investments in Q1, however, were positively impacted by a number of specific transactions involving the purchase and sale of ships in and to foreign countries. Q1 growth was also reinforced by a marked decline in imports (-1.3%), which was sharper than the decline in exports (-0.5%).
May brought a further rise in sentiment, lifting the indicators well above their pre-covid-19 levels. The jump in consumer confidence was among the highest ever recorded. The NBB business indicator firmed up for the sixth month in a row, albeit at a slower pace than in April. The remarkable turnaround in sentiment has been driven by greater optimism about the substantial reopening of the economy from the summer on. Meanwhile, the labour market remains remarkably resilient. Following a further rise by 0.1% in Q1, employment is now almost back to its pre-crisis level. In the euro area, it is still 2.1% below (figure BE1). Belgium’s unemployment rate fell to 5.3% in April, from a peak of 6.5% in August last year. Also, from the latest ERMG survey it follows that many firms have difficulties in finding suitable staff, indicating that the labour market is already tight at this still early stage of the recovery. Moreover, there is more employee turnover than usual. This could be good news: it suggests that workers in the hardest hit sectors have already made significant transitions to jobs in other sectors. Such transitions facilitate the recovery of the economy.
Stronger 2021 growth
Now that many covid-19 related restrictions are easing, growth in private consumption is likely to gather pace quickly. In our scenario, consumer demand will become the main growth engine in the quarters to come. Given the strong indicators seen recently and informed by the prediction of KBC’s nowcasting model, we raised our qoq GDP growth estimate for Q2 to 1.2%. Taking into account the much stronger-than-expected growth in Q1 and keeping the estimates for qoq growth in Q3 and Q4 unchanged at 1.5% and 1.0% respectively, we now see annual real GDP growth for the full year 2021 at 5.3%, from 4.5% previously. The annual growth forecast for 2022 remains at 4.1%. These figures imply that the Belgian economy will reach its pre-crisis (Q4 2019) GDP level by Q4 2021. In line with the updated growth scenario for 2021, we now see the Belgian unemployment rate at 6.5% at the end of this year, instead of 7.0% in our previous scenario.
Despite the more upbeat forecast for 2021, still a number of risks clearly remain for Belgian growth. A first risk is a new worsening of the epidemiological situation following vaccine-resistant variants of the virus. Second, temporary unemployment stays quite high, despite the recent decline, implying a substantial potential for more people becoming effectively unemployed than we assume in the base scenario. Third, the ERMG surveys, including the most recent issue, consistently show that firms’ planned investments in 2021 and 2022 are still negatively impacted by the crisis. Although the poll may overstate the crisis impact, it adds uncertainty to the scenario. Finally, a worrisome observation in the latest ERMG survey is that many firms are facing supply constraints (figure BE2). Bottlenecks at the supply side, both in terms of personnel and the supply chain, may well start to weigh on business activity.
Box BE – Nowcasting Belgian GDP
Although the term nowcasting (merging ‘now’ and ‘forecasting’) was first coined by meteorologists, its popularity among economic forecasters has grown considerably in recent years. Covid-related economic shocks and uncertainties have only accelerated this trend. Accurate real-time assessments of economic conditions and developments are key, not only because they form a basis for medium-term numerical projections, but also because an as-accurate-as-possible interpretation of the most recent economic developments is crucial during periods of elevated economic uncertainty. Nowcasting practices hence complement analysis on actual published data that often are subject to significant publication lags.
For all these reasons we have developed our in-house nowcasting models. They allow us not only to assess the current state of the economy but also provide us with short-term forecasts of GDP and related variables. The main idea is to extract information about the (unobserved) state of the economy from a set of indicators that are available on a higher frequency and/or are more up to date than GDP itself. Information extraction could occur using the broadest set of indicators and information available.
Applied to Belgian GDP developments, our current nowcasting models confirm that the post-Covid recovery is well underway in the second quarter of 2021. For example, early in the second quarter we saw a somewhat poorer performance of the retail sales sector (excluding cars) than might have been expected by the overall economic picture (according to the model), but this can clearly be attributed to strict anti-Covid measures still in place in April. On the other hand, a generally supportive external environment, a good performance of the industrial sector, and strong confidence indicators outweigh this effect and point to much faster than usual (about 0.4%) quarter-on-quarter GDP growth in Q2 2021 at 1.2%. Additional variables and information confirm this picture.
Despite the fact that the Covid period is an illustration of how difficult it is to assess the likelihood of different possible GDP outcomes (because of nonlinearities related to tail events), our model indicates that the probability of a Belgian GDP decline in Q2 2021 (in quarter-on-quarter terms) is very low (figure BBE). As for the model-based near-term outlook for the third quarter, should the recovery continue ‘as usual’, we can again count on a growth rate which is well above the average historical experience. Still, reaching the pre-COVID GDP level already by end-September is very unlikely.