Economic update - October 2020

Slow recovery confirmed

High-frequency and sentiment indicators show that the recovery of the Belgian economy is still sluggish and subject to major uncertainty, partly related to the rise in the number of coronavirus infections over the past few weeks. The latest survey conducted by the Economic Risk Management Group (ERMG) indicates that the slow and incomplete revival of Belgian companies’ turnover seen since May has stalled. End-September, their turnover was still 14% below normal levels, which is slightly higher than the percentage recorded in the previous survey. Business confidence continued to pick up in September, but the rate of improvement seems to slow down. The same goes for the assessment of export orders, indicating that also the pick up in exports has remained sluggish. Despite a sharp improvement, consumer confidence stayed at an ultra-low level in September. As a result, precautionary savings will likely continue to weigh on consumption growth going forward.

The rebound of economic activity in the euro area in the third quarter seems to have been somewhat stronger than initially envisaged (see above). This makes us believe that also in Belgium real GDP growth in Q3 will come out slightly better, at some 5.0% qoq. This is still below the now-cast prediction of the NBB (+8.0%), explained by our somewhat less optimistic view about the rebound in domestic demand. As the second wave of Covid-19 is spreading rapidly, we however now see the quarterly growth rate in the fourth quarter somewhat weaker than previously expected. The new path of quarterly GDP growth implies that our forecast for the annual growth rate is revised upwardly to -8.5% for 2020 and dowwardly to +4.7% in 2021. These figures are still at the bottom of the range of forecasts made by other institutions. According to its update published on October 7th the Federal Planning Bureau e.g. expects real GDP to drop by 7.4% this year but to bounce back by 6.5% in 2021. 

Surprisingly, the harmonised unemployment rate for Belgium was revised downward substantially. The updated figures now show a broadly stable rate since the beginning of the year at 5.0-5.1%, whereas the ones published in the previous release saw a rise from 5.0% in February to 5.5% in July (see figure BE1). Also in the past, the series (which is mainly based on a quarterly survey) was often subject to large revisions, so one should be cautious in interpreting the data. Thus far, the impact of the coronavirus crisis on the labour market has been cushioned by the extensive recourse to the temporary unemployment system. But gradually, the crisis will surely translate into more people being effectively unemployed. This already has started to be visible in administrative unemployment data published by the regional employment offices. So, we continue to see a peak in the unemployment rate in the quarters to come, partly induced by a wave of bankruptcies.

In the meantime, the new federal government, sworn in on October 1st, aims to reach an 80% employment rate by 2030, from 70.5% in 2019. This looks far too ambitious, given the lack of new labour market reforms in the policy agreement. Moreover, this and next year an expected 140,000 net jobs will be lost, making it impossible to raise the employment rate in the short term. Considering the number of persons aged 20-64 projected by the Federal Planning Bureau in its demographic forecast, 73,000 extra Belgians will have to be put to work annually (+1.5%) from 2022 on in order to obtain the 80% goal for the employment rate. In 2000-2019 the annual increase averaged only 40,000 (+1.0%) (see figure BE2). 

Box BE – Belgiums’ housing market in Covid-19 times

Belgium’s housing market surprised amid the coronavirus pandemic. According to Eurostat’s harmonised house price index, the price of existing and new dwellings rose by 4.5% yoy in the second quarter. The strong figure followed the slowdown of the price dynamic in the first quarter (+3.5% yoy), induced by the scraping of the housing bonus from January 1st on (see figure BBE1). For the third quarter, official price data are not yet available, but early figures from Belgium’s federation of notaries indicate that the yoy price dynamic remained strong at +4.7% for houses and even +6.7% for apartments. 

There is indication that investors make up a growing part of activity on Belgium’s housing market and hence are an important driver of the strong price growth seen recently. Over the past decade and a half, Belgians have become significantly more interested in buying additional real estate. The main reason is undoubtedly the low interest rate environment, but likely the successive economic crises also play a role. According to STATBEL figures, roughly 17% of households own additional real estate aside from the house in which they live. This figure includes homes that are rented out, second residences, building plots, garage boxes, etc. In particular, the current Covid-19 crisis has sparked interest of Belgians to buy a second home at the Belgian coast (see also KBC Economic Opinion of 21 September).

The investors’ appetite for real estate is strengthening the duality between those who are still able and willing to buy property, often as an investment, because they have the funds to do so, and those who can no longer afford to buy their own home. The first group, which also includes younger age households who receive financial support from their (grand)parents, are driving prices up further, while the second is increasingly forced to turn to the rental market. In our view, the Covid-19 crisis will still hurt Belgium’s housing market in the quarters to come, as it will affect more and more people’s ability to buy property due to rising unemployment figures. Moreover, the total number of housing units per 1,000 households has risen strongly over the past years, pointing to the risk of an oversupply emerging on the market. In our scenario, we therefore still think that house prices will correct by some 3% in 2021, after having risen by an expected 3% this year. 

The growing duality on the housing market makes it difficult to predict the future price development and, more importantly, poses risks for the stability of the market. The situation could be disrupted if the interest of investors in property would start to wane, for example if interest rates should suddenly rise more than anticipated. This could then lead to a stronger-than-expected correction in prices, with potentially adverse consequences for the whole economy. If, otherwise, house prices would continue to increase (much) faster in the short term than we expect, driven by continued strong investors’ appetite, this could result in the overvaluation (estimated at some 5-8% at the beginning of the year) being built up. In such a scenario, prices could correct later on somewhere in the medium term.

Economic forecasts

National accounts (real yearly change, in %)

              2019 2020 2021
Private consumption 1.1 -7.1 9.0
Public consumption 1.8 -5.9 4.1
Investment in fixed capital 3.2 -17.9 -2.4
Corporate investment 3.2 -18.8 0.1
Public investment -0.4 -13.6 0.2
Residential building investment 4.9 -17.1 -1.7
Final domestic demand (excl. changes in inventories) 1.8 -9.5 5.2
Change in inventories (contribution to growth) -0.4 -0.5 0.0
Exports of goods and services 1.1 -8.7 3.7
Imports of goods and services 1.0 -10.4 4.9
Gross domestic product (GDP) 1.4 -8.5 4.7
Household disposable income 2.5 -1.0 1.7
Household savings rate (% of disposable income) 13.1 18.4 12.6

Equilibrium indicators 

              2019 2020 2021
Inflation (average yearly change, in %)      
Consumer prices (harmonised CPI) 1.2 0.6 1.5
Health index (national CPI) 1.5 1.1 1.4
Labour market      
Domestic employment (yearly change, in '000, year end) 79.3 -110.0 -30.0
Unemployment rate (in % of labour force, end of year, Eurostat definition) 5.2 6.4 7.2
Public finances (in % of GDP, on unchanged policy)      
Overall balance -1.9 -12.1 -7.3
Public debt 98.7 119.8 118.7
Current account balance (in % of GDP) 0.4 -0.5 -2.0
House prices (average yearly change in %, existing and new dwellings, Eurostat definition) 4.0 3.0 -3.0

Other forecasts and economic updates



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