Economic Perspectives for Belgium

The slowdown in Belgium’s GDP growth to 0.2% in the second quarter of 2022, from 0.5% in the first quarter, was confirmed. Q2’s weaker reading was mainly driven by lacklustre performance in the industrial sector (-0.2%). In construction and the services sector, growth of economic activity remained positive, but slowed to 0.3%. Once again, investment growth was distorted by a number of specific transactions. Government investment (+5.2%) was buoyed by the purchase of an aircraft by the Ministry of Defence. Business investment growth (-2.3%) was in turn adversely affected by a few (foreign) ship purchase transactions in Q1. Investment in housing, impacted by rising interest rates, dipped slightly (-0.4%). Household consumption surprised positively (+0.7%) despite rising energy prices and collapsing confidence on the back of the Ukraine war. Likely, the reopening of the economy after the pandemic still supported consumer demand. Net exports had a negative growth contribution, as exports contracted more sharply (-0.6%) than imports (-0.4%) in real terms.

Meanwhile, headwinds to the economy have clearly intensified. Skyrocketing energy prices combined with the lagged wage indexation decrease, at least temporarily, households’ purchasing power. We believe this will lead to a contraction of private consumption in the second half of the year. Certain leading indicators have recently been pointing in that direction. E.g., in the industrial confidence indicator published by the European Commission, Belgian companies are reporting an increase in the lack of demand. Although not yet in a problematic way, the situation on the labour market has been worsening as well. Job creation was still quite robust in Q2, with 29,300 net jobs being created (+0.6% qoq). But unemployment data have clearly reversed upward. The harmonised unemployment rate is up from its low of 5.3% in February to 5.9% in July. Also, the annual change in the number of job seekers has nearly reached positive territory in August (see figure BE1).

Increasing macroeconomic uncertainty and escalating production costs are also likely to depress investment growth in the current and next quarters. More generally, the (energy-intensive) industrial sectors will suffer most from the worsened situation, due to their high level of (direct or indirect) dependency on natural gas. Moreover, export-oriented companies will take an additional hit, as the pass-through of relatively high wage increases worsens their competitive position. Since the start of the year, the assessment of export order-book levels has already deteriorated relatively more in Belgium compared to the euro area (see figure BE2). The growth contribution of net exports hence is likely to become even more negative this and next quarters, with the drop in exports being bigger than the one in imports. 

Entering recession

All in all, we expect the quarterly growth rate of real GDP to become negative in Q3 and Q4 (both close to -0.2% qoq). This means the Belgian economy enters a so-called technical recession (i.e. two consecutive quarters of negative growth), with spill-over effects well into 2023. While annual GDP growth in 2022 will still be substantial, at an expected 2.3% thanks to a large carry-over effect from high growth in 2021 and the first half of 2022, very low growth in 2023 is an almost certainty. More precisely, we slightly downgraded the 2023 growth outlook to 0.2%, from 0.3% expected in August. Both our 2022 and 2023 figures are below the recently updated growth forecasts made by the Federal Planning Bureau, which stand at 2.6% and 0.5% respectively.

Belgian HICP inflation was running at 10.5% in August, implying a stabilisation compared to the previous two months (i.e. 10.4% in July and 10.5% in June). Inflation for energy products eased somewhat in recent months, whereas inflation for other products continued to rise. While inflation is poised to remain high in the coming months, we expect a clear deceleration of inflation in the course of 2023. Energy prices remain high but fall back somewhat after the winter. Nevertheless, average HICP inflation will remain high also next year (at an expected 4.2%), after the particularly high average number in 2022 (forecast at 9.3%). Both these numbers have been upgraded from last month’s inflation forecast.

It should be stressed that the risks surrounding this scenario are elevated. First, the limited stock of gas reserves makes the Belgian economy strongly dependent on day-to-day external gas supply. More generally, Belgium combines a high total energy consumption per capita with a high dependency on energy imports, rendering the country quite vulnerable to the current energy crisis. Second, the loss of competitiveness in case of continued relatively high inflation and strong wage indexation may have longer-lasting negative effects on Belgium’s export performance. Finally, while some fiscal accommodation of the energy shocks is unavoidable in the short term, it is crucial to guard the sustainability of the public debt. As such, structural consolidation efforts will be required in the medium term.

Economic forecasts September 2022

National accounts (real yearly change, in %)

              2021 2022 2023
Private consumption 6.4 4.2 0.9
Public consumption 4.4 1.6 1.5
Investment in fixed capital 7.8 -1.1 1.9
Corporate investment 8.0 -2.0 1.9
Public investment 2.6 -3.5 3.6
Residential building investment 10.0 3.1 1.2
Final domestic demand (excl. changes in inventories) 6.3 2.2 1.3
Change in inventories (contribution to growth) -0.5 0.4 0.0
Exports of goods and services 9.6 3.2 -0.5
Imports of goods and services 9.1 3.5 0.8
Gross domestic product (GDP) 6.2 2.3 0.2
Household disposable income 1.8 -0.1 1.5
Household savings rate (% of disposable income) 16.4 13.2 13.8

Equilibrium indicators 

              2021 2022 2023
Inflation (average yearly change, in %)      
Consumer prices (harmonised CPI) 3.2 9.3 4.2
Health index (national CPI) 2.0 9.0 5.2
Labour market      
Domestic employment (yearly change, in '000, year end) 109.5 59.4 22.5
Unemployment rate (in % of labour force, end of year, Eurostat definition) 5.6 6.0 6.2
Public finances (in % of GDP, on unchanged policy)      
Overall balance -5.5 -5.0 -5.1
Public debt 108.2 105.7 108.5
Current account balance (in % of GDP) -0.4 -3.0 -3.5
House prices (average yearly change in %, existing and new dwellings, Eurostat definition) 7.1 5.0 2.5

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