Economic Perspectives for Belgium

According to the preliminary estimate of the National Accounts Institute (NAI), third quarter Belgian GDP fell by 0.10% quarter-on-quarter. The slight contraction of the Belgian economy was broadly in line with our expectations (-0.15%) and followed an upwardly revised 0.54% expansion in the second quarter (from only 0.19% published by the NAI previously). Remarkably, a longer series of quarterly growth rates was revised, with the drop in annual real GDP in 2020 appearing to have been smaller (-5.4%) than previously expected (-5.7%), while annual GDP growth in 2021 was only marginally adjusted from 6.2% to 6.1%. According to the revised data, the Belgian economy grew an extra 0.85% over the period Q1 2021 – Q2 2022 compared to the previously released data. This all means that the contraction of the Belgian economy caused by the pandemic has been less severe and the subsequent recovery stronger than thought so far.

The Belgian Q3 figure (-0.1%) was worse than that in the euro area (0.2%). The main reason for the growth differential is the relative performance of Belgium’s industry. The first estimate released by the NAI shows that value added in industry contracted sharply by 0.7% quarter-on-quarter in Q3, in line with the downward trajectory seen in monthly industrial production figures and the quarterly rate of capacity utilisation in the sector (see figure BE1). The contraction in industrial activity can be largely traced to the pharmaceutical sector, which saw the production of corona vaccines fall since the beginning of this year. Also, Belgium has many energy-intensive companies, e.g. in the metal sector, which are hit relatively hard by the current crisis. Activity in the construction sector still grew by 0.3% in Q3, similar to the previous quarter, but in the services sector, value added slowed to 0.1%. 

Component data for Q3 growth are not yet available, but both private consumption and net exports likely drove GDP lower. Consumer confidence stabilised in October at a historically low level while business confidence, as represented by the NBB barometer, decreased further. Most remarkably, there has been a significant drop in export-order books since August. Export-oriented companies seem to take a hit, as a pass-through of higher energy and labour costs to their selling prices is worsening their competitive position. Also, from the EC’s industrial confidence indicator, it follows that companies are increasingly facing a lack of demand while, although diminishing, a shortage of equipment and labour also still strongly limits production. 

Entering the recession

The negative Q3 growth confirms our scenario that the Belgian economy has entered a mild technical recession. We keep our scenario of quarterly GDP growth in Q4 unchanged at close to -0.2%, followed by growth remaining at or close to zero in the first two quarters of 2023. For the year 2022 as a whole, our estimate of GDP growth however has been upgraded substantially, from 2.3% to 2.9%. The revision is fully due to the NAI revisions of past GDP data, in particular a higher overhang of 2021 into 2022 (i.e. 2.0 instead 1.8 percentage points) and higher-than-previously-expected growth in Q1 and, especially, Q2. Our annual growth forecast for 2023 remains unchanged at 0.2%.

Belgian inflation once again surprised on the upside, rising further to 12.3% (CPI) and 13.1% (HICP) in October respectively. Inflation moreover continued to broaden. Nearly one in three goods and services in the consumer basket now has an inflation of 9% or above (see figure BE2). Food has become the second largest contributor to the high rate of inflation, after energy. We continue to pencil in a deceleration of monthly inflation numbers in the course of 2023, but have again upgraded the annual inflation for both 2022 and 2023 relative to last month’s forecast. We now see average inflation at 10.9% in 2022 and at 6.2% in 2023. The reason is the upward surprise in October, causing also a higher carry-over effect into 2023 than previously expected.

The 2023 draft budget plan, submitted to the European Commission mid-October, shows that Belgium’s government deficit and debt-to-GDP ratio will be higher than previously envisaged due to additional expenditures to counter the energy crisis. Much of this spending aims to shield households and companies from rising energy costs, but other items, such as aid to Ukrainian refugees, rebuilding after the 2021 floods and remaining Covid-19 related measures, are also enlarging the deficit. The government’s projection for the deficit and the debt ratio in 2023 is at -5.8% and 108.2% of GDP, respectively, up from an expected -5.2% and 105.3% of GDP in 2022. As our forecast for GDP growth in 2023 (0.2%) is below the one of the Federal Planning Bureau (0.5%), which is at the base of the budgetary plan, KBC Economics sees the 2023 deficit and debt even slightly higher at -6.0% and 108.4% of GDP, respectively. With this, the fiscal deficit of Belgium will remain one of the widest among euro area sovereigns in 2023.  

Economic forecasts November 2022

National accounts (real yearly change, in %)

              2021 2022 2023
Private consumption 5.5 3.6 0.9
Public consumption 4.8 -0.2 1.4
Investment in fixed capital 4.9 -1.0 1.3
Corporate investment 3.9 -1.6 1.5
Public investment 5.2 -4.8 1.9
Residential building investment 7.9 2.9 0.4
Final domestic demand (excl. changes in inventories) 5.2 1.5 1.1
Change in inventories (contribution to growth) 0.4 0.9 0.0
Exports of goods and services 11.3 3.7 -0.1
Imports of goods and services 10.7 3.2 0.8
Gross domestic product (GDP) 6.1 2.9 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 10.9 6.2
Health index (national CPI) 2.0 9.0 6.4
Labour market      
Domestic employment (yearly change, in '000, year end) 112.3 63.2 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 -5.2 -6.0
Public debt 108.2 105.3 108.4
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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