Belgium

Belgium

Economic Perspectives for Belgium

September 2021

The preliminary estimate of Belgium’s Q2 2021 real GDP growth was revised significantly higher from 1.4% to 1.7% qoq. The Q1 figure was upgraded as well, albeit less so, from 1.0% to 1.1%. The positive growth adjustments made the first half of the year even better than initially thought. Despite the strong growth, the level of Belgian economic activity in Q2 remained 2.2% below its pre-corona level, compared to 2.5% in the euro area. All components of final domestic demand (i.e. excluding inventories) picked up in the second quarter, indicating that the ongoing recovery of the Belgian economy is broad-based. Net exports of goods and services and, in particular, changes in inventories made a negative contribution to Belgian Q2 growth.

As in most other euro area countries, sentiment indicators in Belgium dipped in August, although remaining at an elevated level. The NBB barometer was down in all branches of economic activity. The turnaround in business sentiment has been driven in large by bottlenecks on the supply-side of the economy, both in terms of personnel and the availability of equipment and materials (see figure BE1). These constraints threaten to slow the further recovery against the background of still strong demand. Consumer confidence seems past its peak as well. With the exception of expectations on the employment front, all components of the indicator dropped back in August. Despite this decline, consumers are still substantially more confident than they were before the pandemic.

Meanwhile, the labour market remains remarkably resilient. Following a further rise by 0.7% in Q2, employment has returned to its pre-corona level. It is now 0.6% higher than in Q4 2019, while in the euro area it is still 1.3% below. According to revised Eurostat data, Belgium’s harmonised unemployment rate fell to 5.9% in July, from a peak of 6.8% in March. The fact that many firms have difficulties in finding suitable staff indicates that the labour market has become tight again. This is not only a result of the economic recovery. The situation is increasingly structural, due to demographic factors – the number of people at working age (20-64) starts to decline from 2021 onwards – and the poor match between job openings and unemployed job seekers. 

Meanwhile, the labour market remains remarkably resilient. Following a further rise by 0.7% in Q2, employment has returned to its pre-corona level. It is now 0.6% higher than in Q4 2019, while in the euro area it is still 1.3% below. According to revised Eurostat data, Belgium’s harmonised unemployment rate fell to 5.9% in July, from a peak of 6.8% in March. The fact that many firms have difficulties in finding suitable staff indicates that the labour market has become tight again. This is not only a result of the economic recovery. The situation is increasingly structural, due to demographic factors – the number of people at working age (20-64) starts to decline from 2021 onwards – and the poor match between job openings and unemployed job seekers.

Stronger 2021 growth

Given the recent reversal in sentiment indicators and the related supply-side bottlenecks, we lowered our qoq GDP growth estimate for Q3 2021 from 1.5% to 1.2%. Despite this downward adjustment, we see annual real GDP growth for the full year 2021 higher at 5.6%, from 5.3% previously. This is due to the upward revision by the Institute for National Accounts of realised growth in the first half of the year (see above). Our annual growth forecast for 2022 remains at 3.6%. These figures imply that the Belgian economy will reach its pre-crisis (Q4 2019) GDP level by Q4 2021. People in the system of temporary unemployment have already largely returned to work in line with the nearly full reopening of the economy. Hence, we now see the Belgian unemployment rate at 6.3% at the end of this year, instead of 6.5% in our previous scenario. Annual inflation for 2021 has been revised as well, albeit slightly, from 2.0% to 2.1% due to recent HICP inflation data coming out a bit higher than expected.

 

Box BE - The impact of the flooding and the recovery plans on regional growth in Belgium

In mid-July, the Planning Bureau published its annual regional economic forecasts. In addition to a forecast for 2021-2026, the figures include an estimate of economic growth in the three regions for 2020 (the Institute for National Accounts always publishes regional growth data with a delay). The estimate shows that the Covid-19 crisis had a greater impact on economic activity in 2020 in Wallonia (-6.9%) than in Flanders and Brussels (both -6.1%). Thanks to the recovery in 2021-2022, real gross regional product in Flanders, Wallonia and Brussels in 2022 is forecast to again be 2.1%, 1.4% and 0.9% respectively above the pre-crisis level. According to the Planning Bureau, average growth in the years during and after the pandemic (2020-2026) would be only 1.2% per year in Flanders, 1.0% in Wallonia and 0.7% in Brussels. After the Flemish economy also grew faster than the Walloon and Brussels economies during and after the financial crisis (2008-2019), this appears to be the case again this time around (see figure BBE1).

 Flooding in Wallonia

 The resumption of economic activity in the regions as from 2021 is also supported by various recovery plans following the Covid-19 crisis, partly financed with European funds (see below). The forecasts of the Planning Bureau take this into account. More recently, the Walloon government also released 2 billion euro for the reconstruction of the region after the heavy floods in July. The question is to what extent this can lift growth in Wallonia higher than what the Planning Bureau figures suggest. As such, it is a considerable sum (about 1.8% of Wallonia’s gross regional product), which has the potential to boost Walloon economic activity this year and the next. However, important caveats must be expressed. Firstly, the flooding in Wallonia this summer was accompanied by considerable destruction of capital stock (housing, businesses, bridges and roads, etc.). This caused some activities to grind to a halt (restaurants closed, people unable to go to work, etc.), which may depress Walloon growth in 2021. Moreover, the economic growth realised by the clean-up and reconstruction operations is in fact perverse. It concerns growth due to a manifestly negative event (the floods) and is therefore - although more than necessary - not the kind of growth that indicates additional wealth creation compared to the pre-disaster situation. To the extent, however, that reconstruction leads to better infrastructure in the affected places (better road network, avoidance of new disasters...), it may contribute, albeit in the long run, to a somewhat higher growth potential. Secondly, a substantial part of the reconstruction funds (more specifically EUR 0.8 billion) concerns a shift of the resources that Wallonia wanted to deploy elsewhere in the economy anyway as part of its Get Up Wallonia recovery plan. Of course, rapid assistance and reconstruction in the face of the severe flooding is desirable, but the shift implies that potentially more productive investments in the framework of Get Up Wallonia will now no longer take place. It is not yet clear which projects from the recovery plan will be dropped. It is also hoped that the European authorities will be flexible enough to agree to the shift.

Regional recovery

In order to overcome the consequences of the Covid-19 crisis, the federal and regional governments are implementing an extensive recovery policy. Most of the measures fall within the framework of the Recovery and Resilience Facility launched by the European Commission. Of the EUR 5.9 billion of European funds, EUR 2.3 billion goes to Flanders, EUR 2.0 billion to Wallonia and EUR 0.4 billion to Brussels. On top of the European money, the regions benefit from some investments included in the federal part of the Belgian recovery plan, and the regional authorities also want to pump additional resources into the economy themselves. Expressed as a proportion of the gross regional product of Flanders, Wallonia and Brussels in 2019, the total is about 1.5%, 6.9% and 0.6% respectively. As mentioned, the global recovery plan in Wallonia is called Get Up Wallonia, in Flanders it is called Vlaamse Veerkracht.  The regional plans are ambitious and will give a strong impulse to public investments. A possible disadvantage is that they are characterised by a great fragmentation of measures, whereby the aspirations of different parties and entities had to be met. This may limit their effectiveness. Moreover, the plans contain many catch-up investments that were necessary anyway. Care will also have to be taken to ensure that investments are prioritised for projects that maximise potential growth. A strong point of the plans is that they link investments to reforms, although the details of these reforms remain insufficiently concrete. It is important that they strengthen the supply side of the economy. There is a need, especially in Wallonia and Brussels but also in Flanders, to tackle structural problems (too many people being inactive, insufficient quality of education, etc.). The downward pressure that demography will exert on the labour potential in the coming years implies that employment growth can be counted on less and less as a driving force for future economic growth. Especially in Flanders, further job creation is already being hampered by an unprecedented labour shortage. In order to support future potential employment growth, policy should therefore focus even more strongly on activating the remaining labour reserve. But that will not be enough. Regional authorities must create the most favourable environment possible for companies to innovate and become more efficient in order to boost productivity growth, which is far too low.

Economic forecasts September 2021

National accounts (real yearly change, in %)

              2020 2021 2022
Private consumption -8.7 4.1 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 3.8
Change in inventories (contribution to growth) 0.1 -1.1 0.7
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 5.6 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 2.1 1.8
Health index (national CPI) 1.0 1.6 1.8
       
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 -5.5
Public debt 114.1 113.9 114.2
       
Current account balance (in % of GDP) -0.2 0.4 -1.0
       
House prices (average yearly change in %, existing and new dwellings, Eurostat definition) 4.2 4.0 2.5

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