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Belgium: Belgium Economy Profile

2015/10/03

Belgium Economy

The Belgianeconomy grew by 0.4% in the second quarter of 2015 compared to the previous quarter
We expect to see economic increase of around 1¼% in 2015, driven mainly by an increase in private consumption
Economic increase will pick up further in 2016, to 1½%. This will be mainly due to a strong development in the net contribution from trade, while the increase of private consumption will slow

Increase forecasts

For 2015 and 2016 we expect to see steady but not particularly exuberant increase in the Belgian economy of 1¼% and 1½% respectively (see Table 1). Leading indicators, inclunding consumer confidence and the Economic Sentiment Indicator (ESI), point to further economic increase in 2015 (see Figure 1).

Table 1: Key figures Belgium

Table 1: Key figures Belgium

Figure 1: Economic sentiment points to further growth

Figure 1: Economic sentiment points to further growth

We expect unemployment to remain high for the time being, at 8½% in 2015 and 8¼% in 2016. In addition to accommodating the expected increase in the working people, the increase in employment will not be enough to bring about a significant decrease in unemployment.

Suspended automatic indexation to slow consumption but boost exports

Economic increase in 2015 is mainly driven by higher private consumption, which in turn is helped to some extent by low commodity prices. We expect the contribution of private consumption to decline somewhat in 2016, since real disposable household gain will increase only to a limited extent. This is half due to the adoption of a parliamentary bill at the end of April, whereby the system of automatic indexation of pay and benefits in line with inflation (up to 2%) will be temporarily suspended. This so-called ‘index jump’ is intended to help lower Belgium’s significantly increased unit labour costs (see figure 2) to levels that correspond to those in neighbouring nations.

Figure 2: Belgium has lost competitiveness due to strong increase in labour costs

Figure 2: Belgium has lost competitiveness due to strong increase in labour costs

Against the decline in private consumption, there is an extensive package of government measures designed to reduce business costs and ensure that Belgian businesses become additional competitive.[1] We expect this to boost exports in 2016, particularly since economic increase outlook of Belgium’s significant trading partners[2] the UK and the US are promising and Belgium will benefit additionally from the weak euro. From presently on we expect this to lead to an development in the net trade contribution from -½% in 2015 to +¾% in 2016.

Moderately positive estimate for investment growth

Investment policy in Belgium has recently featured predominantly one-off purchases. This was the case in the third quarter of last time(see Eurozone uitgelicht), and there was as well strong increase in investment in the initial quarter of this year, because the Belgian branch of the British pharma group GSK took over the production of vaccines from Novartis of Switzerland (see Figure 3). Since it concerns foreign patents, imports have increased by the same all as investments and the result on GDP increase was nil.

Figure 4: Positive development in number of orders

Figure 4: Positive development in number of orders

The expected ¼% contraction in investments in 2016 is mainly due to the very negative spill-over effects of the contraction in investments in the second quarter of this year.[3] Adjusted for this result, the average investment increase in 2016 will all to around 2½%. Our moderately positive estimate for investments is based, part other things, on the expected development in the competitiveness of Belgian businesses as a result of the reforms by presently mentioned, the return of capacity utilisation levels in manufacturing to their long-term averages and a positive development in the number of orders (Figure 4). The downside risk is that the increase in industrial production is still somewhat hesitant.

Figure 3: Investments characterised by incidental purchase

Figure 3: Investments characterised by incidental purchase

Public finances still a cause for concern

The national of the Belgian government’s finances are an extra cause for concern. Government deficit is expected to remain stable at 106½% of GDP due to strong austerity measures by the Michel government that are affecting all layers of government, however low inflation and modest economic increase will prevent any significant reduction in the deficit position. The government will have to continue to exercise restraint in the coming period, and there is thus little potential for increase of government spending and investment .