Perspectives

Domestic demand under pressure to keep delivering

st  
19  
EcoPerspectives // 1 quarter2020  
economic-research.bnpparibas.com  
Belgium  
Domestic demand under pressure to keep delivering  
Belgian GDP growth is expected to drop to 0.8% in 2020, down from 1.3% in 2019. Domestic demand remains the key engine of  
growth, partially offset by a negative contribution from net trade. Private consumption growth is reduced as employment increases  
now at a slower pace, after 4 strong years. Investment growth is up, spurred on by public expenditures. The lack of a majority-backed  
government contributed to renewed fiscal slippage, which remains a key risk for the Belgian economy.  
Belgian economic growth proved to be remarkably resilient,  
especially in the 2 part of last year. Third quarter growth came in  
nd  
1- Growth and inflation  
GDP Growth (%)  
strong, spurred on by private consumption and consumer  
confidence rebounded somewhat at the end of last year. Business  
confidence continued its 4-month rise all through December and  
corporate investment growth has kept pace with 2018. Recently  
announced changes in the Flemish fiscal regime supporting first-  
time-homeownership caused some volatility in the number of  
transactions in the 2nd half of 2019. Based on the current numbers  
it seems that a large portion of the transactions were pushed  
forward in time to still benefit from the old regime.  
Inflation (%)  
Forecast  
Forecast  
2
.3  
2.2  
2
.0  
1
.5  
1.3  
1.2  
1
.1  
1.0  
0.8  
20  
0.9  
20  
Labour market  
1
7
18  
19  
21  
17  
18  
19  
21  
The unemployment rate came in at 5.6% in October of last year.  
After strong employment growth in the period 2014-2018, job  
creation slowed down in recent quarters. The National Bank of  
Belgium (NBB) expects that 169 000 new jobs will be created in the  
period 2019-2022, which is almost a third less than in the previous  
four years.  
Source: National Accounts, BNP Paribas  
benefitted international cost competitiveness. This is consequence  
of the specific characteristics of Belgian export flows, which are  
focussed on intermediate goods, have above average high-tech  
content and often occur between entities of the same multinational  
groups. As a consequence, these flows are much less sensitive to  
movements in labour costs. The study does however point out an  
important role for the Belgian authorities, through export promotion  
and removal of constraining barriers.  
The recent employment growth drove the employment rate to 70%  
in 2018. There is some further improvement expected in this area  
but the Belgian EU2020 objective of 73.2% will unfortunately remain  
elusive. The employment intensity of activity growth is expected to  
come down again, after rising in recent years. This is a  
consequence of the slowdown in labour-supply growth, with  
vacancy rates still well in excess of the EU-average.  
Government policy  
Public spending increased markedly in 2019, driven by local  
government investment as per usual in an election year. For 2020  
and 2021 additional public spending is expected, amongst others on  
a large infrastructure project near the city of Antwerp.  
The Federal Planning Bureau expects that the wage-indexation  
mechanism will kick in in March 2020. As a consequence, welfare  
transfers and wages for civil servants would increase by 2% in the  
subsequent 2 months. Purchasing power per capita should increase  
around 5% by 2022 according to estimates by the NBB.  
Public debt came in at just below 100% of GDP in 2019, after GDP  
was revised upwards as part of a major update of the methodology  
used to calculate the national accounts. The fiscal deficit reached a  
post-crisis low of 0.7% in both 2017 and 2018 but is expected to  
deteriorate significantly going forward. The improved figures in  
these years were a consequence of one-off-events and the absence  
of a majority backed government for the whole of last year likely  
pushed the deficit back up to 2%.Government expenditures are  
climbing, but revenues remain stagnant. The High Council of  
Finance, which advises the government on its multi-year budget,  
foresees deficits in excess of that for the near future. As such fiscal  
slippage is a key-risk for the Belgian economy.  
Price and trade  
Meanwhile, labour costs are picking up again, with yearly growth  
once again in excess of the EU19-average. Domestically, this effect  
will likely only partially spur on core inflation, as lower firm profit  
margins are expected to make up for the difference.  
High labour costs have l been a key worry for a long time with  
regards to the international competitiveness of the small open  
economy that is Belgium. This has come all the more to the fore  
given the sustained loss of global market sharesince the beginning  
of the century.  
In a recent study by the NBB, the positive impact of past Belgian  
wage moderation efforts are shown to have had only marginally  
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