Firm government measures support economy but add to long term fiscal worries

EcoPerspectives // 2nd quarter2020  
Firm government measures support economy but add to long term fiscal worries  
Due to the Covid-19 virus our growth outlook declines by 5 percentage points to -3.5% for the whole of 2020, despite government  
measures to attenuate the impact of the epidemic. We see strong hits across almost all sectors, most notably construction and real  
estate related activities. Prime Minister Wilmés was empowered by a “corona coalition”, which provides a welcome if only temporary  
breather from government formation talks. The government so far managed this crisis in decisive fashion but eventually the bill will  
have to be footed.  
Most sectors of the economy will suffer  
1- GDP Growth and inflation  
(Y/Y, %)  
Already before it became clear to what extent the Covid-19 virus  
would impact the global economy, Belgian GDP growth was  
expected to slacken. For a small open economy, a slowdown in  
international activity would inevitably have negative effects on its  
growth. The strong job creation under the Michel-I government’s  
rule was a persistent boost to private consumption. Also, investment  
growth picked up again in the last quarter of 2019. For 2020, the  
heavy-lifting was expected to be done mostly by government  
spending, with a strong focus on large infrastructure projects, like  
Oosterweel, a highway infrastructure project around the city of  
GDP Growth  
As much as we emphasised the government role in supporting  
economic growth for the country in earlier publications, its actual  
impact in supporting domestic activity over the next coming months  
will be crucial. Measures include an increase in payment to those in  
temporary unemployment and delayed tax-payments by  
corporations. Negotiations about a EUR 50 bn-program carried by  
the government, the largest banks and the National Bank of Belgium  
are expected to reach their conclusion over the next coming days.  
Source: BNP Paribas Global Markets  
In addition, there has been a strong focus on telework. Data from  
2017 show that about 17% of all employees regularly works from  
home, with public workers actually well ahead of their peers in the  
private sector. However, as schools and daycare centres  
increasingly only take in children from parents with jobs considered  
essential, the amount of telework will presumably be closer to 50%  
today. Many of these workers (and their employers) might not yet be  
as experienced in the technological side of such setup. Combined  
with potential round-the-clock childcare, a slump in productivity  
seems inevitable.  
Still, the 3.5% decline in GDP we are currently forecasting is the  
largest such dip since the 2nd World War. This takes into account  
the current measures taken by the government to support  
household income and keep businesses from going broke.  
Public finance  
To reflect the expected impact of the Covid-19 virus and its  
subsequent disruptions, we put aside the traditional “expenditure”-  
approach to calculate total GDP. Instead, we focussed on a  
At the time of the first Covid-19 outbreak in Europe, the political  
situation in Belgium was still best described by a deadlock, following  
the May 2019 elections. In the meantime, Prime Minister Wilmés,  
who inherited a minority-backed government from Charles Michel  
when he became European Council President, received support  
from all but two parties in the federal parliament to execute a  
“production”-approach, a framework that allows to more clearly  
specify changes to the added value on a sector level.  
The subsequent analysis showed that most sectors of the economy  
will indeed suffer over the coming weeks and months, bar notable  
exceptions such as healthcare. For Belgium, the largest slowdown  
in activity is expected in the construction sector and for real estate  
related activities. For the former, the physical nature of the job  
renders it almost impossible for most businesses to comply with the  
strict social distancing rules, whereas the latter’s sector federation  
actually supported a recent government decision to forbid house-  
visits by prospective buyers.  
“corona”-mandate. This in theory authorizes the PM and her  
secretaries to fight the current crisis without consulting parliament  
on a regular basis.  
Public finance was already deteriorating in 2019, as the deficit shot  
up again from a post-crisis low of 0.7% in both 2017 and 2018 . A  
recent publication from the National Bank of Belgium investigates  
how large GDP-shocks could adversely impact the deficit in various  
European countries. This analysis identified the strong automatic  
stabilisers in Belgium as a prime reason for the country’s high  
budget sensitivity, coming in a close second to France. Based on  
the analysis by the NBB, the budget deficit for 2020 could increase  
again by an additional 4 % points to an estimated 7%. But even with  
this kind of deficit, Belgium will be far from the worst pupil in the  
The forced closing of certain aspects of social life obviously  
adversely impacts the demand in all sectors, but also on the supply  
side there are issues. According to the Secretary of Labour Nathalie  
Muylle, at least one million workers (20% of the total workforce) are,  
at currently, temporarily unemployed. Under this scheme, these  
workers are eligible to receive social support to the tune of 70% of  
their normal earnings, within some constraints.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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