Households suffer
CPI came in at 9.9% in May, an all-time high. HICP for the same month is expected to break through February’s (record-)reading, with the flash estimate currently also at 9.9%. Energy prices are still the main driver. Food prices also gained momentum, however, having risen by 1% per month on average since the start of this year. Core inflation should peak right after the summer.
Not all households suffer equally from these higher prices. A recent study by the NBB shows how families in the lowest income quintile experience inflation rates at 1% point or more above those in higher quintiles, even though for some of them the pain is reduced via such measures as social tariffs.
The NBB points out that real income growth would still be positive this year, due to increased employment growth. On a per capita basis, however, it will probably remain flat. Contrary to the Eurozone as a whole, Belgian real wages are expected to post significant gains (4.5%) across 2022-2024, the bulk of which will take place in 2023.
The accumulated (forced) savings are predominantly held by those in higher income groups. These households are not expected to contribute much to (supporting) consumption, due to their higher propensity to save.
Over the short term, consumption will suffer. Despite nominal spending reverting to pre-Covid levels last month (according to our in-house metrics), the situation is still a source of concern. Private consumption, as the largest component of total GDP, remains below its pre-pandemic level in volume terms. We expect it to decline further, due to the loss of purchasing power, before stabilising at year-end.
Investment growth is expected
Investment by non-financial corporates grew by almost 3% in the last quarter. Investment growth is expected to remain elevated in the foreseeable future, since in the latest round of survey data fewer firms reported either labour or equipment as factors limiting production. Especially manufacturers, which experience high utilisation rates, will probably be able to expand their productive capacity in the short term.
Hourly wage costs could increase by 12% in the 2022-2023 period, almost solely due to the wage-index-linking mechanism. Over the same period, the wage gap with neighbouring countries, France, Germany and the Netherlands, could deteriorate by around 5%.
A recent study by the NBB of micro-data for Belgian enterprises provides an estimate of the ease with which firms can push price increases through to the end-user. The pass-through was estimated at 60% and is generally higher for larger, more energy-sensitive firms .
A majority of the Belgian firms that participate in the business confidence survey flag their intentions to raise selling prices over the next three months. All in all, profit margins are expected to decline somewhat, but remain above their long-term average throughout the forecasting period.
This might help explain why the number of bankruptcies is still well below the pre-pandemic average. In this respect, the current situation compares favourably with earlier crises (2001, 2008-2009), when bankruptcies drifted 10-15% above pre-crisis levels.
Public finance
The public finance outlook remains negative. Income support measures to combat higher energy prices, the cost of the booster vaccination drive and expenditure on Ukrainian refugees have all contributed to an increase in government spending.
The deficit is not expected to fall back below the 3% threshold during the next year. Further fiscal consolidation is needed, however, as rising interest rates are no longer just a distant prospect.
