Perspectives

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13  
EcoPerspectives // 4t quarter 2018  
economic-research.bnpparibas.com  
Belgium  
More investment is overdue  
Activity is unlikely to pick up again after sluggish growth in the first half of the year. Jobs are, however, still being created at a solid  
pace, cushioning possible spill-over effects from the weakening external environment. Corporate investment remains rather slow,  
partly because of geopolitical tensions. The budget stance remains too accommodative, as further fiscal consolidation seems rather  
unlikely, given the upcoming federal elections in May 2019. Growth is projected to slow to potential and inflation could decline to  
1.5% by end 2019.  
In 2017, economic growth came in at 1.7%, the highest pace since  
1
- GDP and inflation  
2011, and well in excess of the potential growth rate, estimated at  
.5%. A strong contribution from net trade made up for the  
1
GDP Growth (%)  
Inflation (%)  
slowdown in domestic demand. Headline inflation once again broke  
through the 2% ceiling, with core inflation close to 1.5%. The  
unemployment was on average close to 7% for the whole of 2017, a  
level considered by the European Commission (EC) to be equal to  
the Non-Accelerating Wage Rate of Unemployment (NAWRU) for  
Belgium.  
Forecast  
Forecast  
2
.2  
2.2  
1
.8  
1.7  
1.6  
1.6  
1
.5  
1
.4  
1.4  
0
.6  
This year, volatility in the international environment shifts the  
workload to support economic growth back on the domestic market.  
Corporate investment is expected to pick up, with further job-  
creation and stronger public investment also in line to support still  
above-potential growth.  
1
5
16  
17  
18  
19  
15  
16  
17  
18  
19  
Source: National accounts, BNP Paribas  
High business confidence  
2- Enterprises are reluctant to invest  
In the business sector, conditions look good, at least superficially,  
for additional capital spending. With credit still quite cheap and  
gross profit margins well above their long term average, a lack of  
financing is unlikely to hold back new projects.  
Business investment (%, y/y, rhs)  
▪▪▪ Capacity utilisation rate (%)  
8
8
7
7
7
6
2
8
4
0
20  
10  
0
Capacity utilisation has also been near to an all-time-high for the  
last couple of quarters and business sentiment is close to a post-  
crisis record. Corporate investment, however, was still quite  
underwhelming in the first half of this year. Geopolitical tensions,  
such as Brexit and a potential trade-war, may explain the reluctance  
to invest.  
-10  
-20  
Strong job creation, thanks to tax shift  
2
010 2011 2012 2013 2014 2015 2016 2017 2018  
The strong gross profit margins came about in spite of strong  
employment creation by private enterprises. This was certainly  
helped by the labour reforms (Tax Shift) of the government led by  
Charles Michel, which took office in October 2014. The government  
aims at shifting the tax burden away from labour to other sources.  
As part of this tax shift, employers’ social security contributions have  
been gradually reduced from 33% to 25% by January 2018.  
According to Eurostat, labour costs increased by 2.9% in Belgium  
between Q2 2014 and Q2 2018, whereas the neighbouring  
countries saw an average increase of 7.2%.  
Source: National Bank of Belgium, BNP Paribas  
well above that in the neighbouring countries Germany (3.2%) and  
the Netherlands (3.4%).  
As the mismatches in the labour market become more important,  
the National Bank of Belgium expects hours worked per employee  
to go up, to make up for the lack of skilled labour force. In recent  
quarters at least, the increased employment, combined with the  
income-effects of the Tax shift, has been a boon for private  
consumption.  
Since the installation of the Michel government, 219 000 new jobs  
were created, of which 153 000 in the private sector. The proportion  
of total jobs that are vacant has been rising fast. It now stands at  
Inflation boosted by higher energy prices  
After months of persistent job growth, seasonally adjusted  
unemployment hovered just above its pre-crisis low of 6% during  
last summer. With unemployment below the NAWRU, an increase in  
4
.6%, so more than double the Euro Area-average (2.2%) and is  
h
14  
EcoPerspectives // 4t quarter 2018  
economic-research.bnpparibas.com  
wages should push up core-inflation… but that’s not in the data for  
the moment.  
3- The decline of the public capital stock  
Public capital stock (% of GDP, lhs):  
Belgium  France  Germany  Netherlands  
Infrastructure quality in 2017 on the scale from 1 (highly underdeveloped)  
to 7 (extensive and efficient), rhs  
In fact, inflation excluding food and energy is still only slightly above  
1
% on a year-on-year basis. The acceleration in headline inflation in  
the last couple of months, to 2.5% and higher, was caused almost  
exclusively by the energy-component. The Belgian economy is very  
sensitive to variations in fuel-prices. As a consequence, the  
difference in headline inflation between Belgium and the Eurozone  
average over the last couple of months widened again from 0.2  
percentage points in March to 0.6 percentage points in August.  
6
6
5
5
0
5
6.6  
6.4  
6.2  
6.0  
5.8  
5.6  
5.4  
5.2  
50  
4
4
3
3
5
0
5
0
Structurally balanced budget out of reach  
The Michel government publicly took on the task of delivering a  
structurally balanced budget by the end of its term in 2019. As time  
progressed, the feasibility and political desirability of that goal has  
been questioned. Without additional measures, the High Council for  
Finance (HFC) expects the deficit to increase again from next year  
onwards. After finishing last year with a structural deficit of barely  
1
995  
2000  
2005  
2010  
2015  
Source: European Commission and World Economic Forum, BNP Paribas  
1
%, the HCF projects a troublesome 1.9% for 2020. In addition,  
suggest that the forming of a new government in 2019 could be very  
complicated.  
possible reforms of the eurozone, including a tighter application of  
the growth and stability pact, could spell further trouble for the debt-  
to-GDP-ratio, which is still well in excess of 100%.  
Growth slowing to potential  
For the remainder of this year we expect domestic demand to pick  
up the slack from the lower net trade contribution to growth. Private  
consumption should speed up, after sluggish growth in the first half  
of 2018, due to increases in both real wages and employment. In  
addition, we are expecting gross fixed capital formation to at least  
revert back to its long-term average growth rate of 3%, supported by  
the factors mentioned above. Even amidst concern with regards to  
the future shape of international trade relations, growth should  
progress along the lines of 1.5-1.6% for the next couple of years.  
Inflation, likely to come in at above 2.2% for the whole of 2018, is  
expected to decline to 1.5% by the end of 2019.  
Neglected public investment  
A stricter application of the growth and stability pact could have dire  
consequences for the Belgian infrastructure. Net government capital  
stock has been on the decline since 20 years and in proportion of  
GDP it is now well below that of the neighbouring countries. Also the  
quality of the Belgian infrastructure has deteriorated according to  
the World Economic Forum.  
Over the last couple of years, smart management of the outstanding  
public debt led to significantly lower yearly interest charges.  
Unfortunately, almost all the created budgetary space got eaten up  
by an increase in current expenditure, leaving yearly government  
investment at a paltry 2% of GDP. Since 1995, net government  
investment was on average close to zero.  
The Ministry of Finance has recently been pushing for more leeway  
for to scaling up the quantity and quality of the capital stock. It  
proposes excluding net investments for the calculation of the  
structural deficit and only taking into account replacement  
investments.  
That is unlikely to happen any time soon. Given the need to improve  
the budget deficit as part of the European Medium Term Objective,  
spending should remain tight. Moreover, with the 2019 federal  
election coming up, the centre-right coalition is unlikely to increase  
taxes further, as it is still struggling to shake off the bad reputation it  
earned because of the pension reforms.  
At the local council elections held on 14 October, the three Flemish  
parties of the centre-right coalition have maintained their position,  
whereas the fourth party, the Reform Movement (liberal, French  
speaking) of the Prime Minister, has lost ground. These results  
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