Q3 Belgian GDP growth came in at 2% q/q, which is well above consensus. GDP thus exceeded its pre-Covid level for the first time since the start of the pandemic. For this year, we estimate the growth rate to reach 6.1% in annual average terms, with a slower but still above-potential growth rate of 3.1% expected for next year. As it stands, the Belgian economy looks to have avoided additional scarring; however, with elevated public debt levels entering the limelight once again, the De Croo government has its work cut out.
After shrinking by 5.7% in 2020, the Belgian economy completed its recovery to pre-Covid levels in Q3. Private consumption was the final component of GDP to exceed the level reached at the end of 2019. A new phase of the recovery, one of slowing but still above potential growth, seemed to be underway. However, the picture became much murkier following the emergence of the new Omicron variant , with the number of new daily cases rising strongly in Belgium and neighboring countries once again.
GROWTH & INFLATIONThe risks to our outlook are clearly skewed to the downside, even if it remains to be seen how much of a direct impact (increased social distancing measures) and indirect impact (confidence channel) the virus will have on activity. Our nowcast for Q4 implies a significant slowdown in growth, from 2.0% q/q to a meagre 0.3% q/q. The recent announcement of more stringent measures right before the Christmas holiday period puts the country in a situation similar to where it was one year ago. At that time, the economy shrunk in Q4 2020, a scenario that cannot be ruled out for this quarter.
Belgian inflation, as measured by the Eurostat Harmonised Index of Consumer Prices (HICP), reached 7.1% y/y in November (flash estimate). This is the highest number on record since the series was created in 1992. Like elsewhere, the bulk of the increase is the result of booming energy prices.
Consumer confidence in November came in at its lowest level since April, when more stringent social distancing measures were in place. Compared to early 2021, households are more worried about their financial situation. They are also reporting a decrease in their ability to save money. A recent study by the National Bank of Belgium (NBB) sheds light on the asymmetric impact of the Covid crisis on savings. On aggregate, forced saving and (to a lesser degree) precautionary saving led to an increased savings rate compared to the pre-Covid situation. But for those families with the lowest incomes, the savings rate did not increase during the crisis. This implies that the majority of the increase in savings was generated by high-income households. Their lower propensity to consume suggests that the much-anticipated “pent-up demand” may not be forthcoming.
Regarding the labor market, households are now more optimistic than they were at the beginning of this year. Concerns surrounding employment have almost completely disappeared in the latest consumer surveys. This is supported by the unemployment rate declining during most of the year and total employment reaching a record high of 5 million in Q3.
Business confidence remained stable in November, with construction being the most optimistic sector. The services sector meanwhile reported a slightly bleaker outlook, with an ad hoc survey by the Economic Risk Management Group (ERMG) last month showing that almost half of all surveyed companies are experiencing staff shortages. A lack of input material (40%) and higher input costs (22%) are also key worries for Belgian businesses.
The budget deficit worsened from 1.9% of GDP in 2019 to 9.4% in 2020. With revenue more or less stable as a portion of (declined) GDP, the increased expenditure hit the Belgian budget hard. The situation improved somewhat this year, mostly as a consequence of lower outlay on fighting the economic impact of the Covid-19 crisis. However, even against a backdrop of declining debt service, the deficit remains stubbornly high. The NBB expects a primary deficit of more than 3% of GDP by 2023, compared to a balanced position in 2019.Reversing that situation will not be an easy task for the Government.
