Belgium

Belgium

Economic update - February 2020

Economy ended 2019 on a strong note…

The first released figure for Belgian GDP growth in Q4 2019 was particularly strong, printing at 0.37% quarter-on-quarter, slightly below 0.42% growth in Q3. This brings the 2019 annual GDP growth rate at 1.4%. Belgium’s Q4 figure was much better than expected (our as well as the NBB’s forecast was at just 0.2%) and also compares relatively favourable to Q4 growth in the euro area (+0.1%) (see figure BE1).

As usual, the flash estimate did not provide any details on the composition of growth yet. One might think of three possible drivers for Belgium’s positive Q4 figure. First, consumption growth could have surprised on the upside. After the strong upswing in the savings rate in the first half of the year, the rate partially fell back in Q3 and likely declined again in Q4. Second, household investment in dwellings might have been stronger than expected as well, as sentiment in construction remained at a high level at year-end. And third, Belgium’s export growth possibly benefitted from the recent stabilisation of sentiment in European manufacturing.

We still believe that the household savings rate will not normalise fully towards its 2018 lows, partly due to the uncertainty related to a slow formation of a new federal government. This will limit the dynamism of private consumption growth in 2020. Moreover, the construction activity will start feeling the impact of the scrapping of the housing bonus in Flanders at the beginning of the year. Also, the contribution of net exports to real GDP growth will likely become more negative in 2020 than in 2019. The somewhat more upbeat sentiment in European manufacturing gave hope that the Belgian economy will get a little more tailwind from external demand in the period ahead. However, the recent outbreak of the coronavirus puts a question mark behind this positive signal.

…but 2020 got off to a bad start

The coronavirus outbreak may have a substantial impact on Belgium. Belgium’s direct exposure to China is limited as Belgian exports to China accounts for only about 2% of total Belgian exports. However, the Belgian economy is highly integrated in global supply chains, which might be disrupted by the virus outbreak. In particular Belgium’s strong ties with Germany may be harmful in this case as Germany is by far the largest European exporter to the Chinese market. Moreover, Belgium has the second largest port in Europe and is home to many international enterprises and a wide array of international logistics groups. All these factors make Belgium relatively vulnerable.

Quantifying the impact of the virus outbreak remains difficult as many scenarios are possible. For now, we assume, in line with our general economic scenario, that the coronavirus impact on the Belgian economy will be mild. Still we take into account a slight adverse impact on Belgium’s Q1 en Q2 2020 growth. Up till now, Belgium’s extra-EU exports held up relatively well, but likely they will soon follow the downward trend in intra-EU exports (see figure BE2), not only due to the coronavirus, but also due to general continued international headwinds. This motivates why we remain prudent regarding growth for the full year. We slightly increased our growth estimate for 2020 from 0.9% to 1.0%, but this exclusively results from higher than expected growth in Q4 2019.

 

KBC’s growth estimate is slightly more negative than the one recently published by the OECD (1.1%) in its country report on Belgium. The estimate compares, however, much more negative to the recent update of the Federal Planning Bureau’s forecast (1.4%). Our relatively negative outlook for 2020 is bad news for Belgium’s public finances. The combination of the derailing of the deficit in 2019 (to -1.9% of GDP), the lack of any policy action due to the political impasse, and the moderation of economic growth implies that the government deficit will likely approach the 3% critical limit in 2020.

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