Economic update - May 2020

Ugly start to the year

According to the NBB’s flash estimate, Belgian real GDP was down 3.9% in Q1 2020 compared with the previous quarter. The figure was the worst outturn in the history of quarterly national accounts data. The previous low was -2.2% in Q4 2008 during the period of Great Recession. The drop in Belgian activity in Q1 was worse than expected and roughly equal to that experienced in the euro area (-3.8%). The NBB explicitly mentioned that the Q1 flash figure is shrouded in greater uncertainty than is normally the case owing to the lack of data for March, the month when Belgium went into shutdown. This suggests an elevated risk that the final GDP figure for Q1 might subject to a meaningful revision.

Meanwhile, high-frequency data indicate that economic activity is experiencing an unprecedented hard stop this quarter. In the weekly survey published by the Economic Risk Management Group (ERMG), Belgian companies report a significant drop (i.e. by almost one third) in their sales compared to the pre-crisis period. Fortunately, the drop has been easing slightly in recent weeks, which gives a cautious signal that economic life is very slowly recovering. That is also the message that comes out of other real-time indicators. Total electricity consumption in Belgium during working hours moved a bit higher again since mid-April and Google’s mobility reports for Belgium reveal that gradually less Belgians are staying at home during the past few weeks.

Now that lockdown measures are being lifted somewhat faster than expected, Q2 activity should collapse less than previously thought. Nevertheless, we still foresee Belgian GDP to shrink by 16% in Q2, meaning that the contraction will be four times bigger than that in Q1. Moreover, while last month we still saw a sharp rebound following the shock, we now believe the recovery will be shallower and the crisis impact more enduring (see figure BE1). There are several factors that are likely to delay and weaken the recovery. Consumption will remain muted as uncertainty lifts precautionary savings and measures of social distancing and consumers’ cautiousness hinder shopping. On the side of businesses, the higher risk of bankruptcy and postponement of investments (as indicated in the ERMG survey), as well as the massive deterioration in the international economic environment increase the danger that Covid-19 causes more permanent damage to the Belgian economic fabric.

Weaker 2021 annual growth

The changed quarterly path of real GDP doesn’t imply an altered forecast for annual growth in 2020. On balance, the worse than expected Q1, a less severe contraction in Q2 and a more sluggish recovery thereafter still makes us believe the Belgian economy will shrink by 9.5% this year. The weaker recovery from Q3 2020 on does however have an impact on 2021 annual growth, which we now see at only 5.7% (was 12.3% in our April scenario). This will leave real GDP in Q4 2021 4.4% below the Q4 2019 level. The risks continue to be strongly lifted to the downside. The main uncertainty remains the virulence of the virus as the lockdown eases. That is something we should have better evidence on in in the coming weeks or months. Any resurgence in the number of Covid-19 cases will be a key determinant of the path and strength of the recovery.

The updated scenario also implies a more pessimistic view about the labour market. For the moment, the huge fall in labour demand is being reflected mainly in a massive take-up of temporary unemployment. Nevertheless, the year-on-year change in the number of job seekers has clearly been up as well in March and April, especially in Flanders (see figure BE2). This makes us believe that the Belgian unemployment rate will rise to 6.7% by the end of the year, instead of 6.2% thought in the April scenario. In this scenario, an estimated 80.000 people will lose their job in 2020.

Belgian HICP inflation fell to 0.0% in April, from 0.4% in March. Surprisingly, national CPI inflation held up much better (0.6% in both April and March). This difference is likely due to disruptions in price collection, which makes it difficult to draw up the price index. Because of Covid-19, a large share of prices had to be imputed in April. This means that for some items where no transactions took place (packages holidays, restaurants, hairdressers, etc.) prices from the previous period (adjusted for seasonal patterns) were used. For sectors where physical outlets have been closed, data had to be collected online. Core inflation was still a lot higher (1.6%) but is expected to decline due to sluggish demand. In conjunction with the impact of persistently low energy prices this will push Belgian headline inflation in negative territory in coming months, bringing the annual HICP inflation for 2020 at -0.6%.

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