Belgian economic update December

Q3 growth revised downward

In Q3 2018, Belgian real GDP rose by a non-annualised 0.3% over the previous quarter. This is a bit weaker than the preliminary estimate reported earlier (0.4%) and similar to growth in the two first quarters of the year, which also came out at 0.3%. Looking at GDP components, the most remarkable fact in the Q3 figures was the fall in household consumption and in business investment. The development in business investment was influenced by a number of specific transactions, however, involving sales and purchases of ships to and from abroad. Without these transactions, growth in business investment would have been slightly positive. These shipbuilding transactions also exerted an upward effect on exports and imports of goods and services. The largest contribution to Q3 growth came from net exports (+0.5%) (figure BE1).

Figure BE1 – Contributions to Belgian real GDP growth (% change quarter-on-quarter, non-annualised)

Source: KBC Economics based on NBB.Stat (2018)

The strong export performance is a positive signal amidst globally raising trade tensions. However, export orders indicators point to a weakening in export performance in the near future.
Inventories made a negative growth contribution in each quarter of 2018 till Q3. Consequently, the contribution from the changes in inventories to real GDP growth for the full year 2018 will probably be as big as -0.3 or -0.4 percentage point. This illustrates that inventories can have a substantial impact on the economic cycle. Despite this importance, little attention has generally been paid to this GDP component. One reason for this is that the pattern of inventory formation and reduction by businesses is harder to explain than the other GDP components. This is partly due in turn to the fact that what we refer to as inventory formation is actually an adjustment variable, namely the difference between production and sales. In practice, alongside inventory movements, this also comprises statistical discrepancies, which for the most part cannot be explained logically.

Meanwhile, Belgium’s labour market continues to perform very well. Domestic employment growth in Q3 compared to the previous quarter was at 0.4%. This is a slight acceleration compared to the 0.3% qoq growth in the first and second quarter. Looked at from a longer perspective, almost 250.000 net jobs have been created in Belgium between spring 2013 and autumn 2018. Real GDP growth during the past economic upswing has been particularly labour intensive. In 2014-2017 each percentage point of real GDP growth generated 0.64 percent growth in employment on average, which is higher than in previous recovery periods.

Belgian inflation strongly up

Belgian headline inflation, as measured by the harmonised index of consumer prices (HICP), was running at 3.2% in October. Inflation based on the national CPI stood at 2.8% that month (figure BE2).

Figure BE2 – Consumer price inflation in Belgium (year-on-year change in %)

Source: KBC Economics based on Eurostat, FOD Economie (2018)

The large difference between the two is mainly due to the larger weight of fuels and energy sources in the HICP and to the fact that a moving average is used for domestic heating oil in the national CPI. The product group with the biggest upward effect in inflation in recent months was ‘housing, water and energy’. Despite the notable increase in the headline rate, Belgian core inflation (excluding energy and unprocessed food prices) has remained rather muted and unchanged at 1.6% since July.

In recent months, the headline inflation gap with the euro area has widened substantially again. The higher inflation in Belgium therefore remains a point of attention, as it can result in second-round effects in the economy through the system of automatic wage indexation. We expect average inflation in Belgium to decline, from 2.1% in 2018 to 1.8% in 2019. This should narrow the inflation gap between Belgium and the euro area from 0.7 and 0.3 percentage point in 2017 and 2018 to 0.1 percentage point in 2019.

Political storm

During the weekend of 8-9 December, Belgium’s federal government lost its majority after coalition partner N-VA made it clear it couldn’t support the UN Global Compact for Migration. Prime minister Charles Michel is now heading a minority administration and called for dialogue with parliament, with the intention to avoid a standstill of the country until the 26 May general elections. Early elections remain a possibility though and would create a time gap between the federal and regional/European elections. The economic/financial risks related to the current political situation are not considered as being high, as illustrated by the stable Belgian-German 10-year yield spread in recent days.

Risks can nevertheless increase when a political standstill in the months to come would go hand in hand with the realisation of other (external) risks (e.g. a hard Brexit). The 2010-2011 political gridlock illustrated that there are risks linked to Belgium’s political/regional divides and complex institutional structure. Following the general elections held in June 2010, government negotiations and formation took a total of 541 days. That period of tense communal relations went hand in hand with Europe’s sovereign debt crisis, in which Belgium was particularly involved through Dexia. This brought Belgium on the radar screen of financial markets, with rating agencies downgrading the creditworthiness of Belgium in 2011. The situation at that time was really exceptional, though, so a replay of a 2011-like scenario in 2019 seems rather unlikely.

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