Belgian economic update February 2019
The preliminary flash estimate released by the National Accounts Institute showed a non-annualised GDP growth of 0.3% qoq in Q4 2018 (1.2% yoy). Disappointing industrial production and export data towards the 2018 year end suggest that foreign trade has been the main drag on Q4 growth. It was the fourth quarter in a row that Belgian real GDP rose by a meagre 0.3% compared with the previous quarter. As in the third quarter, quarterly economic activity in the final quarter of 2018 nevertheless grew slightly faster than in the euro area (+0.2%, see figure BE1). Annual average growth in 2018 reached an estimated 1.4% in Belgium, down from 1.7% in 2017. Belgian growth in 2018 again was below the euro area figure (1.8%), as was the case in the previous four years.
Figure BE1 - Belgian GDP growth in Q3 and Q4 above the euro area figure (volume, qoq change in %)
A weak start to 2019
Confidence indicators in the first month of 2019 pointed at a weak start of the new year. Both consumer and producer sentiment weakened a little further in January. Worsening consumer confidence was largely due to more pessimistic expectations about unemployment. The deterioration of the NBB business barometer in recent months has been visible across sectors. Among sectors considered, the building industry is the only where the smoothed curve, which reflects the underlying cyclical trend, is still pointing upward. Demand expectations in the building industry in particular remained strong throughout the year 2018 till January 2019.
The big question is how much domestic demand can offset the expected waning of export growth in 2019. Most growth hopes rest with the consumer. Real income growth will be spurred by still sound labour market conditions, rising wages, lower inflation and personal income tax cuts. This suggests that consumption growth should remain quite vigorous in the coming quarters. Investment is also forecast to continue growing amidst sound profitability of firms and favourable financing conditions. A survey published by the NBB in mid-January indicates that entrepreneurs in the manufacturing industry indeed expect to see their investment rise in 2019. The figure reported (a rise by around 10%) needs to be interpreted with caution however, as the gap between the predictions made in advance and the actual amounts have often proven to be quite big in the past.
For the moment we stick to our outlook for Belgian real GDP growth (i.e. 1.2% in 2019 and 1.1% in 2020), despite the new lowering of our GDP forecast for the euro area (now at 1.1% in 2019 and 1.4% in 2020). In recent weeks, other forecasters, such as the Federal Planning Bureau and the European Commission (EC), also cut their growth expectations for the Belgian economy, as we did in January. Our figures however still are at the lower bound of forecasts. E.g., the consensus forecast for Belgian growth in 2019 currently is 1.4%, the recently updated forecast of the EC equals 1.3%.
We expect Belgian inflation to ease to 1.8% in 2019 and 1.7% in 2020 (according to Eurostat’s harmonised definition), down from 2.3% in 2018. Inflation dropped already from a peak of 2.8% in November to 2.0% in January according to the national CPI definition (January’s harmonised figure is not yet available). The drop in the headline rate in recent months was driven by lower energy price inflation, on the back of falling oil prices. The core rate (based on harmonised data) on the contrary went up slightly, from a low of 1.1% in April last year to 1.4% in December. Both the headline and core rate continued to surpass the euro area figure.
Box 3 - Keeping Belgian public finances on track
In 2018, the Belgian budget achieved its best result since 2007, with a deficit of 0.8% of GDP. The improvement was mainly due to the sharp increase in advance tax payments by companies and the self-employed against the background of higher fines for no or insufficient advance payments. As this is a temporary factor, the budget deficit will increase again in 2019 (on a no-policy change basis). The National Bank of Belgium (NBB) and the Federal Planning Bureau estimate the deficit for this and next year at 1.6% and 1.7% of GDP respectively, and see the figure deteriorate further thereafter to reach deficits of 2.0% in 2021 and 2.6% in 2024, respectively.
During the past legislature, the budget consolidation was rather limited. The reduction in the deficit in 2014-2018 (from 3.1% to 0.8% of GDP) was mainly due to lower interest payments (1.0%) and favourable economic conditions and one-off measures (0.6%). The effective budgetary policy, which is reflected in the change in the structural primary balance, contributed only 0.7% to the reduction in the deficit. Although the overall balance improved relatively more, the consolidation by the Michel government (2014-2018) was even slightly smaller than that of the previous Di Rupo government (2011-2014) (see figure B3). While the Di Rupo government mainly opted for tax increases, the Michel government reduced expenditure. The budgetary room for manoeuvre that was created was filled by tax cuts and less by a strengthening of public finances.
In order to guarantee a sufficient further reduction in the Belgian public debt, a sustained consolidation is still necessary. Due to the fall of the federal government, the 2019 budget could no longer be approved and an emergency budget with ‘provisional twelfths’ was introduced. In 2019, the government can spend one twelfth of the 2018 budget every month. This means that 2019 will be a lost year in terms of further improvement of public finances. Other factors are also worrying about the development of the budget balance in the coming years. Economic growth is slowing down and interest rates are unlikely to remain at their current historically low level for a prolonged period. Although reforms have significantly reduced the projected costs of ageing, they will also weigh on finances.
Figure B3 - Belgian public finances 2011-2018 (change over
periodsconsidered, in percentage points of GDP)
(*) Corrected for the impact of the business cycle and one-off
Source: KBC Economics based on AMECO (EC) and NBB