Economic update Belgium - January 2019

Downward adjustment of GDP growth

Manufacturing data in Belgium disappointed towards the 2018 year-end, in line with the slowdown seen in Germany’s manufacturing sector. In fact, the dynamics of Belgian industrial activity have been weakening already since mid-2017, with the declining trend in Belgium even being a bit more pronounced than in Germany (see figure BE1).

Figure BE1 – Industrial production (excl. construction, volume, yoy % change, 3 mma)

Source: : KBC Economics based on NBB.Stat; Statistiches Bundesamt Deutschland

Other incoming data in recent weeks have been weak as well. Another disappointment, in particular, came from consumer confidence, which nosedived in December and fell back to its lowest level in two years. This was due to consumers expecting the general economic situation to get significantly worse over the next twelve months. Consumers’ fear of a rise in unemployment has also grown, albeit to a lesser extent.

Our worsening GDP growth outlook for the eurozone has prompted us to lower our growth expectations for Belgian GDP in 2019 as well, by 0.2 percentage points compared to the December estimate. So, currently we expect real GDP growth in Belgium to reach 1.2% in 2019 and 1.1% in 2020. These figures are below the growth projections published by the National Bank of Belgium (NBB) in mid-December (1.4% and 1.2%, respectively). If the KBC scenario proves to be true, this would mean that real GDP growth falls below the potential growth rate of the Belgian economy, which is estimated by the European Commission at 1.3%.

Growth still supported by the domestic sector

The declining path of GDP growth over the projection period is due particularly to weaker export growth. In our scenario, net exports will weigh on growth in 2019 and 2020 by 0.2 and 0.4 percentage points, respectively. The domestic sector will continue to support GDP growth, however. In our opinion, the dynamics of household consumption in the coming quarters will likely not be as bad as most recent sentiment data suggest, on the contrary. In a KBC Economic Opinion, published in September 2017, we showed that the correlation between the change in consumer confidence and consumption growth has been surprisingly low in the latest decade. Therefore, caution is needed when drawing strong conclusions about the state of the economy on the basis of the consumer confidence indicator.

It is more important to look at the ‘hard’ determinants of consumption, being especially the development of real household disposable income. Purchasing power of Belgian households will even grow quite strongly in 2019 (i.e. by an estimated 2.2%), supported by several factors. First, although it is gradually losing momentum, employment growth likely will remain vigorous in 2019. Second, wage growth is accelerating, partly resulting from persistent labour market shortages. Third, the tax shift will drive up income growth particularly in 2019 (the NBB estimates the contribution at some 0.5%). Finally, real income growth is also bolstered by lower inflation, due to declining energy prices. We believe Belgian inflation will come out at 1.8% in 2019, down from an estimated 2.4% in 2018.

Sharp downward revision of unemployment

Once again, Eurostat revised figures for Belgium’s harmonised unemployment rate, which measures the actual number of job seekers on the basis of a survey. According to the former series, the unemployment rate in September 2018 was 6.3%. The revised series now says it was only 5.5% that month. The latest figure, for November, stood at 5.6%. Eurostat gives no specific explanation for the downward revision, but most likely it has to do with new survey data that came available for Belgium’s labour force, which is in the denominator of the ratio. With the new data, the decline in Belgian unemployment looks even more impressive than before (see figure BE2). The rate reached towards the end of 2018 is down 3.2 percentage points from the peak in December 2015 and the lowest level seen since 1976.

Figure BE2 - Belgian unemployment rate (harmonised and seasonally adjusted, in %)

Source: KBC Economics based on Eurostat

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