Weaker Belgian economy undermines labour market ambitions

Economic opinion

In the first half of 2019, employment growth in Belgium continued to be fairly strong. This is surprising, as the business cycle has been deteriorating for some time now. The discrepancy is explained by the fact that fluctuations in economic activity generally only have an impact on employment developments with a delay averaging around three quarters. In the meantime, many other indicators already point to the fact that the Belgian labour market has passed its peak and job creation is slowing down. At a time when the economic situation is again deteriorating, the planned increase in the employment rate during the next legislature will mainly have to come from measures that will bring about a structural improvement in the functioning of the labour market.

Job creation figures show that the Belgian labour market still performed strongly in the first half of 2019. In the first and second quarter, domestic employment increased by 1.6% year-on-year. This figure is an acceleration compared to the previous quarters and even the highest annual rate of increase since the summer of 2008. This development is surprising at first sight, as the general economic situation has been deteriorating for some time now. The reason for this is the worsening in the international climate, mainly as a result of the trade war and the Brexit impasse. In the second quarter of this year, real GDP growth in Belgium was only 1.2% year-on-year, coming from a peak of 1.9% in the fourth quarter of 2017.

Labour market is late cyclical

Although employment growth and economic growth in Belgium have in the past been positively correlated, the peaks and troughs of both are generally not in line with each other. Fluctuations in economic activity generally have a delayed impact on employment growth. This is because companies often react to a slowdown (rebound) in demand first by adjusting working hours before laying off (hiring additional) workers. Changes in overtime worked, the use of part-time work or the application of the temporary unemployment system allow them to better use their workers in line with production needs. As the economy picks up, companies will initially adopt a wait-and-see attitude towards new recruitments until there is more certainty about the sustainability of the recovery. Conversely, once companies have made efforts to find the right workers, they will not immediately divest themselves of them at the first signs of a slowdown in activity growth, all the more so as costs are associated with redundancies and possible re-entry into the labour market.

Over the period 1995-2019, the simultaneous correlation between employment growth and real GDP growth in Belgium, at 0.30, was rather low. However, the statistical correlation is significantly higher and maximal (i.e. a correlation of 0.75) when the real GDP growth series is three quarters ahead of that for employment growth (Figure 1). To put it another way, the dynamics of the labour market in Belgium have reacted to economic growth with a delay of about three quarters on average over the past few decades. 

Figure 1 - Real GDP growth and employment growth in Belgium (% change compared to a year earlier)

Source: KBC Economics based on NBB.Stat

In practice, the exact reaction time depends on the intensity and expected duration of the economic slowdown (recovery), as well as on the ability of companies to deal flexibly with labour deployment. Shortages in the labour market may also disrupt the late-cyclical dynamics of employment. In a tight labour market, it is not easy to find a suitable labour force for certain jobs. Companies with sufficient resilience will then be less likely to lay off in the event of a downturn or may even use the dip to recruit. Furthermore, technological transitions can also lead to a structurally greater need for more personnel to implement adjustment processes. All this may explain why job creation remained strong in the first half of the year.

Over the peak

Based on the relationship in Figure 1, the dynamics of employment growth should have been reversed in the meantime. This will likely be reflected in the third quarter figures on domestic employment, which will not be published until later. The latest figures on interim employment already clearly indicate this change. Its development is generally seen as a good leading barometer for the labour market. In contrast to employment, peaks and troughs in interim work largely coincide with peaks and troughs in economic growth (Figure 2). Falling demand for interim workers is usually the precursor to a decline in the number of permanent recruitments, and vice versa. When companies are not completely certain of a cyclical upturn, they prefer to use interim workers rather than directly recruit permanent staff. If the economic downturn is worse than expected, temporary workers are initially terminated. The latter seems to be increasingly the case in recent quarters. In fact, the figures for interim employment worsened remarkably more than those for economic growth.

Figure 2 - Real GDP growth and growth interim employment in Belgium (% change compared to a year earlier)

Source: KBC Economics based on NBB.Stat and Federgon

In the meantime, other indicators are also showing signs that the peak in the Belgian labour market is behind us. For example, the employment prospects of companies (a subcomponent of the NBB business survey) have been deteriorating for some time now. The turnaround is also noticeable in the unemployment figures. The number of unemployed is falling less and less sharply on an annual basis (the number of temporary unemployed is even increasing) and the unemployment rate is bottoming out. In addition, the number of vacancies is now lower than a year earlier.

We are assuming that in the course of this and next year some 30,000 and 10,000 net jobs will be created in Belgium, compared to almost 70,000 in 2018. As a result, annual average employment growth will slow down from 1.3% in 2018 to 1.1% in 2019 and 0.2% in 2020. The economic downturn in the labour market makes it difficult for the Flemish government negotiators and the new Walloon government to raise the respective regional employment rates by 5% during the next legislature. In 2014-2018, the Flemish and Walloon employment rates increased by only 2.7% and 1.9% respectively. This was done against the background of a favourable economic climate. At a time of economic slowdown, the aim of increasing the employment rate must be achieved mainly by means of measures that will bring about a structural improvement in the functioning of the labour market.

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