Relatively strong Flemish growth hides productivity problem

Economic opinion

After the regional growth differences in Belgium virtually disappeared in 2000-2008, the Flemish economy once again grew significantly faster than the Walloon and Brussels economies during and after the financial crisis (2009-2018). Throughout that decade, both employment and productivity growth in Flanders were on average higher than in Wallonia and Brussels. Since 2008, Flanders has also grown more strongly on average than the euro area. However, this was only due to the much stronger growth in employment. Flemish productivity growth indeed slowed down more sharply than that in the euro area and is therefore a major cause for concern. This is even more the case in Wallonia and Brussels, where productivity growth in 2009-2018 (almost) disappeared completely.

Between 2008 and 2018, the gross regional product in Flanders grew by an average of 1.3% per year in real terms. In Wallonia and Brussels growth was only 0.7% and 0.6% respectively per year. After the regional growth differences in Belgium virtually disappeared in 2000-2008, Flanders’ systematic post-war growth lead vis-à-vis the other two regions thus returned (figure 1). Hence, there was no convergence of the three regional economies. The relatively better performance of Flanders manifested itself over the entire period 2008-2018.

The Great Recession of 2009 was much less deep and the recovery that followed was stronger. Flanders also continued to show limited growth during the European sovereign debt crisis at the beginning of the decade, while Wallonia and Brussels entered a new recession. Finally, the growth recovery that took shape from 2013 onwards was also stronger in Flanders (figure 2).
 

The better performance of Flanders during the two consecutive crisis periods - the Great Recession and the European debt crisis - is particularly striking, because one would expect that, being a more open economy, the region would have been relatively more sensitive to the then international economic turnaround. The regional growth figures for 2018 recently published by the Belgian Institute for National Accounts are also striking (those for 2019 are not yet available). It was again expected that the Flemish economy would have suffered relatively more than the Walloon and Brussels economies from the international, and specifically European, economic slowdown that manifested itself in the course of the year. Nevertheless, Flemish growth in 2018 (1.7%) was again higher than that of Wallonia (1.3%) and Brussels (1.0%). One explanation is that the higher Flemish growth was mainly due to the service sectors. The value added of Flemish industry did fall in 2018 in line with the international downturn, while in Wallonia it increased slightly.

Productivity growth a cause for concern

Simply put, economic growth is the sum of employment growth and productivity growth. The fact that Wallonia and Brussels have again grown weaker than Flanders since 2008 was due to both their lower employment growth and their lower productivity growth (figures 3 and 4). In both regions, productivity growth was virtually non-existent. In Flanders, productivity growth also fell back, but remained clearly positive on average over the recent period under review. Nevertheless, the Flemish figure also fell below that of the euro area. The fact that the Flemish economic growth since 2008 was on average higher than that in the euro area was therefore only due to the relatively much stronger growth in employment.

In the coming years, demographics will exert downward pressure on the labour potential. Employment growth can therefore no longer be expected to remain the driving force for future GDP growth. In Flanders, in particular, further job creation is already being hampered by unprecedented labour market tightness. In order to support future potential employment growth, public policy should therefore strongly focus on activating the remaining labour reserve.

But this does not suffice. It is also the government’s task to create the most favourable environment possible for companies to innovate and work more efficiently, so as to boost productivity growth. This applies not only to Flanders, but even more so to the other two regions. The measures that can help in this respect are very diverse and have been indicated by institutions like the NBB and the OECD for quite some time now. They include: stimulating entrepreneurship and competition, reducing the strict regulations in the service sectors, more knowledge sharing and a better dissemination of technology, the introduction of best practices in management, investment in high-quality infrastructure and a high-performing education system, the strengthening of a culture of lifelong learning... Much remains to be done.

Disclaimer:

Any opinion expressed in this KBC Economic Opinions represents the personal opinion by the author(s). Neither the degree to which the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances of realisation can be guaranteed. Any forecasts are indicative. The information contained in this publication is general in nature and for information purposes only. It may not be considered as investment advice. Sustainability is part of the overall business strategy of KBC Group NV (see https://www.kbc.com/en/corporate-sustainability.html). We take this strategy into account when choosing topics for our publications, but a thorough analysis of economic and financial developments requires discussing a wider variety of topics. This publication cannot be considered as ‘investment research’ as described in the law and regulations concerning the markets for financial instruments. Any transfer, distribution or reproduction in any form or means of information is prohibited without the express prior written consent of KBC Group NV. KBC cannot be held responsible for the accuracy or completeness of this information.

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