Economic projections for Belgium – Spring 2007

Since the projections published in December 2006, the international environment has remained buoyant. GDP growth in the euro area, which proved stronger than previously expected over the last months, should keep going at a solid pace in 2007. In Belgium, economic activity has been particularly strong in 2006. It should slow down slightly in 2007 and 2008, to return to a rhythm more in line with potential. Overall, real GDP growth is projected to decline from 3 p.c. in 2006, the highest rate for six years, to 2.5 p.c. in 2007. It is expected to be 2.2 p.c. in 2008. Over the whole period covered by the projections, growth should turn out to be more balanced than in 2006, backed by both foreign demand and domestic demand. In particular, although slowing down somewhat in comparison with the vigorous expansion recorded in 2006, private consumption and business investment should expand in line with still supportive demand, income and labour market conditions over the period 2007-2008. Actually, the rate of employment growth appears to be more sustained than in previous upturns. Following an increase of 46,000 units in 2006, domestic employment should grow by another 115,000 jobs or so over the period 2007-2008. With a cumulative decline of 60,000 jobless, the highest number over a two-year period since 1999-2000, the harmonised unemployment rate is projected to fall from 8.2 p.c. in 2006 to 7.2 p.c. in 2008, prolonging a downward movement that begun in 2006. Estimated on the basis of the HICP, overall inflation is forecast to fall markedly, from 2.3 p.c. in 2006 to 1.6 p.c. in 2007 and 1.8 p.c. in 2008. This drop can be explained by the moderating influence exerted by the energy component of the index, stemming from some appeasement of the oil price evolution and from the downward impact of the liberalisation of the gas and electricity markets in Brussels and Wallonia, as well as the new method of recording these energy prices in the consumer price index. The underlying trend in inflation is expected to rise moderately, from 1.6 p.c. in 2006 to 1.9 p.c. in 2007, before falling back to 1.7 p.c. in 2008. The slight acceleration in 2007 is almost exclusively due to increases in excise duties on tobacco and the levy on packaging. Reflecting the slowdown in labour productivity alone, as a result of the net rise in employment, unit labour costs in the private sector are projected to increase somewhat, rising from 1.1 p.c. in 2006 to 1.6 p.c. in 2007 and 2008. Moreover, the growth in hourly labour costs is expected to dip slightly from the 2006 level, coming down from 2.7 p.c. to 2.4 p.c. in 2007 and 2.6 p.c. in 2008. For both of these years, the cumulative increase corresponds to the 5 p.c. target set in the central wage-bargaining agreement, in the absence of information on the outcome of the wage negotiations being conducted in the various joint committees at sectoral level. After showing a surplus of 0.2 p.c. of GDP in 2006, general government accounts are likely to show a slight deficit, of 0.1 p.c. of GDP this year and 0.2 p.c. in 2008. Interest charges should continue to drop and tax revenues are expected to benefit from the promising economic outlook, but these elements are more than entirely offset by the disappearance of the favourable impact of nonrecurrent factors, as well as by a deterioration of the structural primary balance in 2007. The public debt ratio will continue to fall gradually, coming down by some 6 percentage points of GDP over the two years of the forecasting period, to reach 82.7 p.c. of GDP in 2008.