Economic projections for Belgium – Autumn 2008

Since the publication of the previous forecasts in June 2008, the economic outlook has deteriorated very rapidly, both at global level and for Belgium. The financial tensions which emerged in mid 2007 turned into a serious crisis, and the contagion effects on the real economy proliferated, halting the growth of activity in the advanced economies and causing an abrupt fall in commodity prices. The slowdown in activity which began in mid 2007 as a result of weakening external demand was slightly less marked in Belgium than in the euro area. However, the plummeting confidence indicators show that the deterioration in the international economic situation and the worsening financial crisis will have a more widespread impact on the economy. As in the euro area, activity is predicted to decline in Belgium in late 2008 and early 2009, with a very modest recovery in the ensuing quarters. Thus, real GDP growth is projected to fall from 2.6 p.c. in 2007 to 1.4 p.c. in 2008 and –0.2 p.c. in 2009. Most expenditure categories are affected directly or indirectly by the global financial crisis, and will therefore reflect the sharp growth slowdown in 2009. Exports of goods and services are projected to fall, following the marked deterioration in external demand. After its expansion had been curbed in 2008 by the stagnation of real disposable income caused by rising inflation, private consumption is not expected to grow in 2009, the main factors being the stock market slide and the subsequent increase in the savings ratio, but more generally the deteriorating economic conditions and labour market prospects. In these gloomy circumstances in terms of demand, and in the face of the increased cost of raising finance via bank credit or via share issues, business investment is forecast to decline in 2009, after having been vigorous for more than four years. Investment in housing is likely to maintain the tendency to slow down which began in 2007. On the labour market, net job creation, which had been a significant factor bolstering the economy in the last three years, is likely to dry up in 2009. As an annual average, growth should remain positive thanks to the still favourable trend during 2008. Following a year-on-year increase of 1.8 p.c. in 2007 and 1.5 p.c. in 2008, the rate of employment expansion in persons is projected to fall to 0.2 p.c. in 2009, although supported by a further increased in service vouchers. This expected rise in the average number of persons employed in 2009 corresponds to a 0.3 p.c. reduction in the volume of labour, as firms prefer to start reducing the number of hours worked. The unemployment rate is projected to rise from 6.6 p.c. in the fourth quarter of 2008 to 7.1 p.c. in the fourth quarter of 2009. As an annual average, it is set to increase from 6.7 p.c. in 2008 to 6.9 p.c. in 2009. After having reach a peak of 5.9 p.c. in July 2008, average inflation is likely to diminish from 4.6 p.c. in 2008 to 1.9 p.c. in 2009 on the back of the deceleration in food price rises and the drop in oil prices. The health index is forecast to rise by 4.3 p.c. in 2008 and 2.3 p.c. in 2009. However, inflation is expected to increase in the case of services, particularly as a result of the indirect effect of the energy and food price shocks on transport and restaurants, the linking of certain service price increases to the general level of inflation, e.g. for rents, and the progressive incorporation of labour cost increases. Reflecting both the dip in labour productivity, following the weakness of economic activity in 2008 and 2009, and the continuing sustained increase in hourly labour costs, unit labour costs in the private sector are forecast to rise by 3.1 p.c. in 2007, 3.8 p.c. in 2008 and 3.2 p.c. in 2009, compared to an average annual increase of 0.7 p.c. from 2002 to 2006. For 2009, the growth of 3.3 p.c. in hourly labour costs, assumed for the purpose of this exercise, corresponds essentially to the expected effect of indexation, the latter taking time to respond to the acceleration in inflation measured by the health index. This assumption is in line with that adopted by the Central Economic Council Secretariat, taking account of the adjustment to the outlook for growth and inflation in recent months. It does not in any way anticipate the outcome of the current negotiations between the social partners. According to the latest information, public finances will end the year 2008 with a deficit of 0.9 p.c. of GDP. In the macroeconomic context described above, that deficit is likely to reach 1.7 p.c. of GDP in 2009. The downward trend in the public debt ratio is expected to be interrupted in 2008. At the end of this year, the public debt is forecast at 87.8 p.c. of GDP, or around 4 percentage points above its level at the end of 2007. This increase is due to loans which the Belgian State contracted to finance injections of capital into its financial institutions and the loans which it granted to them. In 2009, the public debt ratio is likely to begin falling again, although more slowly than in previous years taking account of the relative weakness of nominal GDP growth and the increased borrowing requirement.