Economic projections for Belgium – Spring 2006

The backdrop to the forecasting exercise paints a contrasting picture : the initial situation of the projections appears slightly more favourable than in the previous forecast exercise of autumn 2005, with the Belgian economy displaying undoubted momentum at the beginning of 2006. However, a number of conditions relating to the external environment are likely to be less favourable for growth and inflation. In Belgium, after having increased by 0.8 p.c. during the first three months of 2006, economic growth is set to slow gradually throughout the year due to the rise in the price of oil, the recent appreciation of the euro against the dollar, the rise in interest rates and a weakening external demand. All in all, real GDP growth should amount to 2.5 p.c. in 2006 and 2 p.c. in 2007. Most of the domestic demand categories, as well as net exports, are set to contribute to GDP growth, with the composition of growth being more balanced than in 2004 and 2005. As a result of labour hoarding, the economic recovery is highly unlikely to lead to a marked increase in the rate of job creation but is instead expected to bring about a higher utilisation rate of the workforce. After having increased by 39,000 units in 2005, the number of persons in employment in Belgium should increase further, by some 80,000 units over 2006 and 2007. With job creation corresponding broadly to the increase in the population of working age, the harmonised unemployment rate is set to fall only very slightly, from 8.4 p.c. in 2005 to 8.2 p.c. in 2006 and 2007. Overall inflation movements in Belgium will mainly be determined by the developments of energy prices, with the energy component continuing to make a key contribution to the rise of the harmonised index of consumer prices until the early months of 2007. On annual average, overall inflation is expected to fall, from 2.5 p.c. in 2005 to 2.4 p.c. in 2006 and 1.9 p.c. in 2007. The underlying inflation trend should only increase moderately, to 1.6 p.c. at the end of 2007, due, among other things, to moderate labour costs developments. Hourly labour costs are likely to increase by 4.2 p.c. for the years 2005-2006 taken together, which is less than the nominal norm of 4.5 p.c. endorsed by the government. As far as 2007 is concerned, the growth rate in hourly costs is assumed to be in line with projected inflation. After having shown a limited surplus in 2005, of 0.1 p.c. of GDP, the general government financing balance should turn negative from 2006, by 0.3 p.c. of GDP that year and by 1.2 p.c. in 2007. This forecast does not take into account the new measures which would be adopted by the government during the next few months, on the occasion of the additional budget review announced by the federal government for 2006 and within the framework of the 2007 budget. Interest charges should continue to fall and tax revenues are expected to benefit from the promising economic climate, especially in 2006, although these elements are more than offset by the disappearance of the favourable incidence of non-recurring factors. Despite the budget deficits forecast for 2006 and 2007, the debt ratio should continue its downward trend during these two years.