Economic projections for Belgium – Autumn 2007

Since the publication of the Bank’s spring projections, the growth of activity and employment has proved robust in the euro area and in Belgium in the first half of 2007. However, the external environment has become more uncertain, owing to the financial market turmoil, the appreciation of the euro and the rising cost of energy and agricultural raw materials. Maintaining its 2006 momentum, economic activity in Belgium remained buoyant during the first half of 2007, expanding at a rate of 0.7 p.c. per quarter. GDP growth dropped to 0.4 p.c. in the third quarter, confirming the hitherto moderate fall in the synthetic indicator of business confidence. The slower rate of expansion looks set to continue in the fourth quarter and in the first part of 2008. Overall, real GDP growth is projected to decelerate from 2.9 p.c. in 2006 to 2.6 p.c. in 2007 and 1.9 p.c. in 2008. The vigour of the Belgian economy at the beginning of 2007 was due mainly to the boost from domestic demand. In particular, firms and households were still resolutely increasing their fixed capital investment at the time, as they had in the preceding years, while private consumption was expanding significantly. These two factors are expected to weaken at the end of the year and in 2008. Supported by the robust activity pace, net job creations increased in the first half of 2007. Employment is projected to grow by 1.6 p.c. in 2007 and 1 p.c. in 2008, representing net cumulative growth of almost 115,000 jobs in the two years. Taking account of the expected movement in the labour force, the decline in the unemployment rate which began in April 2006 should continue, bringing that rate down from an average of 8.3 p.c. in 2006 to 7.7 p.c. in 2007 and 7.3 p.c. in 2008. Estimated on the basis of the HICP, overall inflation should fall from 2.3 p.c. in 2006 to 1.8 p.c. in 2007, before rising to 2.9 p.c. in 2008. This profile mainly reflects the movements in energy prices. The underlying inflation rate is projected to increase slightly in 2007, rising from 1.6 p.c. in the previous year to 1.9 p.c. ; it should remain at that level in 2008. The rise in 2007 is due solely to the movement in prices of processed food. Conversely, inflation is expected to remain subdued in the case of non-energy industrial products and services, being held down by the appreciation of the euro, global competition and the generally moderate movement in wages over the recent years. Reflecting modest growth in labour productivity, which stems from the marked expansion of employment in 2007 and the cyclical slowdown in activity in 2008, the rise in unit labour costs in the private sector is forecast to accelerate, from 1.4 p.c. in 2006 to 2.2 p.c. in 2007 and 2.1 p.c. in 2008. Hourly labour costs are projected to rise by 2.8 p.c. in 2007 and 3 p.c. in 2008, an increase comparable to the 2006 figure. According to the latest data, public finances should end the year 2007 with a deficit of 0.1 p.c. of GDP. In 2008, the deficit is expected to rise to 0.3 p.c. of GDP. In 2007, public finances are benefiting from the favourable economic conditions and the further decline in interest charges. However, the positive impact of these factors is likely to be considerably outweighed by the disappearance of non-recurring factors. In 2008, the budget deficit will grow, despite a further fall in interest charges. In 2007 and 2008, the public debt will maintain its downward trend, falling by around 3 p.c. of GDP per annum. By the end of 2008, the debt ratio is forecast to reach 82.1 p.c.