Economic projections for Belgium – spring 2005

Twice a year, in June and December, the National Bank of Belgium publishes the macroeconomic projections for the Belgian economy for the current and the following year. The current projections cover the years 2005 and 2006. These projections make up the national component of the broad macroeconomic projection exercise conducted within the Eurosystem ; the ECB publishes the aggregated results of this exercise for the euro area economy in its Monthly Bulletin. At the current juncture, the international environment is expected to remain supportive in 2005 and 2006, although real world GDP growth would be somewhat weaker compared to the impressive growth in 2004. Following the slowdown which hit the euro area since the summer of 2004, the Eurosystem expects, for the euro area, a gradual recovery from mid-2005 onwards and a deceleration of inflation from a higher level in the first months of 2005, due to receding pressure from energy prices, while domestic cost pressures should remain contained. In Belgium, GDP growth slowed down markedly at the end of 2004. During the first quarter of 2005, the level of activity even stabilised and business confidence further dropped. Compared to the projections of December, GDP growth for 2005 has thus been revised downwards by more than 1 percentage point towards 1.4 p.c. In line with the Eurosystem’s assumptions, the slowdown would be temporarily and activity should increase by 2.4 p.c. in 2006. A gradual strengthening of real household disposable income is expected in 2005, stemming mainly from financial income, and further in 2006, due to the proceeds of the tax reform. However, private consumption growth should be weak in the beginning of 2005, due to the high oil price level and the increased uncertainty of consumers regarding the economic situation. Domestic demand would nevertheless show some resilience in 2005 due to increasing investment. Also, towards 2006 exports would strengthen, supported by an improving international environment. Although employment growth is likely to slacken somewhat in the course of 2005, there would be a net creation of 62,000 jobs over the period 2005-2006. Still, the unemployment rate is likely to rise somewhat further, to 7.9 and 8 p.c. in 2005 and 2006 respectively, as the increase of the working population would slightly outpace the number of new jobs. Inflation is expected to increase to 2.2 p.c. in 2005, largely as a consequence of high energy prices, before decreasing to 1.9 p.c. in 2006. The underlying trend in inflation should however stay limited, at 1.3 and 1.6 p.c. in 2005 and 2006 respectively, as domestic cost developments should remain contained. Only taking into account the measures which have already been taken upon in the 2005 budget, the general government balance is expected to show a deficit of 0.5 p.c. of GDP in 2005 and of 1.4 p.c. in 2006.