Economic projections for Belgium – Autumn 2006

Since the publication of the Bank’s spring projections, the growth of activity in the euro area in the first half of 2006 has been stronger than previously predicted and oil prices, after rising further during the summer, have fallen to a level hovering around 60 dollars since October 2006. In Belgium, economic activity recorded a considerable increase in vitality in late 2005 and early 2006, with quarterly GDP growth reaching 0.9 p.c. in the first quarter and 0.7 p.c. in the second quarter. The rate of GDP growth may have dipped slightly in the second half of the year, maintaining a sound course more in line with the potential for growth in the medium term. In all, real GDP growth is expected to increase from 1.5 p.c. in 2005 to 3 p.c. in 2006. The projected figure for 2007 is 2.1 p.c. Apart from the robust support of foreign demand, the improvement in 2006 had its origins largely within the economy, in household expenditure on consumption and housing and in business investment. The same factors are expected to operate in 2007, although the effect will be more moderate. Since the cyclical movements in activity are largely absorbed by productivity, the 1 p.c. rate of net job creation achieved in 2005 will probably be maintained for the ensuing two years. Altogether, around 43,000 net additional jobs will be created each year from 2005 to 2007. However, taking account of the rapid growth of the labour force since 2005, the harmonised unemployment rate will only fall slightly during the period covered by the forecasts, to average 8.3 p.c. in 2007 against 8.4 p.c. in 2005 and 8.5 p.c. in 2006. Estimated on the basis of the HICP, total inflation – which had averaged 2.5 p.c. in 2005 – is predicted to fall to 2.3 p.c. in 2006 and 1.9 p.c. in 2007, as a result of the projected easing of energy prices. In contrast, the underlying trend in inflation is expected to maintain the gradual rise which began in mid 2005, increasing from 1.5 p.c. in 2005 to an average of 1.9 p.c. in 2007. For that year, the introduction on 1 July 2007 of the general packaging levy and the increase in excise duty on tobacco, included in the 2007 budget, will push inflation up by 0.2 point. Unit labour costs are projected to increase by 0.7 p.c. in 2006 and 1.2 p.c. in 2007, following an average annual increase of 0.5 p.c. in the two preceding years, these fluctuations reflecting the cyclical movements in productivity. Hourly labour costs should maintain their annual rate of increase of 2. p.c. in 2006 and 2007, comparable to that of the two preceding years. Taking account of the latest information, public finances should end the year 2006 more or less in balance. For 2007, the forecasts indicate a deficit of 0.4 p.c. of GDP, despite a further decline in interest charges – although the fall is admittedly not as steep as in previous years – and the reduction in local authority investment expenditure which is normal in the year following the local elections. The adverse movement in the budget balance is due largely to the non-recurring measures taken into account in the estimate, the impact of which will be less than in 2006. In addition, public revenues are also expected to contract in relation to GDP, since labour incomes – which are taxed relatively heavily – are growing more slowly than GDP. In 2006 and 2007 the public debt will continue to diminish steadily.