Economic projections for Belgium – Spring 2009

Since the previous forecasts were published in February 2009, the downturn in activity and international trade in late 2008 and early 2009 has proved to be even sharper than initially expected. An unprecedentedly deep recession has spread across the various economic regions of the world, requiring resolute action in the monetary and fiscal sphere. There are signs which suggest some stabilisation of both financial market conditions and business and consumer confidence. Nonetheless, the adjustments to be made to employment, investment and the position of financial institutions are likely to hamper the economic recovery. The sharp cyclical downturn in the euro area at the end of 2008 and the beginning of 2009 had a major impact on economic activity in Belgium. In particular, both industrial production and foreign trade in goods plummeted from October 2008. According to the national accounts data, real GDP was down by 1.7 p.c. in the fourth quarter of 2008, falling by a further 1.6 p.c. in the first quarter of 2009, the deepest recession since the Second World War. The decline in activity should decelerate sharply from the second quarter of 2009, and give way to a modest recovery in 2010. Thus, having grown by 1 p.c. in 2008, GDP is set to contract by 3.5 p.c. on average in 2009 and by 0.2 p.c. in 2010. In the face of the abrupt contraction in activity, firms reacted for example by reducing agency work and greatly increasing their use of temporary lay-offs. Such systems offer a provisional buffer against the effect on employment of fluctuations in production. However, taking account of the deep and sustained decline in activity, the number of persons employed is likely to decline progressively. As an annual average, net job losses are forecast at 36,000 and 80,000 persons respectively in 2009 and 2010. The unemployment rate is set to rise from 7 p.c. in 2008 to 9.2 p.c. in 2010, reaching 9.7 p.c. by the end of 2010. In 2009, all the main expenditure categories – domestic demand, change in stocks and net exports – are set to be seriously affected, directly or indirectly, by the recession in global demand and the repercussions of the global financial crisis ; in 2010, their contribution to the change in GDP is forecast to be broadly neutral. Exports of goods and services are projected to record a very marked fall in 2009, following the collapse of foreign demand. They are likely to continue falling slightly in 2010. In the absence of support from domestic demand, the profile of imports is expected to mirror that of exports. Following the curb on growth in 2008 resulting from the stagnation of real disposable income in a context of rising inflation, private consumption is set to fall in 2009, mainly owing to the plunge in share prices and the deterioration in economic conditions and the labour market outlook, both these factors contributing to an increase in the savings rate. In the context of the decline in their capacity utilisation rate, gloomy forecasts for demand, the high cost of external financing and the reduction in the financial resources generated by their own activity, businesses are likely to cut their investment in 2009 and 2010, following more than four years of sustained vigour. Investment in housing is also set to fall in 2009 and 2010, continuing the slowdown which began in 2007. Having peaked at 5.9 p.c. in July 2008, inflation in Belgium eased rapidly and should continue to fall in the short term, becoming negative for a time. This situation, likely to last only a few months, is due mainly to base effects connected with the record prices of petroleum products during the summer of 2008. Once these base effects have faded away, inflation is expected to return to positive figures at the end of 2009, though remaining low up to the end of the projection period, owing to the rapid attenuation of pressure from import prices and wages. In all, as an annual average, inflation is expected to reach 0.1 p.c. in 2009 and 1.3 p.c. in 2010, having stood at 4.5 p.c. in 2008. The health index is projected to rise by 0.8 p.c. in 2009 and 1.1 p.c. in 2010. Reflecting both the fall in labour productivity, following the cyclical weakness, and the still sustained rise in hourly labour costs, unit labour costs in the private sector rose by 3.9 p.c. in 2008 and are likely to rise by a further 2.9 p.c. in 2009, as a result of high indexation which follows from the surge in inflation in 2008. In 2010, they should remain more or less steady. This deceleration between 2009 and 2010 is due partly to the cyclical recovery in labour productivity. Also, the growth of hourly labour costs is set to fall from 3.5 p.c. in 2008 to 2.3 p.c. in 2009 and 0.4 p.c. in 2010. The deterioration in labour market conditions is expected to result in wage growth moderation. According to the provisional figures published by the NAI in March 2009, Belgium’s public finances recorded a deficit of 1.2 p.c. of GDP in 2008. In the macroeconomic context depicted above and in the light of the measures approved by the federal government and the regional governments, e.g. in connection with the recovery plans, that deficit is expected to reach 5.5 p.c. of GDP in 2009 and 6 p.c. in 2010, if policy remains unchanged. After having declined continuously since 1993, to reach 84 p.c. in 2007, the ratio of public debt to GDP began rising again in 2008, mainly as a result of the capital injections and loans granted to financial institutions. In 2009 and 2010, the general government debt is expected to record a further sharp rise to 97.4 and 103 p.c. of GDP respectively.