How is the Belgian economy doing?
Better than expected, actually. The economy will have grown by 1.5 percent this year. That is less than in the truly golden years, but double the euro zone average. In a sluggish European environment, the Belgians are still holding up reasonably well. In the coming years, growth would be stable around the same, moderate level of 1.3 percent, the National Bank predicts in its forecast.
Last year, growth was mainly supported by domestic consumption. Because purchasing power remained reasonably stable throughout the corona and energy crisis, Belgians could also continue to spend money. That picture has changed somewhat in 2023. Now it is business investments that drive growth the most. This also somewhat surprises the economists at the National Bank, who call the investment growth (+8.6 percent in 2023) downright “spectacular”. In a classic scenario, you would expect investments to decrease at a time of higher interest rates. The investment jump is also at odds with business confidence, which remains low.
For many companies there will have been a ‘now or never’ moment. Investments in digitalization and greening are urgently needed, and now that wage costs have risen and the labor market remains tight, this is the right time for many companies to invest in productivity. Governor Pierre Wunsch of the National Bank also points out that many companies have sufficient reserves to incur these costs.
Nice. But what am I left with?
It is known: due to automatic wage indexation, purchasing power in Belgium remained better protected than in neighboring countries. Price inflation, which triggers the indexation, has now cooled considerably and even turned negative last month (prices in November were on average 0.7 percent below the 2022 level). The National Bank expects inflation to increase again to 4 percent next year and to fade out in subsequent years.
Indexing will take place again next year, which will leave many personnel directors with clammy hands. The National Bank does qualify the problem of wage costs. Wages have grown faster in Belgium than in neighboring countries over the past two years, but the opposite is expected to happen in the next three years, meaning the difference would be non-existent by the end of 2026. This means that further wage increases on top of the index should not immediately be expected in the coming years if the current wage law is applied.
Despite a renewed call from employers’ organization VBO to abolish automatic indexation, Governor Wunsch does not think that will happen. “The indexing is here to stay,” he said at a press briefing. “Every country has its own economic characteristics, and that is ours. There is no political majority to adjust this. The indexing also worked, but we were lucky. If the rise in energy prices had continued for longer and inflation had remained very high, our companies would have really run into problems with wage indexation.”
Are there also sectors that are doing less well?
One stands out in a negative sense: construction. Investments in housing have fallen sharply. The construction sector is having a hard time. Building materials have quickly become much more expensive, while the tightness on the labor market also plays a role. In addition, banks have significantly raised interest rates on home loans and investors are withdrawing from the less secure sector in search of returns. That in turn slows down the demand for new homes. “The latest figures for building permits and mortgage applications show that this cooling down is not over yet,” says economist Geert Langenus of the National Bank. There will only be some recovery in the second half of next year.
There is also a flickering light at the export. The (temporary) wage handicap is affecting Belgium, but there is also a broader, European problem of declining market share in trade.
All in all, no storm clouds. Why do many economists still sound gloomy about Belgium?
In the short term, the economy is doing quite well, but in the medium term, the shaky government finances lead to uncertainty. The Belgian governments will end the year with a deficit of 4.3 percent of gross national product. If policy remains unchanged, we will already be at -5.2 percent in 2026. Pierre Wunsch: “Just to maintain the deficit at current levels, the next government will have to seek a total of 10 billion over the next five years: 1 billion per year for the aging population and 1 billion in interest costs.”
Wunsch calls the situation “untenable in the long term”. Especially because no change has yet been initiated. Together with Slovakia and France, Belgium is one of the countries at the tail end of the EU pack that cannot get the budget under control and is even seeing the deficits increasing. That is a problem because we already know for sure that the government will face new costs, such as the aging of the population and climate change.
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2023-12-18 18:00:56
#Belgian #economy
