Around 1.5% growth for the Belgian economy over the period 2017 to 2021, sustained job creation but limited reduction in the public deficit (21/06/2016)

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According to our “Economic Outlook for 2016-2021” , Belgian economic growth is expected to rise from 1.2% in 2016 to 1.5% per year on average over the period of 2017 to 2021. Employment is assumed to increase at a sustained pace (creation of more than 38 000 jobs per year on average over the 2016-2021 period).  The fiscal deficit is forecast to increase from 2.5% of GDP in 2015 to 2.8% in 2016, to decline to 2.2% of GDP in 2017 and subsequently to remain almost stable. The economic weight of general government, in particular with regard to employment, should be declining.

Moderate and stable economic growth, pickup in inflation

Belgian GDP growth is expected to go down from 1.4% in 2015 to 1.2% in 2016 as a result of a slowdown in the growth of private consumption and exports. The latter are sustained by measures aimed at reducing labour costs, but are adversely affected by weakening economic activity outside the Euro area. Moreover, the terrorist attacks on 22 March have had a negative macro-economic impact that is, however, temporary and limited. The Belgian economy is assumed to grow by 1.5% per year on average during the 2017-2021 period, a pace similar to that of the Euro area. This performance is supported by high job creation, but remains relatively modest as a result of weak, although accelerating, productivity growth.

Belgian exports are expected to grow further significantly after 2016, given the stable development of Belgian export markets, but stronger economic growth during the period 2017 to 2021 is mainly attributable to the dynamics of domestic demand. Private consumption is assumed to rise by 1.4% on average during the 2017-2021 period (compared to 0.7% in 2016), in line with real disposable income of households. The development in purchasing power is expected to be boosted by job creation, higher wages and lower compulsory taxation. It is also expected to stimulate residential investment, although this should weaken in the medium term due to higher interest rates. Against a backdrop of higher profitability and positive sales prospects, business investment remains an important driver for growth, with an average rise of 2.9% during the 2017-2021 period.

Taking into account the decisions known at the time of the finalisation these projections, the volume growth in public consumption is assumed to be limited to a 0.6% yearly average during the 2016-2021 period and public investment in real terms should rise by 1.1%.

In spite of a decrease in nominal unit labour costs, Belgian inflation, as measured by the yoy growth rate of the national consumer price index, is expected to rise sharply from 0.6% in 2015 to 1.9% in 2016, mainly due to the increase in electricity consumer prices. Inflation is subsequently projected to stabilize around 1.7% on a yearly basis. This pace is similar to the growth rate of unit labour costs, which are expected to go up assuming renewed wage growth as from 2017.

Nominal hourly labour costs in the corporate sector are expected to go down by 0.4% in 2016, considering the impact of the index jump, measures aimed at reducing labour costs and a 0.5% rise in gross wages before indexation.  Taking into account a 0.9% average yearly growth in gross wages before indexation, the nominal hourly labour costs are expected to increase by 2.1% per year on average as from 2017.

Further decrease in GDP energy intensity and in greenhouse gas emissions

Due to use of technologies that are increasingly energy-saving, final energy consumption is expected to rise only slightly (0.2% per year on average) during the projection period. As a consequence, GDP energy intensity is projected to continue its historical downward trend. Greenhouse gas emissions are assumed to decrease from 113.9 million tons of CO2 equivalents in 2014 to 105.5 million tons in 2021 and would thus be reduced by more than 25% compared to the 2005 level. The only target for Belgium within the European climate and energy package that will not be reached, and will therefore require supplementary measures, is for the share of renewables in final net energy consumption.

Strong rise in total employment and decrease in public employment

Over the whole 2016-2021 period, job creation is expected to increase by 230 000 units, which is considerably more than during the six previous years. Employment in all market services should develop by 242 500 units over the same period, despite a marked slowdown in the growth of service voucher jobs. By contrast, employment in the branch “General Government and Education” is forecast to fall significantly (-4 700) and the decrease in industrial employment (-4 400) should be less pronounced than in the recent past.  In total, the employment rate as defined in the EU2020 Strategy (Labour Force Survey, 20-64 year age group) should go up from 67.2% in 2015 to 69.2% in 2020 and 70.0% in 2021, with a high increase in the 55-64 year age group. The employment rate target of 73.2% by 2020 set for Belgium is nevertheless out of reach.

The working-age population is expected to expand in the short term, mainly with the arrival of refugees, but is projected to decline as from 2019, taking into account the dominant impact of ageing baby-boom cohorts on the working-age population. Nevertheless, the labour force is expected to expand fast (by almost 130 000 persons from 2016 to 2021), supported by a strong rise in activity rates caused mainly by the measures on early retirement and unemployment with a company bonus.

As in 2015, unemployment is expected to fall this year (- 23 400 persons). The fall in unemployment is assumed to be limited over the 2017-2019 period, but should speed up as from 2020 (-67 500 persons over the 2020-2021 period) given the slower growth in the labour supply, new support for job creation, the phasing in of the social security contribution reductions and the break in the downward development in public employment.

Persistence of a public finance deficit above 2% of GDP in the medium term despite a significant decrease in 2017

After reaching 2.5% of GDP in 2015, the general government deficit is forecast to be once again close (2.8% of GDP) to the ceiling of 3% of GDP set in the EU Treaty despite decreasing interest charges. This unfavourable development is due in particular to sluggish economic growth, additional expenses for migrants and security and the impact of previous one-off measures. As these factors disappear, the deficit is expected to narrow significantly in 2017, slightly increase in 2018-2019, and decline somewhat in 2020-2021. By 2021, it should still exceed 2% of GDP.

More restrictive expenditure policies and tax relief operations -  cuts in personal income tax and social contributions are nevertheless partially offset by increases in other types of levies – are expected to result in a simultaneous decrease in both primary expenditure and general government receipts. Primary expenditure is assumed to go down from 51.0% of GDP in 2015 to 50.2% in 2021 and receipts to decrease from 51.4% to 50.2% of GDP.

By 2021, the total general government deficit is assumed to remain at the federal level only. Despite the significant steps taken to reduce government running costs, the federal government deficit is not expected to narrow in view of the planned tax relief and the ever faster increase (compared to that of GDP) in transfers to social security. Without these transfers, social security should face a growing deficit as a result of a trend rise in its expenditure in % of GDP, which is partially slowing down but not totally offset by budgetary savings and extensive pension and unemployment reforms, and as a result of significant cuts in social security contributions.

The communities and regions as a whole are expected to reach balanced budgets by 2021 and local entities’ accounts are projected to remain in balance. Taking into account the impact of cuts in personal income tax (via the regional and local entity additions to personal income tax) on the receipts of both government entities, this balance assumes restrictive expenditure policies at both government levels.

Without additional measures, the objectives of the stability programme of Belgium, essentially structural balance by 2018, will be far from being achieved since the structural budget balance should reach a deficit of 1.8% of GDP by 2018.

After going up in 2016, public debt is expected to decrease slightly as a percentage of GDP by the end of the projection period: from 107.1% of GDP in 2016 to 104.8% of GDP in 2021. The decrease is thus largely inadequate for the debt to fall below the 100% threshold.

 

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