Since mid-September, the financial crisis has entered an exceptionally turbulent new phase. The US and European authorities have had to take extraordinary measures in order to deal with solvency and liquidity problems in the banking sector. As financial conditions are likely to remain difficult, it is obvious that the crisis will have large negative effects on the world economy, although the size of these effects is currently very difficult to grasp due to huge uncertainties concerning the magnitude and the duration of the crisis.
This uncertainty explains the volatility of most indicators, which makes it currently very difficult to establish credible economic forecasts. The latest short-term forecasts of the FPB were finalised in the first half of September, i.e. before the aggravation of the financial turbulence. According to these forecasts, Belgian GDP growth should amount to 1.6% in 2008 and slow down to 1.2% in 2009. The 2009 government budget is based on this outlook.
In the light of recent financial sector developments, the latest FPB forecasts should be revised downwards, in line with revisions of economic growth by national and international institutions. In fact, the weakening of economic growth in the course of 2008 will probably be stronger than expected, while the subsequent recovery could take longer to materialise and could lack strength. The channels through which the financial crisis is affecting the real economy are discussed in the Special Topic of this Short Term Update.
Belgian business and consumer confidence have dropped to their lowest level in more than five years due to weakening economic growth and the financial crisis, which are tending to reinforce one another. Moreover, consumer confidence has suffered from the high number of lay-offs in large Belgian companies. On the other hand, the decline in oil prices and the depreciation of the euro have limited the worsening of sentiment somewhat through their positive effect on households’ purchasing power and export competitiveness.
Inflation forecasts for 2009 have been revised downwards since September, which is the result of two counteracting factors. [...]