This working paper assesses the impact of the oil price shock on the Belgian economy and tries to explain why the impact has been very limited when compared to the oil price shocks in the seventies.
During the last two years, the economic situation has been marked by an upsurge in oil prices. If we refer to the oil crises in the seventies, the current energy prices should have serious effects on the economy: increased prices, a fall in profitability, declining purchasing power, unemployment and de-industrialisation. Nevertheless, the performances and forecasts for 2005 and 2006 show that the oil shock has indeed significant effects on growth and inflation but that these effects are far from disastrous.
This can be explained mainly by two factors. Firstly, the structural changes in energy use, stimulated by high oil prices during the seventies and the eighties, have led to increased energy efficiency, especially in the consumption of oil products by households and businesses. The ratio of gross energy consumption to GDP has decreased by 40 % between 1970 and 2003 and the ratio of oil consumption by 60 %. Secondly, the reform of wage negotiations with the adoption of the so-called health index, which excludes some energy prices from the national price index, and the monitoring of wages within the framework of the Competitiveness Act have strongly reduced the second-run effects on wages and inflation.
In this context, the drastic downward adjustment of wages decided on in Germany has had repercussions in Belgium, where average wages have been visibly constrained by the German wage restraint. In Germany, the main effect of the oil shock was a decline in the purchasing power of wages. This drop in purchasing power has gone together with a very limited rise in nominal wages. As a result, businesses are making high profits, export is thriving and the domestic market is depressed. Nevertheless, unlike in the seventies, businesses should be in a favourable position to kick-start their activity provided that no new shock occurs. This situation also applies to Belgium, but to a lesser extent since wages are not totally protected against the second-run effects of the oil price shock. Nevertheless, real wage increases have been very limited in Belgium: they have risen by 0.4 % during the period 2003-2004 and should even decrease by 0.4 % during the period 2005-2006.
From a macroeconomic point of view, unlike in the seventies, the low underlying inflation resulting from wage development has enabled the European Central Bank to pursue a loose monetary policy. Moreover, interest rates are relatively low at world level. The budgetary policy conducted by the large Member States was rather expansionary, but finally proved neutral for the whole euro area.
The paper shows that the effects of the oil price shock on the real economy, even if they are limited until now, have been sufficient to lead the Belgian economy on a slow trend growth, which causes pressures on the public finances and induces a restrictive budgetary policy.
The analysis of the economic history of the last 30 years reveals that high energy prices, more specifically high oil and gas prices, are the most efficient way to lower the energy intensity of economic growth. Reducing energy intensity has become a double priority, firstly, to achieve the necessary cut in greenhouse gases, and secondly, to control the increasing risks surrounding the security of energy supply.