Belgian economic growth should amount to 1.2% in 2016 and 1.5% in 2017 (09/06/2016)

Slight improvement in international economic conditions in 2017

Just like last year, the world economy is expected to achieve moderate growth of close to 3% in 2016 as a result of disappointing growth performance in emerging economies. In 2017, world growth should accelerate to 3.5%, driven by a gradual recovery in demand in emerging economies. The simultaneous rise in commodity prices should also be favourable to those emerging countries producing these commodities. As in the two previous years, growth in advanced economies is expected to develop at a relatively moderate pace. In the Euro area, where economic activity is driven by continuing low oil prices and extremely accommodating monetary policy, growth is expected to reach 1.6%, both in 2016 and 2017.

In this international scenario, the main uncertainties concern particularly the risk of a hard landing for the Chinese economy, a much faster increase in oil prices than anticipated in these forecasts and the effects of the progressive normalisation of U.S. monetary policy. Moreover, a Brexit could harm (trade) relations between the Member States and, as a consequence, undermine confidence within the European Union.

A temporary slowdown of Belgian GDP growth in the first half of 2016

In 2015, the Belgian economy grew by 1.4%, which is somewhat faster than in 2014, due to buoyant private consumption (1.3% against 0.4% in 2014). Given the low energy prices, real disposable income increased by 1.3% in 2015 despite the “index jump”. 2016 GDP growth is projected to decline to 1.2%. Indeed, a subdued international environment is hampering exports and, consequently, weighing down on domestic expenditure. Moreover, exports and private consumption are adversely affected by the attacks in Brussels on 22 March. According to our estimates, these attacks will curb 2016 GDP growth by 0.1 percentage point, but will have no impact in 2017. Next year, Belgian GDP growth should reach 1.5%, spurred by stronger domestic demand.

Belgian exports for 2016 are supported, on the one hand, by a positive development in domestic costs as a result of measures aimed at limiting labour costs and, on the other hand, by the strong depreciation of the Euro last year. Nevertheless, growth in export volumes is not expected to exceed 4.1% this year (against 4.9% in 2015), primarily due to the cyclical downturn outside the Euro area, but also as a result of the recent attacks’ effects on non-residents’ spending. In 2017, export growth is also expected to reach 4.1%, in line with the stable economic growth in the Euro area.

This year, the real disposable income of individuals is projected to increase by 1%. A number of measures are having a positive effect on purchasing power, partially offset by a VAT rise on household electricity prices, an increase in other indirect taxes and the index jump. In 2017, purchasing power is expected to grow at a similar pace (1.1%),

supported by a stronger increase in wages (assuming no new wage moderation measure). During these two years, the indexation of wages and social benefits is expected to lag behind inflation. However, real disposable income will be boosted by improved labour market conditions.  In contrast, the terrorist threat and attacks have had a negative impact on household consumption in the first half of 2016. Over 2016 as a whole, private consumption is expected to rise by only 0.7% and the household saving ratio to go up temporarily. In 2017, consumer expenditure should catch up and increase by 1.3%. The strong volume growth (5%) in residential investment in 2016 is due to a favourable starting point, as a result of the sharp increase in housing construction in the second half of 2015. Next year, household investment is expected to grow by 1.4%.

In 2016, volume growth of business investment should not exceed 0.2%, in the aftermath of exceptional transactions that took place in 2014 and 2015. These acquisitions have boosted business investment but not economic growth, given that they were imports. Excluding these transactions, business investment is expected to rise by 4% in 2016 and 4.2% in 2017 owing to increased profitability and a higher industrial capacity utilisation rate.

Taking into account all known measures, the volume growth of public consumption should amount to 0.3% in 2016 and 0.5% in 2017. The 2.5% volume growth in public investment in 2016 is largely due to the building of schools by the Flemish authorities. In 2017 (2.6%), it is expected to be spurred on by increased investment by local authorities in the run-up to the 2018 local elections.

Measures aiming at reducing labour costs support employment growth

Employment grew by 0.9% in 2015 (net increase in employment of 41 400). In 2016 and 2017, employment in the market sector is expected to be positively affected by measures designed to limit labour costs. Moreover, it can be assumed that the economic downturn that took place in the first half of 2016 will be largely offset by a temporary fall in hourly labour productivity and working time and will thus only have a limited effect on employment. Public employment in 2017 is projected to be down by 1 000 persons compared to 2015. Total domestic employment should thus grow by 0.8%, both in 2016 and 2017, which represents a cumulative net creation of more than 74 000 jobs over these two years.

Taking the increase in the labour force into account, the number of unemployed (including wholly unemployed non job-seekers receiving benefits) is expected to decrease by more than 27 000 persons in total over the 2016-2017 period. As a result, the harmonised unemployment rate (Eurostat definition) is expected to go down from 8.5% in 2015 to 8.4% in 2017.

Inflation accelerates markedly in 2016, before going down slightly in 2017

Belgian inflation, as measured by the yoy growth rate of the national consumer price index, decreased to 0.3% in 2014 and 0.6% in 2015, largely as a result of the decline in oil prices. Even if oil prices gradually increase, they are expected to remain below their 2015 level on average in 2016. At the same time, gas and electricity price quotations are projected to be down relative to last year. Nevertheless, inflation should reach 1.9% in 2016. The negative contribution of oil and natural gas prices is fully offset by the positive contribution of the consumer electricity price. It will increase significantly after some taxes and charges are introduced or raised and the free KWh for households in Flanders are withdrawn. Moreover, underlying inflation is expected to be higher in 2016 compared to 2015.

In 2017, inflation is expected to decrease to 1.6% due to several factors that compensate each other partially. On the one hand, crude oil prices are expected to rise for the first time since 2012 but, on the other hand, core inflation should decline – particularly as a result of labour cost reduction measures – and the upward pressure from measures aimed at electricity prices should disappear to a large extent.

The health index, which is not affected by petrol and diesel price developments, is expected to rise by 2% in 2016 and 1.4% in 2017. According to the monthly forecasts for the development of the health index, the current pivotal index for public wages and social benefits (103.04) should be exceeded in December 2017.