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Short Term Update 04-11 : Special Topic - Relative performance of Belgian GDP since the onset of the financial crisis [Short Term Update 04-11]

Headlines Belgian economy

The European Union set up the Europe 2020 Strategy as the successor to the Lisbon Strategy to monitor and stimulate structural reform by the Member States. In the first semester of each year (the so-called European Semester), the Member States compile their Stability & Convergence and National Reform Programmes. At the turn of the semester the European Council develops policy recommendations to be implemented, preferably during the second semester. Sound performance on structural issues lays a foundation for healthy potential growth around which the business cycle oscillates.

Following the calendar of this renewed strategy, the Federal Planning Bureau decided to move the structural performance update – traditionally published in December - to the March issue and adapt the calendar of the business-cycle updates accordingly. The present December issue is, however, a one-off issue exclusively devoted to the system of innovation. Innovation has been recognised in the Europe 2020 strategy as the first of seven ‘flagships’ that should secure smart, sustainable, and inclusive growth. Innovation should have a positive impact on productivity growth and hence encourage potential GDP growth and employment. Measured in terms of R&D, not more than a few Member States achieve an innovation effort that is comparable to that of the other advanced economies of the world.

The system of innovation is an assembly of six interlinked dimensions: knowledge development by R&D; human resources; valorisation of R&D, e.g. through patents; innovation absorption capacity within and among enterprises; entrepreneurship; and financing. A good performance on each of the six is needed for a system to perform optimally. This December issue monitors the performance of Belgium on each of the dimensions. Other EU countries, the USA, and Japan serve as a benchmark. The performance seems to be mixed, so efforts are still needed to drive further improvement of the Belgian innovation system as a condition for growth and jobs.

STU 04-11 was finalised on 16 December 2011.

Special topic : Relative performance of Belgian GDP since the onset of the financial crisis

The financial crisis has led to more prominent differences in economic growth across euro area Member States. Two groups of countries can be distinguished, i.e. southern Europe and Ireland on the one hand and the northern member countries on the other. The economic growth divergence between both groups was particularly pronounced during the short-lived recovery of the northern Member States, but cross-country differences in northern Europe have also mounted. In this Special Topic the performance of the Belgian economy is compared to that of its three main trading partners (Germany, France, and the Netherlands). This is done by examining the changes in real GDP and its main expenditure categories (consumption, gross capital formation, and net exports) between 2007Q4 and 2011Q2.

The choice of 2007Q4 as the reference quarter is motivated by the fact that economic growth turned negative in many large economies during the first half of 2008. Note that the gain or loss in GDP since the beginning of the financial crisis should not be considered as an accurate measure of the economic damage related to the crisis. That kind of impact should be calculated by comparing the current level of GDP to the level that would have been reached in the absence of that event1.

As shown in Graph 1, Belgian GDP exceeded its pre-crisis level by 2% in 2011Q2, a performance that was matched by few other euro area countries. In spite of a more pronounced recovery between mid-2009 and 2011Q1, growth in the German economy (1.2%) remained significantly below the Belgian figure as it suffered from a deeper recession. GDP levels in France (-0.5%) and the Netherlands (-0.4%) were still below their pre-crisis levels in 2011Q2. The euro area average (1.3%) was dragged down by Ireland and the southern economies, where private debt deleveraging, a lack of competitiveness, soaring government debt levels, and resulting) fiscal austerity weighed heavily on economic activity. As economic growth in Belgium and other euro area countries was hampered much less by such problems, Belgium’s economic performance will be compared to that of its three neighbouring countries.

When comparing the contributions of the main expenditure categories to economic growth, private consumption appears to be the main reason by far for the better performance of the Belgian economy as compared to its neighbouring countries (see Graph 2). It more than compensates for the relatively lower contribution of other expenditure components. The relatively modest contribution of public consumption is probably related to the rather limited scope of the Belgian fiscal stimulus in response to the financial crisis. The contribution of changes in inventories to economic growth was negative in Belgium. As a large part of inventories is imported, this is more or less compensated by a less negative contribution of net exports. Comparing the performance of gross fixed capital formation (GFCF) provides a mixed image: Belgian investment exerted a smaller drag on GDP growth than in France and the Netherlands, but it lagged behind German GFCF. German investment activity plunged by 13% in reaction to the financial crisis, but bounced back to be much stronger (+13%) than in other countries during the subsequent recovery. Apart from the relatively more dynamic recovery in GDP, the catch-up of German investment was also supported by the strong pick-up in capacity utilisation and the higher profitability of German enterprises, implying that they were probably less exposed to tighter credit conditions.




The outperformance of Belgian private consumption relative to its neighbouring countries could be due to diverging developments in households’ real disposable income and/or saving rate. Comparing the saving rate in 2010 to its 2007 level shows that it roughly stabilised in Belgium (-0.2%-points), Germany (+0.2%-points) and France (+0.5%-points), whereas it decreased by 2.1%-points in the Netherlands. However, as shown in Table 1, differences in the evolution of real disposable income were more pronounced: while it increased by 4.6% between 2007 and 2010 in Belgium, it went down by 0.8% in the Netherlands. A moderate increase was registered in Germany and France (1.1% and 2.4%, respectively).

Between 2007 and 2010, the disposable income of Belgian households was mainly supported by compensation of employees. This increase in the wage sum was related to employment by only a small extent as the number of hours worked barely exceeded its pre-crisis level in 2010. By contrast, the (automatic) indexation of wages accounted for about two thirds of the aggregate wage increase. Taxes on wages grew more strongly than wages, which is in line with the progressive income tax system, although this was partly offset by a decline in other current tax categories. Due to automatic stabilisers, social benefits increased more strongly than social contributions, resulting in a positive contribution of net current transfers (excluding direct taxes) to disposable income growth.

Nominal disposable income in Germany and France increased 3-4%-points less than in Belgium, mainly due to a lower contribution by compensation of employees. This is mainly related to slower growth in compensation per employee and also (in the case of France) slower growth in employment. A lower contribution from non-labour income, mainly explained by slower growth in dividends paid by corporations, also played a role. The effect of these lower (positive) contributions was partially compensated by a smaller negative contribution from direct taxes. Disposable income growth in the Netherlands strongly differs from that in the other countries, acting as a significant drag on private consumption. The relatively high contribution of compensation of employees, mainly related to increases in hourly wages, is wiped out by the negative contribution of non-labour income (related to mixed income as well as net property income).




All in all, it appears that Belgium has outperformed its neighbouring countries in terms of GDP since the beginning of the financial crisis due to private consumption, which is related to stronger growth in households’ disposable income. This is mainly explained by the relatively strong increase in (nominal) wages and the fact that the Belgian labour market suffered relatively less from the crisis.

Looking ahead, it should not be taken for granted that the Belgian economy will continue to outperform its neighbouring countries in terms of GDP growth. Firstly, this would be at odds with observations prior to 2008. Between 2000 and 2007, for example, Belgium recorded GDP growth that was in line with growth in France, the Netherlands, and even the euro area as a whole. Secondly, as stronger growth in Belgium over the last few years has been mainly due to stronger wage growth, this could hamper its future external competitiveness, resulting in a lower contribution of (net) exports to economic growth. Finally, the Belgian government needs to implement rigorous fiscal consolidation in the coming quarters in order to maintain financial markets’ confidence in its sovereign debt. These measures are likely to weaken domestic demand. This issue is of lesser importance for Germany as its budget deficit is rather limited and as financial markets consider it the safe haven in the euro area.

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