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STU 01-02 : Special Topic - The business cycle in Belgium and the euro area: a comparison [Short Term Update 01-02]

After an exceptional year in 2000, world trade growth deteriorated sharply in 2001. The collapse of world trade can be explained by the synchronized slackening of the three main economic powers (United States, Japan, and the European Union). The attacks of 11 September and their economic and political impact have, of course, amplified the downturn. The end of destocking and the hesitant recovery, which, according to certain indicators, may be starting in the United States during the first semester of this year, should allow world trade to regain positive growth rates, although a stronger recovery should not be expected before the second half of 2002.

The Belgian economy was severely affected by the slowdown in world trade. On annual average, GDP should have grown by about 1.0% in 2001. In 2002 GDP should record an almost identical average annual increase, i.e. 0.9%. The composition and dynamics should, however, be quite different. After a first quarter marked by the impact of the bankruptcy of SABENA, real GDP should grow at positive qoq rates in a range between 0.5 and 1%. The economic upturn should only have a positive impact on employment by the end of the year. This year, consumer price inflation should fall below 2%. It seems that lower imported inflation is finally beginning to be passed on to the underlying inflation.

Our forecast is counting on a gradual recovery in world trade, which should regain its full dynamics by the end of the year. We assume that the positive impact on economic recovery will mainly be observed in 2003. A strong recovery earlier this year would of course have a positive impact on growth in Europe and in Belgium as long as it does not give rise to an increase in oil prices.

In this special topic we analyse the similarities and differences between the Belgian and euro area business cycles over the last two decades. First we will compare the amplitude of GDP cycles and the contributions of the various elements towards the global final demand cycle. Next we will examine whether any empirical evidence can be found for the often cited ‘leading character’ of the Belgian business cycle vis-à-vis the euro area cycle.

To evaluate the properties of these business cycles we have extracted the cyclical component from GDP and its elements. This means that the series has been corrected for seasonal and incidental factors and for the trend. Cyclical components can be interpreted in the same way as an output gap. For example, when the cyclical component of private consumption has a value of 1, this means that private consumption is 1% higher than its trend value at that moment.

Amplitude

To evaluate the amplitude of the cyclical component of GDP in Belgium and the euro area, their standard deviations were calculated over different samples. The bigger these standard deviations, the wider the range within which the cyclical component is varying. Table 1 shows that the amplitude of the business cycles is generally smaller in the euro area than in Belgium. This is mainly explained by the fact that the GDP cycle in the euro area is an aggregate of a number of national cycles which do not have exactly the same evolution and turning points. Aggregation of the national cycles to obtain the euro area business cycle smooths out these differences.

Contributions of expenditure elements

In this context, the contribution of an element towards final demand must be understood as the extent to which each element contributes to the cyclicity of final demand . We can divide this contribution into three parts.

The first part is the weight of the element in final demand. The greater its weight, the higher the contribution of that element towards final demand. The second part of the contribution is the standard deviation of the cyclical component of the relevant element relative to the standard deviation of the final demand cycle. The more volatile the element in comparison with final demand, the greater its contribution towards the final demand cycle will be. The third factor that determines the contribution is the correlation between the cycle for the element and the final demand cycle. The greater this correlation, the higher the contribution. It is clear that all three factors must be high to obtain a large contribution.

Private consumption contributes approximately 20% towards the final demand cycle both in Belgium and the euro area. The quite large contribution from private consumption is due to the high weighting of this element in final demand and its high correlation with final demand, contrary to its relative standard deviation which is quite low in comparison with the other elements. The small contribution from government consumption is mainly the consequence of the small correlation with the final demand cycle. Government consumption (as well as public investment) seems to develop almost independently of the global business cycle.

Some significant differences can also be pointed out between Belgium and the euro area. Exports of goods and services contribute much more to final demand in Belgium than in the euro zone, which can be explained by the more open character of the Belgian economy. In a complementary way, the contributions of inventory changes and gross fixed capital formation are much higher in the euro area than in Belgium. This is a consequence of the weighting of these elements in and their correlation with final demand, which is higher for the euro area than for Belgium.

STU 1-02 was finalised on February 22th 2002. [More in the publication ...]

 

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Short Term Update

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