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STU 02-99 : Special Topic - The FPB macroeconomic leading indicators [Short Term Update 02-99]

Sustained economic growth in Belgium in 1998 was supported by rapidly growing private consumption and investment. In contrast, the contribution of trade to real economic growth was negative in 1998. Nevertheless, a strong increase in terms of trade, due to the low prices of raw materials, allowed trade still to make a positive contribution towards growth in nominal terms.

Export performance remains the key question for 1999: the deterioration of our export markets led to negative growth in Belgian exports in 1998Q4 (t/t-4) and the timing and strength of a recovery remain uncertain. International organisations are forecasting a clear upturn in world trade in mid-1999. On the basis of this scenario, the FPB is forecasting economic growth in Belgium of 2% in 1999.

So far, however, leading indicators suggest that the upturn in exports in 1999 could be weaker than expected. The Balkan crisis is also having a negative impact on growth prospects. On the other hand, the recent fall in interest and exchange rates in the euro area does improve prospects for 1999.

Domestic demand is not expected to be as buoyant as in 1998, and it should continue to drive growth in 1999. With a 1% increase in employment, consumer confidence will remain high: private consumption growth should be around 2%. Inflation remains at around 1%. The general government borrowing requirement should be less than 1% of GDP, due to the low level of interest rates.

The medium-term outlook for Belgium points to an average growth rate of GDP of 2.5% per year during the 2000-2004 period in an “unchanged policy” scenario. Gross nominal wages are expected to be broadly in line with nominal labour costs in the neighbouring countries. Planned cuts in non-wage costs should therefore lead to enhanced competitiveness. Nonetheless, the slightly accelerated pace of inflation in Europe should cause domestic inflation to rise to 1.6%. The average rate of growth of employment, strongly supported by active labour market policy measures, is estimated at around 0.9% per year in average, leading to a drop in unemployment.

Based on this scenario, the general government financing capacity should become positive from 2001 onward. The “budgetary margins”, which will cumulatively reach 1.7% of GDP in 2004, will probably be used to decrease the tax burden or/and increase expenditure: this “changed policy” scenario implies stronger macroeconomic performance than the “unchanged policy” scenario.


The recent publication of quarterly national accounts by the Institute for National Accounts (INA), as well as the development of new data bases with a quarterly or even monthly periodicity, has allowed the FPB to start constructing new statistical tools that aim to improve the perception of business cycle evolution. Our first efforts were concentrated on the development of a system of leading indicators for the major macroeconomic variables.

The forecasting process

Twice a year, in February and July, the FPB produces macroeconomic forecasts for the INA. The FPB also presents two revisions of these forecasts in May and November. The econometric model MODTRIM plays a key role in the forecasting process. However, the model results are adjusted on the basis of experts’ views and are also adjusted to take into account all the relevant monthly or quarterly information, which cannot be incorporated directly into the annual model. Our system of leading indicators is designed to supply extra information about the business cycle turning points and the intensity of upturn and downturn phases.

The methodology of leading indicators

The National Bureau of Economic Research originally developed this methodology in the United States during the 1930s and 1940s. Since then, this approach has been used widely by other national institutes as well as by international organisations such as the OECD. The principle of a composite leading indicator can be described as follows. While most macroeconomic data (called the reference series hereafter) are only available with a certain delay, a number of variables (here called the leading indicators) can be combined to form a composite leading indicator. These series must be available at an earlier stage than that of the reference series and possess cyclical movements that predate those of the reference series. The main purpose of a composite indicator is to give a clear picture of the current state of the business cycle and to anticipate the turning points of the reference series.

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