Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
Belgium
Difficult resilience, sown with reforms Country Risk Level MEDIUM
Overview The Belgian economy continues to perform better than the European average and, along with Germany and Austria, is among the small club of eurozone member states to have returned to and exceeded (only just) its pre-crisis GDP level. However, this performance is primarily attributable to foreign trade and, to a large extent, trade with Germany, as domestic demand has clearly weakened (-0.6% in 2012, -0.3% excluding stocks). The European sovereign debt crisis and the ramping up of austerity measures have weighed on household consumption for the second consecutive year and caused a new fall in investment. All in all, GDP is unlikely to escape a slight decline in 2012 (-0.2%), but a return to muted growth in 2013 (+0.3%) and 2014 (+1.4%) is expected on the back of a fresh boost provided by exports and investment, these latter benefiting from the first positive effects of the structural reforms of the past two years. However, a return to a balanced budget, scheduled for 2015, promises to be tricky.
Exports are expected to hold up in 2013 and 2014. The export dynamic came to an end in 2012 and the positive annual balance (+0.4%) reflects the remarkable rebound in Q1 (+1.9% q/q). The stabilization of order books in late 2012 and the prospect of a recov- ery in demand in the second half of 2013 should give rise to a gradual upturn in exports (+1.1% in 2013), still concentrated in Europe and in partic- ular Germany, the Netherlands and France. Imports are also likely to grad- ually pick up in 2013, but their growth will remain limited by weak domestic demand. Thus, foreign trade will con- tribute positively, albeit only slightly, to growth (0.2 pp in 2013 and 2014).
Investment will start to contribute to growth again only in mid-2013. The rebound in investment in 2011 did not withstand the renewed weakening of the economy. The contraction in new orders (at a three-year low) has forced a number of companies to revise investment prospects and reduce staff numbers to prevent feed- ing the ongoing surge in insolvencies (+3% in 2012 to a new all-time high and +10% in 2013). The stock of for- eign direct investment, among the highest in Europe (93% at end-2011), should nevertheless provide support by the time when foreign trade, boosted by reforms aimed at a com- petitive recovery, and credit growth
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can once again stimulate investment post mid-2013.
Household consumption will remain limited in 2013. Belgian households, although only moderately indebted and armed with a high savings rate on a European scale, quickly adjusted their consumption volumes in 2012 (0.6%) in the face of a downturn in the labor market (with the unemployment rate rising to 7.5% in October), tax hikes and mounting uncertainty. Despite a system of wage indexation and moder- ate inflation, consumption spending isn’t likely to pick up again before household confidence, which has fallen to new lows in late 2012, truly recovers. Thus, household spending would only regain its pre-crisis level in 2014, leading household investment by several quarters. This latter is expected to remain in contraction territory throughout 2013.
The budgetary adjustment remains on track, but beware of the political cal- endar in 2014. The austerity measures introduced in 2012 by the government (around 4% of GDP with 1% of further measures scheduled in 2013) should pave the way for a reduction in the deficit to around 2.3% of GDP in 2013, although new measures remain a pos- sibility given the government’s more optimistic growth forecasts (+0.7% in 2013). This fiscal trajectory will help
keep bond yields at low levels, but a return to a balanced budget in 2015 risks being undermined by the political calendar (general and regional elec- tions will take place in 2014) and the high stock of debt (close to the psycho- logical level of 100% of GDP).
The structural reforms should bear fruit in the medium term. Following the pension and labor market reforms in 2011, the government took action in order to improve business competi- tiveness in 2012. The objective is to wipe out by 2018 the gap in labor cost between Belgium and the average labor cost in Germany, France and the Netherlands (estimated at 3.4%) through a stabilization of real wages in 2013 and 2014 and potential revisions of the wage indexation rule._AB/ML
To watch…
>The trend in order books. >Compliance with the budgetary targets and the trajectory of the public debt. >The ongoing structural reforms. >The unfolding of the general and regional elections in 2014._