Belgium - Developments in Individual OECD Countries

OECD Economic Outlook, June, 1993

The economic situation worsened considerably in early 1993, reflecting the downturn in neighbouring countries and weakness in practically all components of domestic demand. Economic growth may be negative in 1993 as a whole -- for the first time since 1981 -- but it is projected to pick up in 1994, following a substantial further decline in interest rates and a rebound in continental Europe.

Recent developments. GDP growth slowed to less than 1 per cent in 1992. After a strong start, economic conditions deteriorated markedly in the final months of the year, and this trend has continued into 1993, with unemployment increasing rapidly. The unemployment rate rose to 10.3 per cent in 1992, from 9.3 per cent in 1991. In addition to developments in neighbouring countries, fiscal consolidation may have weighed on domestic TABULAR DATA OMITTED demand, even though in Belgium such a negative impact on activity is typically cushioned by a decrease in imports. Rising unemployment and concern about the growth of disposable personal income seem to have depressed private consumption and housebuilding. Business fixed investment has been affected by the worsening outlook, deteriorating profits, and the low level of capacity utilisation. The growth of imports of goods decreased in volume terms in 1992, but exports stagnated, pointing to an important loss of market shares and a deterioration in competitiveness. Nonetheless, due to a terms-of-trade gain, the current-account surplus of the Belgium-Luxembourg Economic Union (BLEU) may have remained broadly unchanged. Measured by the 12-month increase in the consumer price index, inflation has edged up -- to 2.9 per cent in April. But "underlying inflation" -- excluding food and energy prices -- has remained rather stable at just under 4 per cent.

Policies and other forces acting. The current weakness of the economy seems likely to continue in the near term. The National Bank's leading indicators fell sharply in January and remained depressed in February and March: they have been on a steep downward trend for over a year. According to the latest surveys, confidence is deteriorating, business fixed investment should decline markedly this year, and consumers are scaling down their spending plans. Exports are unlikely to provide much support to activity in the near future. In their annual assessment of Belgium's competitive position, required by the "Law on Competitiveness" of 1989, the social partners have recently concluded -- for the first time since the Law was enacted -- that competitiveness has deteriorated. To redress the situation, the Government has announced a reduction in social security charges for most exporting firms, to be financed through a tax on energy consumption by non-industrial users.

Domestic interest rates are expected to decline further in 1993 and 1994, in line with German rates. Interest differentials vis-a-vis Germany increased early in 1993, reflecting pressure on the Belgian franc and political uncertainties. More recently, they have narrowed again and are now very close to the levels prevailing before the Autumn 1992 EMS crisis. They are projected to remain around current levels.

Despite a major corrective package, the general government deficit widened slightly to 6.8 per cent of GDP in 1992, reflecting the economic slowdown. In March 1993, the Government announced a new series of measures to reduce public expenditure, increase taxes and improve their collection. In the OECD Secretariat's projections, however, the deficit is set to decline only to 6.6 per cent of GDP in 1993, as the positive impact of these measures and of a decline in interest rates is largely offset by the negative effects of a weak economy. In 1994, the deficit is expected to be reduced to around 5 1/2 per cent of GDP as the full impact of the recently announced measures comes through, and also because of both a further decrease in interest rates and the projected pick-up in the economy.

Prospects. GDP will very likely decline this year, reflecting weakness in practically all its main components, especially private investment. The economy is projected to rebound somewhat in 1994, following a further decline in interest rates and a recovery in continental Europe. Housing in Belgium is typically very sensitive to changes in mortgage rates and should lead the up-turn, along with exports, which can be expected to benefit from more buoyant foreign markets. The unemployment rate is likely to approach 12 per cent in 1993 and 13 per cent in 1994. Growth below potential and a further deterioration in labour-market conditions should moderate the rise of wages and unit labour costs. Inflation, as measured by the private consumption deflator, should nevertheless remain broadly stable as the decline in food and energy prices recorded in 1992 is unlikely to be repeated. The current-account surplus of the BLEU may decline, to a little under 2 per cent of GDP in 1994.

Apart from external developments, the risks in the outlook concern primarily the reaction of the economy -- and especially housebuilding -- to the projected decline in interest rates. Also it is uncertain how the economy will react to the recent fiscal package, although past experience suggests that the negative direct impact on activity should be minor and might even be outweighed by a positive effect due to increased confidence.