OECD Economic Outlook November 2019 Country Note, Belgium

 87

Belgium Economic growth is projected to moderate to around 1% in 2020-21. External headwinds will weigh on exports and business investment, despite supportive financing conditions. Private consumption will be more resilient on the back of past tax cuts and wage growth that will increase household disposable income. The job market is set to remain tight, with the unemployment rate at 5.4% at the end of 2021.

Fiscal policy will support growth moderately in 2020-21, which is appropriate in the current economic slowdown. However, the public debt-to-GDP ratio remains high and the government should stick to prudent medium-term fiscal targets. Loose financial conditions have fuelled credit growth, which could require additional and binding borrower-based macroprudential instruments. Competition in some professional services and incentives for firm creation should be enhanced, and the efficiency of public support to innovation and policies to re-skill workers should be improved to boost productivity growth.

Economic growth has eased In an environment of rising uncertainty, trade tensions and sluggish euro area growth, business confidence has declined, hurting investment. Nevertheless, domestic demand remains the main driver of growth.

Private consumption is still supported by past reductions in income taxation. Labour costs have gradually started to increase, with the end of the wage moderation and tighter labour market conditions. Headline inflation has fallen recently, following a decline in energy prices, but core inflation is gradually rising.

Belgium Growth is moderating but unemployment will remain stable Y-o-y % changes 4

High capacity utilisation has supported investment

% of labour force 9

2

% 85

15

80

10

75

5

70

0

65

8

7

0 Unemployment rate →

-2

-4

Y-o-y % changes 20

6

← Real GDP

2008

2010

2012

2014

← Total investment, volume¹

-5

2016

2018

2020

5

-10

Capacity utilisation, manufacturing →

2008

2010

2012

2014

2016

2018

60 55

1. Four-quarter moving average.

Source: OECD Economic Outlook 106 database; and National Bank of Belgium.

StatLink 2 https://doi.org/10.1787/888934045031

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION © OECD 2019

88 ď ź

Demand, output and prices 2016

2017

Current prices EUR billion

Belgium GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1,2 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation3 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

430.4 221.1 100.0 99.9 421.0 4.2 425.2 341.6 336.5 5.1 _ _ _ _ _ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2015 prices)

2.0 1.8 0.3 1.3 1.3 -0.1 1.2 5.3 4.4 0.7

1.5 1.5 0.9 4.0 1.9 0.3 2.2 1.2 2.1 -0.7

1.3 1.1 1.9 3.8 1.9 -5.9 -3.9 1.2 1.3 -0.1

1.1 1.4 1.4 1.7 1.5 0.0 1.4 0.9 1.3 -0.3

1.1 1.3 1.1 1.4 1.3 0.0 1.3 1.2 1.5 -0.2

1.7 1.5 1.6 1.1 1.4 2.2 2.3 1.3 1.1 1.5 1.5 1.3 1.5 1.4 1.5 7.1 6.0 5.5 5.5 5.5 5.2 4.8 5.1 5.2 5.2 -0.7 -0.7 -1.7 -2.0 -1.9 120.6 118.6 117.9 118.1 118.0 101.8 100.0 99.3 99.5 99.4 1.2 -1.0 -1.2 -1.5 -1.8

1. Contributions to changes in real GDP, actual amount in the first column.

2. Including statistical discrepancy. Statistical discrepancy contributes to 5.3% in 2019 percentage changes.

3. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 106 database.

StatLink 2 https://doi.org/10.1787/888934046152

Further reforms are needed to boost productivity growth The budget deficit is set to increase to 1.7% of GDP in 2019 from 0.7% of GDP in 2018, driven by the end of some temporary factors related to corporate taxation. Fiscal policy is projected to loosen in 2020-21, which will support growth in the current slowdown. In the medium term, it is important to adhere to fiscal consolidation targets to ensure a gradual durable reduction of the debt-to-GDP ratio and to use windfall revenues to reduce the debt ratio further. Significant measures will be needed to reach a structural budget balance in the medium term.

Ongoing accommodative euro area monetary policy is also supporting economic activity, but could create some risks eventually. The strong growth in bank credit to the corporate sector, at 6.9% in 2018, has prompted the National Bank of Belgium (NBB) to introduce some macroprudential measures, notably a countercyclical capital buffer rate of 0.5% in June 2019. In addition, the NBB established lending thresholds in October 2019, such as loan-to-value limits for a significant share of new loans, that banks are expected to meet to reduce risks. This is a welcome measure. In case the current measures prove ineffective, additional and stricter macroprudential tools, such as binding limits on loan-to-value and debt-service-toincome ratios, should be implemented.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION Š OECD 2019

ď ź 89 Achieving more dynamic long-term growth requires boosting productivity growth, which remains subdued, especially in the service sector. Despite recent reforms, a complex permits and licence system continues to create administrative burdens on start-ups, weakening business entry rates. Stringent regulations in several professional services hinder competition. Public support to R&D investment is high, but direct support could better support long-term research in areas with a high potential for spillovers.

Consumption will continue to support growth, but risks are high GDP growth is projected to moderate in 2020 and 2021. Business investment and export growth will ease in 2020, in line with the deterioration in global economic conditions. Private consumption will continue to be the main driver of growth, supported by past reductions in labour taxation, robust job creation and wage growth. Inflation is projected to progressively rise to 1.6% at the end of 2021. The main risks include a further slowdown in the euro area and uncertainty related to Brexit, which could adversely affect economic activity, notably in Flanders, which has close trade ties to the United Kingdom. In addition, a slow formation of a new federal government could delay reforms. On the upside, growth could be stronger if tax reductions enhance private consumption more than expected.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION Š OECD 2019