BELGIUM

Belgium’s economic activity recovered strongly from the pandemic in 2021 (after the plunge of -5.7% in 2020), thanks also to the comprehensive government support to protect businesses and employment. The recovery continued in H1 2022, with GDP growing by +0.5% and +0.2% q/q in Q1 and Q2, respectively. In Q2, there was a slight expansion across all components but investment  recorded a -1.1% quarterly drop.

Inflation continued to increase in September, reaching 11.27% y/y, its highest level since August 1975, from 9.9% the month earlier. Upward price dynamics were still driven by persistently high energy prices, which were up more than 60% in September, and accounts for 5.4% of the total inflation basket. In addition, food inflation accelerated sharply in recent months (at 10.4% y/y in September). Moreover, the broadening effects of surging energy prices led core inflation to jump to 6.2%, compared to 5.7% in August.

Looking ahead, the high level of inflation and the deterioration in consumer confidence are expected to weigh on private consumption and household investment. On the business side, high costs stemming from surging input prices and wages , as well as supply-side constraints, are expected to impact corporate investment. Furthermore, we expect a slowdown of import and export growth, given the weakening demand. We expect activity to slow down markedly at the end of 2022, followed by a recession in 2023, with GDP starting to recover only from H2 2023. Overall growth will reach +2.4% this year while we expect economic contraction of almost -1% in 2023.

Overall, public finances remain a hurdle for the medium-term outlook. The public deficit is expected to reach -6.2% of GDP in 2022 (from -5.5% in 2021) and public debt is also expected to stay around 107% of GDP in 2022. The increase in non-temporary current expenditure over 2022-2023 will be driven by the automatic indexation of public sector wages and social benefits, but also by rising aging costs and by the permanent measures taken by the government during the pandemic (i.e. increase in the minimum pension and health care sector wages).

After +1.9% in 2017, the highest level since 2011, Belgium’s real GDP growth slowed down to +1.5% in 2018 and reached +1.4% in 2019, the lowest level in six years. Due to the Covid-19 crisis, real GDP growth should fall to -10% in 2020. We expect a stronger recession in Belgium than the Eurozone average (-9.3% in the Eurozone) due to the strictness and length of the lockdown, as well as the more limited support measures.

In the face of the pandemic that hit the global economy beginning in January 2020, the Belgian caretaker government implemented a strict lockdown. We estimate that activity has lost 30% of its production capacity per month of the lockdown, as in France. Thus, in Q2, we expect Belgium’s GDP to fall by more than -16% (q/q). With a production capacity that will remain durably below 100% as a result of health restrictions, we estimate that Belgium will not return to pre-crisis levels before 2023. At the end of 2021, Belgium will remain -4.5% below its pre-crisis level and at -1.4% at the end of 2021. The fall in new orders to industry was clearly sharper than in 2009 and for the past two months a significant rise in stocks has been reported by Belgian companies, a sign of weak demand in a period of production recovery. We believe that a recovery in company turnovers in the coming months will be very slow, in particular due to volumes persistently below pre-crisis levels, combined with deflationary pressures. Regarding exports of goods and services, Belgium is estimated to lose more than EUR85bn in 2020, which represents about 30% of its exports in 2019, whereas in normal times Belgium would normally record EUR20bn in export gains. The largest export losses are expected in the sectors most affected by the Covid-19 crisis: energy, metallurgy, transport, automotive and machinery. Finally, we estimate that the household savings rate is currently at 22% of gross disposable income (+10% above the pre-crisis level), which is equivalent to an excess of savings of EUR25bn , or 25% of domestic investment. Without measures to stimulate demand, household spending will remain well below pre-crisis levels until the end of the year. 

Business insolvencies are likely to reach a new record high over the next 12-18 months. The trend was already on the rise in 2019, with a rebound of +7% for nearly 10,600 companies, a high point since 2014. The rise was seen across almost all sectors (+11% for services, +4% for trade, +8% for construction, +2% for hotels and restaurants). Over 2020, the final balance sheet will be misleading, with a limited increase in insolvencies due to (i) the impact of the lockdown on the activity of commercial courts (insolvency registrations fell by 68% in April 2020 compared to April 2019), (ii) temporary adjustments to bankruptcy legislation and (iii) emergency business support measures. But these factors are temporary in nature and fundamentals are on the rise: We expect a surge in insolvencies over the second half of the year, which will continue into 2021 with more than 13,000 cases in the end, representing an increase of more than 20% compared to 2019. 

Belgian companies also suffer from a very high debt stock: 154% of GDP. This constitutes a debt stock as high as France and is the highest in Europe after Luxembourg, Ireland, the Netherlands and Sweden. The introduction of public guarantees was therefore essential to avoid a liquidity crisis.