Belgian economy supported by resilient consumption
The Belgian economy has shown resilience in 2023 thanks to private consumption. The reason for this stronger consumption is the automatic price indexation of Belgian wages – originally a public scheme, but traditionally copied by most unions/employers, it has a time lag of several quarters – that has probably pushed hourly wages up by over 8% in 2023, after an already high 5.5% increase in 2022. Furthermore, household purchasing power in 2023 has been supported by tax reductions as the personal income brackets were indexed in January 2023 based on 2022 inflation figures. For 2024, real wages are expected to remain stable, with wage growth keeping pace with inflation, which should ease further. However, private residential investments are being affected by increased financing costs posed by higher interest rates. This should remain the case in 2024. Investments by companies should also remain subdued in 2023 and could even drag on growth over the winter before possibly staging a gradual recovery throughout 2024. On back of automatic wage increases, corporate labour costs have skyrocketed over recent years and are set to rise further. To support companies, the government has introduced measures to significantly reduce their social security contributions. They also profited from the reduction of the VAT for electricity and gas from 21% to 6%, which gave companies more room for maneuver. However, while for private households the lower VAT level will probably remain in place until the end of 2023, for companies it ended at the end of June 2023. The high wage burden has also an effect on foreign trade. Thanks to the relatively higher purchasing power of Belgians, their imports should remain robust, but the loss of price-competitiveness of Belgian products has resulted in lower original exports (40% of Belgian exports to the rest of the European Union are transit-oriented imports). This will also remain an issue in 2024. Minimal support should also come from public expenditures, which are set to grow only moderately and will be concentrated on local investment projects that are dated before the election in summer 2024. In the wake of very sluggish eurozone economic growth in conjunction with easing inflation, the ECB should go into “wait-and-see” mode after a sharp tightening phase between July 2022 and September 2023. However, interest rates are likely to remain at this high level during the first half of 2024 and probably even longer.
Persistent double deficit
The public deficit is expected to have once again increased in 2023. Although the temporary pandemic-related measures have been unwound and the support measures around the war in Ukraine have decreased, the financing costs for government debt increased noticeably compared to the low interest rate environment, the reduction of the VAT for electricity and gas is evident in the public accounts, public investments have risen (defence, regional infrastructure and local government investments). Furthermore, due to the automatic inflation indexation of public wages and general pensions, public wage costs have risen sharply. In 2024, the deficit should decrease only slightly. While the temporary energy and Ukraine-related measures will be eliminated, the costs of the aging population (higher pensions) will increase, and local government investments are expected to peak ahead of the election due in the summer of 2024. Public debt will therefore remain very high and its sustainability will be one of the main challenges. The European budgetary rules that were suspended in 2020 will apply again in 2024. Moreover, financing costs will remain much higher than in the previous years as the ECB is unwinding its asset portfolio that resulted from its quantitative easing policy of the last decade. The ECB already stopped the reinvestments of its APP-program in July 2023.
The current account should remain in deficit but improve in 2023 and 2024 due to better terms-of-trade conditions (mainly on the import side thanks to the lower – albeit durably high – energy bill) and an increase of the primary balance, which includes profits from investments abroad. However, given sluggish demand for Belgian products in the main export destinations (i.e., Germany, the Netherlands and France) combined with robust imports, the current account balance will remain in deficit.
Repetition of the Vivaldi coalition after the election in June 2024 possible
Prime Minister Alexander De Croo, a Flemish Liberal, leads a large-scale coalition with 87 out of 150 seats in the House of Representatives. The coalition is known as the “Vivaldi” coalition due to its four-group composition: socialists, liberals, environmentalists, and Christian Democrats. It includes seven parties: the French-speaking PS, with 19 seats and the Dutch-speaking socialists, Vooruit (with 9), the French-speaking Ecolo (13) and the Dutch-speaking environmentalists Groen (8), the French-speaking MR (14) and the Dutch-speaking liberals Open VLD (12), as well as the Flemish Christian Democrats, CD&V (12). The parties’ ideologies are not aligned, but the government has managed to hold on to power. One reason for this resistance is the fear of extremist parties coming to power after the far-right Flemish nationalists (VB) amassed its sharpest gain in votes during the last election in 2019.