The Belgian economy is in good shape. Until now

How is the Belgian economy performing?

Better than expected, actually. The economy is expected to grow by 1.5 percent this year. This is lower than in the truly golden years, but double the eurozone average. In a slow European environment, the Belgians are still holding up reasonably well. In the coming years, growth will be stable around the same moderate level of 1.3 percent, as the National Bank expects in its forecasts.

Last year, growth was mainly supported by domestic consumption. Because purchasing power has remained reasonably stable throughout the Corona and energy crisis, Belgians have also been able to continue spending money. This picture has changed somewhat in 2023. Now it is business investments that are driving growth the most. This also somewhat surprises economists at the National Bank, who describe investment growth (+8.6% in 2023) as absolutely “astonishing”. In the classic scenario, you would expect investments to decline at a time when interest rates are rising. The investment jump also conflicts with business confidence, which remains low.

For many companies, there will be a “now or never” moment. There is an urgent need to invest in digitalization and greening, and now that wage costs are rising and the labor market remains tight, it is a good time for many companies to invest in productivity. National Bank Governor Pierre Wunsch also points out that many companies have sufficient reserves to bear these costs.

Nice – good. But what do I have left?

It is known that thanks to the automatic indexation of wages, purchasing power in Belgium has remained better protected than in neighboring countries. The price inflation that triggers the use of the indicator has now slowed significantly and even turned negative last month (prices in November were on average 0.7% lower than the 2022 level). The National Bank expects inflation to rise again to 4 percent next year and to fade in subsequent years.

Indexing will be done again next year, which will leave many personnel managers in the wet. The National Bank does not qualify the problem of wage costs. Wages in Belgium have grown faster than in neighboring countries over the past two years, but the opposite is expected to happen in the next three years, meaning that the difference will be nil by the end of 2026. This means that no further above-index wage increases should be expected immediately. In the coming years if the current wage law is implemented.

Despite renewed calls from the VBO to eliminate automatic indexing, Governor Wunsch does not believe it will happen. “Indexing Here to stayHe said in a press conference. “Every country has its own economic characteristics, and these are ours. There is no political majority to change this. Indexation also worked, but we were lucky. If energy prices had continued to rise for a longer period and inflation had remained very high, our companies would have had real problems with wage indexation.” .

Are there also sectors that are performing less well?

One of them stands out in the negative sense: construction. Investments in housing fell sharply. The construction sector is facing a difficult time. Building materials are quickly becoming more expensive, while tightness in the labor market also plays a role. In addition, banks dramatically raised interest rates on home loans, and investors began to withdraw from the less safe sector in search of returns. This in turn slows demand for new homes. “The latest figures on building permits and mortgage applications show that this cooling off is far from over,” says economist Geert Langnos of the National Bank. There will only be some recovery in the second half of next year.

There is also a flashing light when exporting. The (temporary) wage blockage affects Belgium, but there is also a broader European problem of low market share in trade.

Overall, there are no storm clouds. Why are so many economists still pessimistic about Belgium?

In the short term, the economy is doing well, but in the medium term, fragile government finances create uncertainty. The Belgian government is scheduled to end the year with a deficit of 4.3% of the gross national product. If the policy remains unchanged, we will already reach -5.2% in 2026. Pierre Fonche: “Just to maintain the deficit at current levels, the next government will have to seek a total of $10 billion over the next five years: $1 billion Annually for seniors and $1 billion in interest costs.”

Funch describes the situation as “untenable in the long term.” Especially since no change has begun yet. Belgium, along with Slovakia and France, is one of the countries at the bottom of the EU pack that cannot control the budget and is seeing a growing deficit. This is a problem because we already know for sure that the government will face new costs, such as an aging population and climate change.