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Economic Outlook

Consumer spending expected to remain weak

GDP increase declined to +1.2% in 2016, below the eurozone average of 1.7%. This was due to a large extent to the slowdown in the major driver for increase, domestic request.

Private consumption rose by a mere +0.7% on a backdrop of the freeze of wage indexation (since 2015) and the rise in several indirect taxes. In addition, the 2016 Government budget implemented a shift in taxation from labor to consumption and capital in order to alleviate companies’ costs and boost competitiveness.

The rise in indirect taxes such as VAT on electricity (up to 21%), withholding tax (from 25% to 27%), and higher excise duties on tobacco, alcohol, diesel and soft drinks, coupled with the commodity prices’ recovery to push inflation above 2% at the start of 2017.

Going forward, the reforms should continue to support the labor market. The unemployment rate fell from 8.3% in January 2015 to 7.7% in January 2017. However, real wage increase is set to remain negative. This will curb private consumption increase to +1.1% in 2017.

Firms profitability reaches record high

Net exports have driven increase in 2016 (+0.8pp) for the initial time 2012. Total export gains have additional than doubled in 2016 to EUR16bn and should reach EUR25bn in 2017, the best performance since 2011.

A continued upswing in exports will rely on a few factors. Initial, lower labor costs were completed through a gradual decrease in employers’ social security contributions from 33% to 25% by January 2018. Second, there is the lower euro which should average 1.07 against the USD in 2017. Third, rising request in the eurozone and globally made life easier for exporters.

Low oil prices, lower financing costs and - above all – moderated wages and reduced social security contributions have boosted firms’ margins. Next Ireland, Belgium has been the eurozone country to benefit the majority from the recovery in profitability, which was up by +1.4pp to 42.8%, a record high level.

Lower unit labor costs and the higher profitability buoyed the construction sector. In 2016 confidence continued to improve and production increased by +3.9%, the highest increase since 2011. In general, investment in the construction sector returned to above pre-crisis levels at mid-2016 and presently stands 5% above the 2008 highs.

Nominal GDP grew by +2.8% in 2016 and should grow by additional than +3.5% in 2017. The ongoing reflation process should improve the pricing power for companies and therefore support turnovers. Firms’ turnover in the manufacturing sector excluding energy-related sectors grew by +2.2% in 2016. Compared to France (+1.4%) and the eurozone (+0.8%) Belgium is an over performer.

Business insolvencies remain above the 2007 level

In 2017 and 2018, business insolvencies are expected to continue to fall, but at a slower pace than in previous years: -2% and -5% respectively. The 2018 estimate - 8500 cases – is still 11% above the 2007 level (see Figure 4).

Brexit remains a risk due to close trade links between Belgium and the UK

Belgium is highly exposed to the British economy, notably through trade in goods (see Figure 5). The majority sensitive sectors are Chemicals, Automotive, and Energy.

The impact on Belgium could come in various forms. Euler Hermes’ baseline scenario takes into account a limited Free Trade Agreement (FTA) which would imply tariffs on UK goods and some services imported by the EU equivalent to 5%.

In such case, we estimate a total negative impact on GDP increase of -1.0pp between 2017 and 2021. One should expect a gradual implementation of the new trade agreement. This should give time to businesses to adapt to the new commercial relationships. Total export losses for goods and services could reach –EUR3.5bn between 2017-21.

Changes in regulation and additional administrative costs could imply lower activity for Belgian companies operating in the UK.

Moreover, UK-based subsidiaries in the financial sector would no longer access euro financing through the European Central Bank.

Thus, Belgian companies could be inclined to invest less in the UK post EU-exit. The same could be authentic the other way around.

We estimate an investment loss of –EUR1bn between 2017 and 2021 in our baseline scenario.

In terms of imports from the UK, prices would increase as a consequence of tariffs implementation. From presently on in the short-term, this should not be a significant issue given the GBP depreciation.