OECD Economic Outlook, Volume 2023 Issue 2

Belgium

GDP growth is expected to weaken from 1.4% in 2023 to 1.1% in 2024, before increasing to 1.5% in 2025. Household consumption will slow as purchasing power is held back by slowing employment growth, while tight financing conditions restrain investment. Belgium is highly exposed to international economic conditions and a further loss of competitiveness due to wage growth. Headline inflation is projected to increase to 3% in 2024 as energy prices rise and core inflation stays high, before declining to 2.4% in 2025 as economic slack alleviates underlying inflationary pressures.

The fiscal stance is expected to be broadly neutral in 2024 and 2025. Given Belgium’s high debt burden, a consolidation plan and expenditure rules are needed to ensure confidence in fiscal sustainability. Strengthening the taxation of personal capital income with a progressive tax rate schedule and a capital gains tax would reduce tax arbitrage opportunities. A credible long-term carbon pricing framework and improved coordination and coherence across federal and regional governments is required to promote green investment and diversification away from fossil fuels.

Economic growth has slowed

Growth slowed to 0.5% in the third quarter of 2023, amid high inflation and borrowing costs, weakening international trade and high uncertainty. Household consumption has supported growth, partly due to automatic wage indexation and a robust labour market, but weak confidence has weighed on economic activity. Business confidence indicators have fallen during 2023 and higher borrowing costs have held back household residential investment, with mortgage demand at its lowest level since 2007. Annual headline inflation has fallen fast to -1.7% in October, mainly due to lower energy prices. Core inflation remains high at 6.4% in October, but is declining as raw material prices subside, supply chain problems ease, and second-round effects from wage indexation diminish.

Belgium: Economic growth and housing indicators

Source: OECD Economic Outlook 114 database; and OECD National and Regional House prices and related indicators database.

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Belgium: Demand, output and prices

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The slowdown in world trade has led to a significant decline in exports this year. Belgium has lost price competitiveness due to automatic wage indexation, though this is lessening as wages among neighbouring countries catch-up. Retail energy prices fell substantially; the average annual household bill had fallen 52% by August 2023 from its October 2022 peak. Belgian energy prices are now lower than in all neighbouring countries, with the exception of electricity prices in France. However, an increase in fuel prices is expected this winter as oil and gas prices rise. Natural gas accounts for almost 40% of Belgium’s energy supply during peak winter months.

The fiscal deficit is expected to rise

Financing conditions will remain tight for the government as well as for businesses and households. The fiscal deficit will widen in 2023 and remain large in 2024 and 2025 under current policies. The spring 2024 elections and subsequent coalition negotiations make near-term consolidation unlikely, with major reforms postponed for the next government. Sovereign bond yield spreads are nevertheless stable. Belgian government debt has a relatively long average maturity (just over 11 years) so higher yields transmit slowly to the average cost of debt servicing. Energy policy support measures were all terminated by July 2023, except for the VAT reduction on electricity and gas, which was made permanent. A new excise duty was introduced to partly compensate the revenue loss. Next Generation EU funding will support public investment with around EUR 4 billion to come.

Economic activity will gradually recover

GDP growth is projected to slow to 1.1% in 2024, before picking up to 1.5% in 2025. Purchasing power will be held back by the ending of energy support measures and slowing employment growth. Lacklustre global trade and reduced cost competitiveness will drag on exports in the near term, while tight financing conditions will also hold back business and residential investment. Improving trade prospects next year alongside moderating labour cost growth suggest some export recovery from 2024, while the stabilisation and anticipated decline in mortgage rates should allow for a recovery in housing investment. Headline inflation is projected to rise to 3% in 2024 as energy prices increase again and core inflation stays high, before easing to 2.4% in 2025 as economic slack reduces underlying inflationary pressures. A slowdown in Belgium’s main economic partners, alongside further losses in competitiveness and productivity, are risks to the outlook.

Ensuring fiscal sustainability is key

Government debt as a share of GDP (104.3% in 2022) continues to be among the highest in the European Union. Spending pressures from ageing-related costs and the climate transition call for substantial consolidation efforts to stabilise the debt-to-GDP ratio. Ageing-related fiscal pressures are expected to increase health care and pensions costs by 1% and 1.3% of potential GDP by 2040, respectively. The reformulation of EU fiscal rules will help. In addition, a medium-term consolidation strategy, based on spending reviews, is needed to reduce public indebtedness. Adding progressive taxation to all forms of capital income and a capital gains tax would help reduce tax arbitrage opportunities. The postponement of the phase-out of nuclear energy calls for clarity in the strategy to ensure long-term energy security, while a credible long-term carbon pricing framework would promote clean energy investment and diversification away from fossil fuels. Lastly, further removing barriers to competition by reforming complex regulatory, license and permit procedures in services would improve productivity and strengthen growth.