Durably robust growth
In contrast to many other European countries, the Belgian economy showed resilience in 2023 thanks to private consumption. The reason for this stronger consumption is the automatic indexation of Belgian wages to the cost of living, which was originally a public scheme, but has traditionally been copied by most unions and employers. A time lag of several quarters (wages are adapted once or twice a year in these cases) pushed gross wages up by between 10.4% year-on-year (services) and 7.6% year-on-year (industry) in 2023, after already strong increases in 2022 (between 12.6% year-on-year in services and 8.1% in trade). This ongoing robustness was the main growth driver, in contrast to neighbouring countries. In 2024, the Belgian economy will continue to benefit from this situation especially in light of the GDP tailwind from the previous year (statistical overhang). However, private consumption could be a bit more timorous. The inflation rate came down sharply towards the end of 2023, but went up again and will probably stabilise between 3.5% and 4% over 2024. Wage growth, however, is expected to be noticeably lower compared with that of the last two years, so that real wages, should rise only modestly in comparison. Corporate investment should also support economic growth, but within limits. The corporate labour costs skyrocketed over the last years due to the automatic indexation of wages and resulted in a noticeable reduction of corporate profits. Hence, their financial leeway is narrower. Lower interest rates should ease the pinch somewhat. On that score, the ECB is expected to embark on a cautious rate-cutting period as of June 2024. A total of up to three cuts are in the pipeline for 2024. However, the number and scope of these cuts will clearly depend on (core) inflation and nominal wage trends in Europe. At the same time, while the ECB will fully reinvest the principal payments from maturing securities purchased under the Pandemic Emergency Purchasing Programme (PEPP) during the first half of 2024, it intends to reduce reinvestments by €7.5 billion per month in the second half of the year and cease completely thereafter. Private residential investment could also benefit from lower interest rates. However, it is expected that banks will take some time to translate the ECB’s rate cuts into their loans. Therefore, a cautious turnaround in the construction sector is not expected until the last quarter of the year. Some support for growth should also come from government expenditures, especially in the first half of the year before the June elections. These investments should concentrate on infrastructure projects. Last, foreign trade was a drag on growth for most of 2023. In 2024, a timid improvement should be visible as recovering purchasing power in neighbouring countries would benefit the Belgian export business. Nevertheless, due to the loss of price-competitiveness of Belgian products, the recovery of original exports – 40% of Belgian exports to the rest of the European Union are re-exports – should be limited.
Noticeable public deficit keeps public debt level high
The public deficit is expected to remain high in 2024. While energy price support measures stopped in mid-2023 and are therefore not relevant for the budget of 2024, Belgium is maintaining its support for Ukraine, with military equipment purchases, humanitarian aid and reconstruction measures. The State will incur further costs from the automatic indexation of wages (even more so with pensions) and local government investments are expected to peak ahead of the election due at the start of the summer of 2024. However, following the elections, in the (probably long) process of building a government coalition, the caretaker government must comply with the current budget plan and cannot decide on additional expenditures. This will prevent the budget deficit from increasing further. Nevertheless, public debt will remain very high and far exceed the fiscal rules of the EU that have reapplied as of 2024, which would require a noticeable reduction in the public deficit.
Although the level of the current account deficit did not change much in 2023, its structure has. Exports and imports of goods both fell sharply, with the latter significantly more than the former, resulting in an improvement of the trade in goods deficit balance. This was levelled out by a noticeable deterioration of the trade in services deficit. Similar patterns were visible in the balance of income. While the primary income surplus (the balance on investments) improved, the deficit on secondary income (the transfer of money for example from from foreigners to their families abroad) increased. In 2024, the trade in goods’ balance should improve further thanks to higher exports, while the balance on services should decrease due to higher prices for tourism activities abroad. The balance of income, however, should remain roughly unchanged.
Repetition of the Vivaldi coalition, with possible Christian-Democratic addition
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 Socialist Party (PS), with 19 seats and the Dutch-speaking socialists, Vooruit (with 9), the French-speaking green Ecolo (13) and the Dutch-speaking environmentalists Groen (8), the French-speaking liberals of 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) registered their sharpest gain in votes at the last election in 2019.
Looking at the next election in June 2024, the overall direction of the next Parliament is very difficult to predict as the already fragmented political landscape has drifted even wider. According to the latest polls, Flanders is and will remain firmly in the hands of the nationalists and right-wing conservatives. The Flemish Nationalists Vlaams Belang (VB, 26% share in the Flemish polls) and the New Flemish Alliance (NVA, 20%) have together a huge majority in their province. However, in Wallonia, the political landscape is the complete opposite. In that part of the country the PS is in the lead (23% in the Walloon polls), followed by the MR (20%). Holding a share of around 18% of both local polls, the Marxist Worker’s Party of Belgium (PTB/PVDA) is another important force. In Brussels, the MR is in the lead (23% of the regional polls). Due to this polar opposition in regional preferences, it is certain that it will take again a long time to build a coalition after the election. The last time it took 494 days between the election and the swearing-in of the cabinet. The most probable result from the current polls would be that the Vivaldi coalition could carry on, which would mean keeping the far right and far left out of government. If the current coalition parties failed to secure a majority, the Walloon centrist and former Christian-democratic party LE (17% in the Walloon polls) could join the coalition.