Brussels, June 2023 – According to the spring forecasts by the National Bank of Belgium (NBB), the Belgian economy is expected to continue growing in the short term, albeit at a gradual pace. The annual growth is projected to reach 1.4% in 2023. However, the growth rate is anticipated to slow down to 0.3% on a quarterly basis or 1.2% annually in the medium term, aligning with the potential growth, as the impact of labor scarcity becomes more evident. Achieving higher GDP growth would require a stronger increase in productivity or higher labor market participation.
The overall inflation has significantly decreased since the autumn, mainly due to a sharp decline in international gas prices. The underlying price pressure, as well as food inflation, are expected to gradually recede. In 2023, the indexing mechanisms will still contribute to an 8% increase in wage costs. Over the next four years, hourly labor costs in Belgium are projected to rise nearly 3 percentage points more than in the three main neighboring countries, deteriorating cost competitiveness.
The budget deficit is expected to remain unsustainably high in the coming years, with a further increase in 2023. Without policy changes, the deficit is estimated to reach 4.7% of GDP in 2025. Consequently, the government debt is on an upward trajectory.
The Belgian economy has demonstrated considerable resilience in recent months and has effectively weathered the cost crisis, thereby avoiding a recession as anticipated. Although growth slightly slowed down at the end of 2022, it rebounded to 0.5% on a quarterly basis at the beginning of 2023. Job creation has also picked up momentum again after a temporary slowdown in the second half of last year. Currently, all indications point to the growth remaining relatively stable in the next quarters. Overall, economic activity is expected to increase by 1.4% annually in 2023. The growth rate will gradually moderate to 0.3% on a quarterly basis or 1.2% annually by 2025, aligning with the potential growth.
The growth is primarily driven by domestic demand. Despite weak consumer confidence in the autumn of the previous year, household consumption continued to grow strongly in 2022. The indexing mechanisms ensure that households experience a significant increase in real wages, which supports consumer spending. As the significant indexing effect diminishes, the growth of purchasing power and household consumption normalizes, but it remains a significant driver of economic activity.
Business investments have slowed down due to rising costs and uncertainty but are gradually recovering. Efforts towards energy efficiency, green initiatives, digitalization, and automation are facilitating this recovery, given the tight labor market. Increased financing costs do not pose significant obstacles to business investments but do dampen housing investments, which show a much slower recovery and remain weak throughout the projection period. This is particularly noteworthy as substantial investments are needed for the gradual climate transition of the Belgian housing stock.
The labor market remains robust, with the creation of approximately 130,000 jobs during the forecast period. As a result, labor scarcity persists, with an unemployment rate remaining below 6%. Due to labor scarcity, economic growth is expected to gradually decline towards its potential. Achieving higher GDP growth would require a stronger increase in productivity or labor market participation.
In the meantime, inflation has already significantly decreased, primarily due to a sharp decline in international gas prices. This year, the overall inflation is expected to average below 2% annually and even turn negative in certain months. The underlying price pressure, as well as food inflation, are projected to further recede. However, in 2024, total inflation is expected to temporarily rebound due to the technical impact of the expiration of energy support measures, before dropping below 2% again in 2025. The uncertainty surrounding inflation forecasts remains high, particularly towards the end of the projection period.
The high inflation figures from the previous year are now reflected in a substantial increase in wage costs in 2023, amounting to 8%. Although high wage growth can contribute to additional price pressure, these forecasts assume that companies will not fully pass on the higher costs to their prices. Instead, companies are expected to absorb these costs partially through their profit margins, as they have done in the past during periods of significant wage increases. Available statistics for 2022 already indicate a clear contraction in the historically high profit margins of businesses. In the coming years, profit margins are projected to further decline but remain above the long-term average.