Belgium is expected to experience lower growth and higher inflation next year, as domestic challenges coupled with major international crises are likely to exacerbate the country's already dire economic outlook.
In a recent report, the International Monetary Fund (IMF) predicted that "weaker external environment and slowing domestic demand" mean that the Belgian economy will expand by just 1% this year, down from 3.2% in 2022. It also forecast that, "in the medium-term," growth will remain at just 1.25%: barely half the country's average annual growth rate over the past three decades.
In addition, the IMF forecast that inflation will rise from 2.5% this year to "above 4%" in 2024: twice the European Central Bank's (ECB) 2% target rate. It attributed the increase "mostly" to the "fading effects from energy price support measures" introduced after Russia's full-scale invasion of Ukraine in February last year.
Even more worryingly, the fund noted that core inflation, which strips out the impact of energy and volatile food prices, will remain extremely high, reaching 7.5% this year before dropping to just 3.75% in 2024.
Budget blues
Despite praising the Federal Government's "strong and timely policy response" to the Covid-19 pandemic and the war in Ukraine, the fund stressed that policymakers must still do more to address Belgium's major "cyclical and structural challenges."
In particular, it noted that the climate transition and an ageing population are "putting pressure on public finances" while low productivity and job market participation are "dampening potential growth."
To address these issues, the fund called for policymakers to "effectively widen the net income gap between non-work and work" and to "increase flexibility" in the labour market. It also recommended a reduction in fossil fuel subsidies, higher carbon taxation, and "greater coordination" between the country's federal and regional bodies.
More controversially, the fund called for the Federal Government to implement "significant and sustained" budget cuts in pension and healthcare spending. It argued that such measures are necessary to address the country's soaring fiscal deficit, which, at -4.1%, is one of the highest in the EU.
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"Belgium's social contract is characterised by a high level of redistribution and wide-reaching safety nets," the report noted. "The model has been successful in reducing inequality and mitigating the impact of the multiple shocks that afflicted the economy since the pandemic. However, it is generating large structural deficits and rising debt and faces the pressure of an ageing population. Ensuring its sustainability requires further reforms."
Speaking to Belga News Agency, Jean-François Dauphin, the fund's European Department Mission Chief for Belgium, added that a "budget adjustment is necessary to absorb new potential shocks and to ensure the sustainability of Belgium's redistributive and solidarity-based social model."
However, IMF admitted that its forecasts are "subject to considerable uncertainty and risks." These include "escalating geopolitical tensions", insufficiently tight or excessively loose ECB monetary policy, and the inability of Belgium's political parties to quickly form a government following next year's national elections.
"A protracted government formation after the June elections would risk delaying the needed fiscal adjustment and reforms, increasing risk premia, and worsening debt dynamics," the report concluded.
