Belgium’s gross domestic product (GDP) growth is expected to be in line with the eurozone average this year at 0.8%, as well as next year (1.6%), according to new European Commission forecasts unveiled on Monday.
The new figures are being welcomed as good news, as it could mean a previously anticipated recession in Belgium is narrowly avoided.
Inflation is expected to fall to 2.7% next year from the 4.3% forecast for this year, although this is harder to predict.
With these figures, Belgium would therefore be in line with the average for the eurozone, where growth is expected to be 0.9% this year and 1.5% next year, while inflation would fall from 5.6% this year to 2.5% next year.
Improved forecasts
Growth would be over half a percentage point higher than the EU Commission had expected in the autumn. Inflation would come down faster than expected, at least if the expected fall in wholesale gas and electricity prices is quickly passed on to retail prices.
The EU economy could therefore avoid a technical recession, but headwinds persist, notes the EU, almost a year after the outbreak of the Russian war in Ukraine.
Diversification of energy supplies and a sharp drop in consumption have kept gas reserves above the seasonal average of previous years, allowing wholesale gas prices to fall well below their pre-war levels in Ukraine, the Commission notes.
In addition, the labour market remains robust, and confidence is growing, according to the EU. For Belgium in particular, “the automatic indexation of wages and social benefits will continue to contribute to the recovery of household purchasing power” this year, the Commission stresses.
Pressures still being felt
However, not all aspects are rosy. Consumers and businesses continue to face high energy prices, while core inflation (inflation excluding energy and unprocessed food) was still on the rise in January, further eroding household purchasing power.
With inflationary pressures persisting, monetary tightening is likely to continue, weighing on business activity and curbing investment, according to Economic Commissioner Paolo Gentiloni.
“Domestic demand could turn out to be stronger than expected if recent falls in wholesale gas prices are passed on more to consumer prices and if consumption holds up better than expected. However, a possible reversal of this trend cannot be ruled out, in a context of continuing geopolitical tensions. External demand could also prove more robust following the reopening of China, but this could fuel global inflation,” he explains.
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These parameters explain the fact that, overall, "the risks to growth are balanced." However, these forecasts are essentially based on the purely technical assumption that Russia's invasion against Ukraine will not escalate, but will continue throughout the forecast period.
Maastricht escape clause to be lifted
Since the Covid-19 crisis, the Maastricht criteria, which monitors compliance with government deficits and debt standards, have been suspended by a general escape clause in the Stability and Growth Pact. The clause allows EU Member States to take on more debt to support businesses and households.
The clause "should reasonably" be lifted by the end of this year, according to the Italian Commissioner. This prospect has been raised several times by the Commission over the past two years, but the clause has already been extended several times.
In parallel, the Member States still have to conduct the delicate debate on economic governance reform.
