National Bank of Belgium Sees Belgian Economy Narrowly Avoiding Technical Recession

19 December 2022

By David Barwick – BRUSSELS (Econostream) – The National Bank of Belgium on Monday said that the euro area economy would be in a mild recession at the end of this year and early next year, but that Belgian growth would hold up relatively well and only briefly turn slightly negative, thus avoiding a technical recession.

The euro area outlook called for ‘a short and shallow recession’ in 4Q and 1Q, following which ‘activity will start to recover as inflation should come down gradually, allowing uncertainty to recede’, the NBB observed in its latest economic review.

‘Supply chain disruptions have already moderated recently and are expected to further unwind’, the NBB said.

After having weakened in November, inflation in the region would subside further on the back of lower energy price pressures but remain above the ECB’s price stability target over the three-year projection period, the NBB said.

Core inflation, though expected to peak at above 5% already in 1Q 2023, is still seen at an average 2.4% in 2025 and thus ‘clearly remains above [its] long-term average due to ongoing strong wage growth’, the NBB said.

Inflation risks were predominantly to the upside, the NBB said, citing the potential for a wage-price spiral and a de-anchoring of expectations as well as ‘very uncertain’ prospects for geopolitics and energy prices.

As for the Belgian economy, growth in the second and third quarters of 2023 had ‘remained firmly positive’ and thus surprised on the upside relative to projections of flat growth, the NBB said.

‘Supply chain deterioration proved very limited, and it seems that tailwinds from improvements in the public health situation outweighed the impact of the war in Ukraine, the rise in inflation and the drop in consumer and business confidence’, the NBB remarked.

‘However, with confidence indicators further deteriorating after the summer, growth in the fourth quarter is expected to temporarily dip into slightly negative territory’, it continued. ‘A deep or long-lasting slump is currently considered unlikely, however, as high-frequency indicators such as retail sales and industrial production showed signs of improvement in September.’

Once past the very short run, there are positive indications suggesting that Belgian economic growth would gradually gain steam through the rest of 2023.

‘The economic fundamentals remain sound, with a very robust labour market, in particular, continuing to support household purchasing power’, the NBB commented. Household incomes would increase because of indexation, and lower futures prices on energy markets would also help, it said.

‘In addition, the labour market is expected to remain resilient and property income may offer some support as interest rates pick up’, the Belgian central bank said. ‘Overall, after shrinking in 2022, purchasing power is expected to grow by a solid 6% over 2023-2025.’

After 3.1% this year and 0.6% in 2023, Belgian GDP growth would thus strengthen anew to 1.7 % in 2024 and 1.8 % in 2025, it said.

Forecasts, however, are subject to ‘much larger than usual’ uncertainty, it noted. The expectation of easing domestic inflation assumes that energy price pressures moderate further and that this development has a rapid impact at the retail level; that global supply chains do not deteriorate; that companies partially absorb higher input prices; and that conventional wage increases are in line with Belgian legislation.

‘Keeping inflation in check will also require an adequate monetary policy response and well-anchored inflation expectations’, the NBB added. ‘Inflation may turn out to be higher or more persistent if external price pressures remain higher than currently assumed, if profit margins do not decline or if conventional wages rise faster.’