Belgian National Bank not expecting severe economic recession, but labour cost on the rise

The war in Ukraine is having a serious impact on the Belgian economy, but will not lead to a severe economic recession or stagflation in the country, estimates the Belgian National Bank. This is evident from new economic forecasts released by the central bank on Monday.

Even though Belgium’s direct exposure to Russia and Ukraine is limited, the war is causing significant economic shocks. The national economy is expected to grow much less than previously expected, but the central bank is not expecting a severe economic recession or stagflation. In the second quarter however, growth could be slightly negative. But thanks in part to stronger-than-expected growth in the final months of last year, economic growth should still reach 2,4 percent this year. Up until the war in Ukraine, the Belgian central bank was still expecting growth as high as 2,6 percent.

Next year, a reduced growth of 1,5 percent is expected instead of the expected 2,4 percent. In 2024, growth might again turn out slightly higher than expected: 1,9 instead of 1,6 percent.

Insecurity due to the Russian invasion of Ukraine will nonetheless adversely affect labour costs for Belgian companies, resported Flemish public broadcaster VRT NWS on Monday morning. Skyrocketing inflation and automatic wage indexation in Belgium could increase labour costs by more than 10 per cent by the end of next year, according to the new estimates released by the Belgian National Bank.

Consumption should pick up again relatively soon, as soon as the first “shock reaction” subsides, the Belgian national Bank expects.

The initial “shock effect” of the war is currently causing a dip in consumer confidence, the National Bank’s deputy governor Steven Vanackere said on VRT’s Radio 1. Consumption should pick up again relatively soon though, as soon as the first “shock reaction” subsides. “We had a similar dip at the start of the corona crisis. It recovered quite quickly once people realised that the automatic economic stabilisers, which keep people’s incomes up, were working.”

The National Bank assumes inflation will fall reasonably quickly next year, reports VRT NWS, provided that energy prices fall. If this does not happen, high inflation could persist. As Belgian wages are automatically increased when prices rise above a certain level, this high inflation will also push up wages in our country. By the end of next year, hourly wage costs in the private sector will increase by over 10 per cent, the National Bank estimates.

This is “exceptionally high” and even unprecedented,Vanackere agrees, but “this in itself is not a problem if it also happens in other countries.” The deputy governor expects this to “happen anyway, but with a delay” (because most countries do not have automatic wage indexation, ed.). Therefore, the National Bank expects Belgian companies’ competitive position to be temporarily affected by the so-called “wage handicap”.

Photo © Belga, showing Belgian National Bank (BNB-NBB) deputy governor Steven Vanackere

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