European Economics Update Belgium & Greece (Feb 10)

17 Feb. 2010 EUROPEAN ECONOMICS UPDATE th Is Belgium the Greece of the North? • Despite growing fairly solidly in the last two quarters, Belgium shares some worrying similarities with Greece and the other troubled Southern euro-zone economies. But its stronger trade position and lower levels of household debt should ensure that it continues to perform more robustly. • Today’s GDP figures revealed that Belgium expanded by a quarterly 0.3% in Q4 last year. This was smaller than the 0.7% gain seen in Q3, but better than the euro-zone average (+0.1%) and significantly better than the continued contractions seen in most of the Southern economies, or so- called “PIIGS” (Portugal, Ireland, Italy, Greece, and Spain). • But despite that performance, there are ways in which Belgium looks more like those Southern economies than its traditionally austere Northern neighbours. Most obviously, the level of public sector debt was close to 100% of GDP last year, way above that of France and Germany, and lower only than that of Italy and Greece. • Meanwhile, like most of the PIIGS, Belgium has suffered from a severe loss of competitiveness over recent years. As Chart 1 shows, its real effective exchange rate has risen more sharply than those of most other economies with the exception of Italy. For an open economy which exports a whopping 80% of GDP, that is a major concern - note that Belgium ran a current account deficit last year for the first time in a decade. Finally, Belgium has been mentioned alongside Greece as a country which has used financial derivatives to improve its reported fiscal position. • Thankfully, however, that is where the similarities end. For a start, despite its high level of public debt, Belgium’s budget deficit is relatively small at around 6% of GDP. As such, it is under less pressure to implement an aggressive fiscal tightening than Southern economies like Greece and Portugal. The EC has recommended a relatively moderate tightening of 0.75% of GDP per annum. • Secondly, despite its apparent loss of competitiveness, Belgium’s export sector should still benefit from strong links with relatively healthy northern European economies rather than the beleaguered South. Meanwhile, its focus on exporting intermediate goods leaves it well-placed to benefit from the recovery in global investment. Note that survey measures of Belgian export orders have risen sharply. The pick-up has been more marked than in the euro-zone on average. • Finally, and perhaps most importantly, Belgium does not have the same high levels of household indebtedness as some of the Mediterranean economies. (See Chart 2). As such, there is less risk of a bout of household de-leveraging that could constrain consumer spending for a prolonged period. • The upshot is that, despite its Southern characteristics, there are good reasons to expect Belgium to continue to outperform, not just the PIIGS, but most of the euro-zone, over the coming quarters. We still expect Belgian GDP to grow by around 1.8% in 2010 and by around 2.5% in 2011. Jonathan Loynes Chief European Economist (+44 (0)207 808 4984, jonathan.loynes@capitaleconomics.com) Emilie Gay European Economist (+44 (0)207 808 4693, emilie.gay@capitaleconomics.com) Chart 1: Real Effective Exchange Rates (Q1 1999 = 100) Chart 2: Household Debt by Country (% of GDP) 140 140 140 140 Italy Belgium 120 Mortgages 120 130 130 Netherlands 100 Consumer credit 100 120 120 France Other household lending 80 80 110 Germany 110 60 60 100 100 40 40 90 90 20 20 80 80 0 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Ita Bel Gre Aus Fra Fin EZ Ger Net Spa Por Ire Source – IMF Source – Thomson Datastream European Economics Update

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European Economics Update Belgium & Greece (Feb 10)

by Geert Noels on Feb 23, 2010

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