Supply issues, weaker demand, and high uncertainty held back recovery

After a strong rebound in 2021, following the lifting of most pandemic-related restrictions in the second half of the year, activity should continue to recover in 2022 while gradually slowing. Although the dampening effects of the still-ongoing pandemic will further ease, the different impacts of the war in Ukraine are weighing on the growth prospects, notably with the high inflation rate and a heightened level of uncertainty straining the propensity to buy for private households. In March 2022, the inflation rate stood at 8.3%, reaching its highest level for almost 40 years, and will barely decline over the year. In terms of public spending, the stimulus plan financed by European funds, worth EUR 5.9 billion (1.3% of GDP) for 2021-2026, is expected to peak in 2022, with EUR 1.5 billion of investments in energy transition, infrastructure, and digital transformation. While trade with Russia and Ukraine is limited (Russia: 1.0% of total exports and 2.4% of total imports, Ukraine: 0.2% and 0.1%, respectively), the economy is vulnerable to the consequences of the war in Ukraine, as it is heavily dependent on regional trade. Although 40% of exports to the rest of the European Union are imported in transit, the Belgian economy will be affected by the slowdown in business and further impairments to production and value chains. After contributing positively to growth in 2021, external trade is expected to dampen activity in 2022. Weaker prospects for demand, ongoing procurement shortages, and elevated prices of raw materials and intermediate goods will weigh on companies’ profit margins and, therefore, on their gross capital formation. 

Slight improvement in public finances despite some support measures

The public deficit is expected to be gradually reduced in 2022. This improvement in the public accounts will be made possible mainly by increased tax revenues, driven by the moderate recovery in activity and employment. In addition to the increase in excise duties on tobacco, the additional revenue in 2022 will be attributable to income tax and the tax on securities accounts. In mid-March, the federal government announced a new package (EUR 1.3 billion) to support the purchasing power of private households. This package includes a VAT cut on electricity to 6%, direct transfers of 200 euros per household for those with oil heating, tax reliefs for motor fuel, and the extension of the social energy tariff and short-term allowances. Despite these measures, gross public debt is expected to fall slightly while remaining very high. If the government pursues further expansionary measures, the positive tendency in public finances could end.

The current account should switch to a small surplus in 2022. As the Belgian economy is integrated into European production chains to act as a regional hub for transforming intermediate products into consumer or capital goods, imports move in line with exports. However, with oil and gas prices soaring, the energy bill will weigh on the trade surplus in 2022. Although substantial, external debt is much lower than the total assets held abroad, resulting in a net external excess of about 48% of GDP at the end of 2021.

A still vulnerable Vivaldi coalition despite some important agreements

The federal parliamentary elections in May 2019 led to further fragmentation of the political landscape, followed by many months of fruitless negotiations, before an emergency government was established in March 2020 to tackle the pandemic. Seven months later, a majority government coalition, led by the Dutch-speaking liberal Alexander De Croo, was finally formed (87 seats out of 150 in the House of Representatives). This coalition, known as the “Vivaldi” coalition because it is made up of four groups (socialists, liberals, environmentalists, and Christian Democrats), includes seven parties: the French-speaking socialists (PS, 19 seats) and the Dutch-speaking socialists (Vooruit, 9), the French-speaking environmentalists (Ecolo, 13) and the Dutch-speaking environmentalists (Groen, 8), the French-speaking liberals (MR, 14) and the Dutch-speaking liberals (Open VLD, 12), and the Flemish Christian Democrats (CD&V, 12). Although the first year of the Vivaldi coalition was devoted to managing the health crisis. Despite the government reaching an agreement on the Budget 2022 in October 2021 and on the labor market reform five months later, the disparate nature of the coalition makes it highly vulnerable. This is all the more true since the opposition ranks include the party that came out on top in 2019, the N-VA (Flemish conservatives, 24 seats), and the two parties that recorded the most vigorous growth at the time: the VB (far-right and Flemish nationalists, from 3 to 18 seats) and the PTB (united far-left, from 2 to 12 seats). Although the fear of extremist parties coming to power will help the coalition to stay together, political instability seems destined to persist in this fragmented landscape, a situation compounded by a growing divergence between Flanders, which is increasing to the right, and Wallonia, which is increasing to the left.