| Moderate growth continues thanks to stable purchasing power |
| After experiencing some weakness in 2024, the Belgian economy should pick up slightly in 2025. Household purchasing power is an important factor. In contrast to the rest of the eurozone (except for Luxembourg), purchasing power is maintained by the automatic indexation of Belgian wages, pensions and benefits to the cost of living, which was originally a public scheme, but has traditionally been copied by most unions and employers. While in 2022 and 2023 income indexations were huge and posted double-digit growth rates in some sectors, the April 2024 rise was a relatively small 2% (the average over all sectors). Another increase is planned for January-February 2025, which will reach around 3.5%, but not all sectors will be included. While this should technically fuel private consumption, political uncertainty regarding the future government and the start of EU deficit proceedings against Belgium (see below) that impose a significantly tighter fiscal policy stance, caused the already elevated gross savings rate of Belgian households to rise to 14.9% in the second quarter of 2024 (the average over 2014 – 2019 was 11.6%). This is likely to continue in 2025 and reduce the momentum of private consumption. |
| Private corporate investment was particularly strong in the first half of 2024. This may be attributed to the pharmaceutical industry which is expected to have recorded robust sales growth rates of 9.1% in 2024 and is forecast to grow by 8.4% in 2025. The pharmaceutical industry benefits from being relatively independent of economic developments. The slowly declining interest rate environment is also having a supportive effect. By mid-December 2024, the ECB had reduced its key interest rate (deposit rate) by 25 basis points on four successive occasions to 3.00%. Further cuts are expected in 2025 with a view to taking the deposit rate down to a “neutral” level of around 2%. This interest rate scenario should neither slow down nor drive up the European economy. While lower interest rates should also support the investments in the construction sector, this will probably take some time given the low level of building permits granted in 2024, especially in the private sector. Therefore, an initial recovery is only expected to occur during the second half of 2025. |
| The greatest uncertainty for 2025 lies in government spending and foreign trade. Technically speaking, Belgium is eligible to receive EUR 5.3bn (0.9% of GDP) under the EU Recovery and Resilience Facility, with the majority directed towards infrastructure projects in coming years. Some 17% of the funds have already been paid out. According to the EU Commission, further payments will follow at least until the end of 2024, with pension system reform being one of the EU's requirements for full payment. In the absence of a new government, this could take some time. Foreign trade is also likely to continue to struggle especially following Donald Trump’s election as US President and his threat of blanket tariffs of 10% to even 20% on all imported products, except from China, for which it could be even higher. The US imports 6% of all goods exported from Belgium, making it “only” the fourth-largest trading partner. That said, Belgium acts as a trading platform for many large exporters in Europe such as Germany and France. The US has a larger share of foreign trade business these latter countries. That aside, Belgian products are still losing some of their price competitiveness due to wage increases, which is why a significant revival in goods exports is not expected in 2025. |
| Public deficit on the rise despite a new EU excessive budget procedure |
| Suspended at the start of the pandemic, the public deficit rule has now been reinstated by the EU. Due to their budget deficit exceeding 3% of GDP, a procedure was initiated against seven EU members, including Belgium. According to the new EU regulations, the Belgian government is now expected to draw up a structural reform plan that would make Belgian finances comply again with Maastricht criteria over the next four to seven years. This would involve reducing the deficit by 0.5 percentage points per year, either by increasing revenue and/or by cutting expenditure. According to EU guidelines, a country has six months to initiate the necessary measures, failing which the EU could demand a penalty payment of 0.05% of the previous year's GDP. The main problem with Belgium is that in addition to the caretaker government being unable to decide on major reforms, its pension system (including indexing it to inflation) takes a long time and would probably fail to win majority endorsement. At the same time, only 50% of all general government expenditures come from the federal level. The reform must then include the Flanders and Wallonia regional governments, as well as the local government in Brussels, with their very divergent views deriving from their respective economic structure. It is therefore unlikely that Belgium will be able to rapidly introduce the requested reforms and the deficit is likely to increase further in 2025. Public debt will follow suit, also because of higher debt servicing costs on newly issued bonds. |
| The tiny current account deficit will probably improve slightly in 2024 and possibly in 2025, but only in small increments. The minor trade in goods surplus should rise thanks to improved terms of trade. Again, this is conditional on the economic growth of neighbouring trade partners as well as the impact of Donald Trump’s trade policy. Financial services are expected to recover in 2025, which should also improve the balance of trade in services, as well as the primary income surplus. |
| Arizona or Vivaldi – Coalition talks under way |
| The right-wing New Flemish Alliance (N-VA) won the June 2024 election for the House of Representatives (the lower house of the Parliament) after securing 16.7% of the votes. This gave them 24 seats (-1) out of 150 seats in Parliament. The result came as a surprise as the far-right Vlaams Belang were leading in the polls. The latter won 20 seats (+2). The Walloon liberals MR won 20 seats as well (+6), followed by the Walloon Socialist Party (PS, 16 seats, -4), the Marxist Worker’s Party of Belgium (PTB/PVDA, 15 seats, +3), the Walloon centrists (Les Engagés, LE, 14 seats, +9), the Flemish socialists Vooruit (13 seats, +4 seats), the Flemish Christian Democratic Party (CD&V, 11 seats, -1 seat), and the Flemish liberals (Open Vld, 7 seats, -5 seats). Green parties were the main losers. Its Flemish section lost 2 seats (now at 6) and the Walloon section 10 seats (down to 3 seats). Together with the Walloon social-liberal DéFl (1 seat, -1) they represent now the smallest groups in the lower house. Prime Minister Alexander De Croo stepped down after the severe defeat of his party Open Vld, but has remained in office as a caretaker Prime Minister until a new government can be formed. |
| Forming a coalition in Belgium is thwart with challenges. Most political ideologies are represented by two parties, one Flemish and one Walloon. This means that several political ideologies, as well as their regional variants must find common ground, which is time consuming. The last coalition, which consisted of seven parties and four political tendencies (socialist, liberal, environmentalist, and Christian Democrat) and was dubbed the “Vivaldi coalition” – took 494 days to form. In view of the significant loss of votes, the new chairman of Open Vld, Tom Ongena, declared that his party would not be part of the next government. The Flemish Greens and the Walloon Socialists (PS) followed his example. Furthermore, a coalition with the far right Vlaams Belang party is deemed to be out of the question due to the Cordon Sanitaire (an agreement from the late 1980s not to enter into a coalition with the VB for ideological reasons). Mathematically, this would lead to a so-called “Arizona coalition”, named after the colours of its constituting parties that are reflected in the flag of the US state. These include the Flemish right-wing N-VA, the Walloon Liberals (MR), the Walloon Centrists (LE), together with the Flemish Christian Democrats (CD&V) and finally, as its only left-wing party, the Flemish Socialists Vooruit. Should this coalition materialise, Bart De Wever, the N- VA chairman, would be the first Flemish separatist Prime Minister. De Wevers could work to transfer powers from the federal level (e.g., law enforcement, wage negotiations or some tax matters) to the regional level and achieve greater regional autonomy for Flanders. However, the negotiations, with the N- VA chairman Bart de Wever heading the formal government coalition talks, have proven extremely difficult, particularly regarding the next budget plan, as the future coalition will be under pressure as a result of the EU deficit proceedings. Should his coalition negotiations fail, the only real alternative would be the continuation of the “Vivaldi coalition”, which could then also include the Walloon centrists LE, although this is not strictly necessary. In that case, however, the N-VA would have to give up its claim to government (given its ideological differences with the Green and socialist parties) and the current government parties that want to switch to opposition would have to refrain from doing so. It remains to be seen whether any coalition will be able to last until the next regular election in 2029. |
