Belgian economy: on the way to a sustainable but modest recovery

Belgian economy On the way to a sustainable

but modest recovery

KBC Economic Autumn Seminar 5 September 2013 Johan Van Gompel

Chief Economist Department KBC Group

2

-25 -20 -15 -10 -5 0 5 10 15 20

Germany Austria Belgium France Euro Area Netherlands Finland Spain Italy Portugal Ireland Greece

Poland Slovakia Czech Republic Hungary

Real GDP Q4 2007 – Q2 2013 (%-change)

-25 -20 -15 -10 -5 0 5

Employment Q4 2007 – Q2 2013 (%-change)

Belgium - Financial & economic crisis Weathering the crisis reasonably well...

3

-5

-4,5

-4

-3,5

-3

-2,5

-2

-1,5

-1

-0,5

0

1958 1975 1981 1993 2001 2009 2012

Real GDP decline (peak to trough, in %) Cumulative job losses (in %)

GDP and job losses in Belgium’s post-war recessions

Employment in the ‘service cheque’-system

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

0

20000

40000

60000

80000

100000

120000

140000

Number of persons employed in the system (lhs) % of total employment (rhs)

Belgium - Financial & economic crisis ...decline in working time instead of in employment & public sector (subsidised) employment recording strong growth

4

93

94

95

96

97

98

99

100

101

102

103

104 Belgium Germany Netherlands France Euro-periphery (*)

Standstill in the Belgian economy since early 2011 GDP (real GDP, Q4 2007 = 100)

-0.6%

-4.3%

Belgium - Economic growth Economy emerging from (a mild) recession, growth still very modest

(*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

-1,5

-1

-0,5

0

0,5

1

Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013

Real GDP growth (quarter-on-quarter not annualized, in % )

+0.1%

5

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

-3,0

-2,5

-2,0

-1,5

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

Belgium Germany Euro-periphery (*)

Belgium - Confidence indicators Marked improvement in (consumer) sentiment, still below LT-average

Consumer confidence (standard deviation from LT-average)

Producer confidence (standard deviation from LT-average)

(*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

6

-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

Private consumption Government consumption Investments Net exports Stocks Real GDP 86

88

90

92

94

96

98

100

102

104

106

Real GDP Private consumption Investments Exports

Belgium - GDP and its components (Q4 2007 = 100)

Belgium – Contribution to real GDP growth (quarter-on-quarter, annualized, in %)

Belgium – Growth components Consumption contributing to growth again, investments remaining weak

7

10

11

12

13

14

15

16

17

18

19

20

98

99

100

101

102

103

104

105

106

Real private consumption (Q4 2007 = 100) Real disposable income (Q4 2007 = 100) Household savings quote (rhs)

Belgium - Income, consumption & saving

Belgium - Private consumption The interplay of inflation, wage indexation & savings behaviour

88

90

92

94

96

98

100

102

104

106

Belgium Germany Netherlands France Euro-periphery (*)

Real private consumption (Q4 2007 = 100)

(*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

8

-30

-25

-20

-15

-10

-5

0

5

10

15

20 10

11

12

13

14

15

16

17

18

19

20

21

22

Savings quote ( % disposable income, lhs) Consumer confidence (inverted, rhs)

-1

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

4

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Consumer confidence (lhs) Private consumption (y-o-y change in %, rhs)

Belgium - Household savings As confidence picks up further, consumers are likely to save less

9

Belgium – Labour market performance Unemployment on the rise again...

Unemployment rate (harmonized and seasonally adjusted, in %)

Unemployment during and after recessions (0 = quarter preceding the start of the recession, in %)

6

7

8

9

10

11

12

1

2

3

4

5

6

7

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Q4 1974 - Q4 1978 (*) Q3 1980 - Q3 1984 Q2 1992 - Q2 1996 Q4 2000 - Q4 2004 Q2 2008 - Q2 2012 Q1 2012 - Q1 2016

Kwartalen

(*) left-hand scale, other periods right-hand scale (*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

2

4

6

8

10

12

14

16

18

20

22

Belgium France Germany Netherlands Euro-periphery (*)

10

-25

-20

-15

-10

-5

0

5

10

15

20

25

Flanders Wallonia Brussels

Number of unemployed people (year-on year change, in %)

2

4

6

8

10

12

14

16

18

20

22

Belgium France Germany Netherlands Euro-periphery (*)

Unemployment rate (harmonized and seasonally adjusted, in %)

(*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

Belgium – Labour market performance ...particularly in Flanders (the more open region in Belgium)

11

-12

-8

-4

0

4

8

12

16

20

24

-3

-2

-1

0

1

2

3

4

5

6

Real GDP growth (in %)

Bankruptcies (y-o-y change in %, rhs)

(*) First 7 months

500

1000

1500

2000

2500

3000

3500

4000

4500

Flanders Wallonia Brussels

Job losses associated with bankruptcies (number)

Belgium – Bankruptcies Crisis continues to influence bankruptcies for some time to come

12

-20

-10

0

10

20

30

Belgium – Domestic employment (quarter-on-quarter change, number in ‘000)

-28,000 jobs (-0.6%)

-20,000 jobs (-0.4%)

+68,000 jobs (+1.5%)

0

5

10

15

20

25

30

35

-10000

-6000

-2000

2000

6000

10000

14000

18000

Number (year-on-year change in %, lhs) Per 100 unemployed (rhs)

Unfilled vacancies: still high and increasing again (Flanders)

Belgium – Labour market performance Capacity to absorb the newly jobless...

13

5

6

7

8

9

10

11

-20

-10

0

10

20

30

40

50

60

70

80

Expected course of unemployment +12M (consumer survey, lhs) Unemployment rate (Eurostat, rhs)

-3,5

-2,5

-1,5

-0,5

0,5

1,5

Manufacturing Market services Construction

Employment forecast next 12 months (NBB-indicator, standard deviation from LT-average)

Belgium – Labour market performance ...and less negativity towards the labour market

14

Capacity utilisation rate in manufacturing (in %)

Belgium – Corporate investment Still little need for investment in expansion

60

64

68

72

76

80

84

88

92

96

100

104

Belgium Germany Netherlands France Euro-periphery (*)

Investments (GFCF, Q4 2007 = 100)

-20

-15

-10

-5

0

5

10

15

65

70

75

80

85

90

Corporate investment Belgium (y-o-y %-change, rhs) Belgium Euro Area Germany

(*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

15

-25

-20

-15

-10

-5

0

5

10

15

20

25

Achievement Fall in year t-1 Spring in year t Fall in year t

Investments in fixed capital in manufacturing industry (successive forecasts, y-o-y change in %, investment survey NBB)

Belgium – Corporate investment NBB-investment survey quite optimistic, though

16

-15

-10

-5

0

5

10

2

2,5

3

3,5

4

4,5

5

5,5

6

Investments residential real estate (real y-o-y in %, rhs) Construction permits granted (in '000, 3m moving average, lhs) Construction starts houses (in '000, 3m moving average, lhs)

-34

-29

-24

-19

-14

-9

-4

1

6

Producer confidence manufacturing Producer confidence construction

Producer confidence construction Construction indicators

Belgium – Construction Building permits suggest imminent improvement in actual housing starts

17

-30

-20

-10

0

10

20

30

40

Intra-EU exports Extra-EU exports

80

84

88

92

96

100

104

108

112

Belgium Germany Netherlands France Euro-periphery (*)

Real exports (Q4 2007 = 100)

Belgium – External trade Stagnation since end 2011, but foreign orders turning mid-2013

-4

-3

-2

-1

0

1

2

3

Survey NBB Survey EC

Export values (y-o-y change in %, 3mma)

Export orders manufacturing industry (st.dev. from LT-average)

(*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

18

100

105

110

115

120

125

130

135

140

France Belgium Euro-periphery (*)

Relative unit labour costs vis-à-vis Germany (Q1 1999 = 100)

Belgium – Competitiveness & inflation Inflation in 2013-2014 lower than in neighbouring countries

0,5

1

1,5

2

2,5

3 -2 -1 0 1 2 3 4 5 6

Belgium Euro Area Avg. 3 neighbouring countries (*)

Harmonized consumer price index (year-on-year %-change)

Headline inflation

Core inflation

(*) Euro-periphery = Portugal, Ireland, Italy, Greece & Spain

(*) Netherlands, Germany & France

Inflation (in %) Belgium Euro Area Germany

2011 3.4 2.7 2.5

2012 2.8 2.5 2.1

2013 1.2 1.4 1.4

2014 1.4 1.6 1.6

19

Real GDP growth 2013 & 2014 (in %)

2013 Belgium Euro Area Germany

EC (Spring) 0.0 -0.4 0.4

Planning Bureau (July) 0.2 - -

Consensus (Aug.) -0.1 -0.6 0.4

KBC (Aug.) 0.1 -0.4 0.6

2014 Belgium Euro Area Germany

EC (Spring) 1.2 1.2 1.8

Planning Bureau (July) 1.2 - -

Consensus (Aug.) 0.9 0.9 1.7

KBC (Aug.) 1.2 1.1 1.9

Belgium – Real GDP forecast 2013-2014 On the way to a sustainable, but modest recovery

0,5

1

1,5

2

Forecast made in month

EMU (consensus) EMU (KBC) Duitsland (consensus) Duitsland (KBC) België (consensus) België (KBC)

Evolution consensus forecast real GDP growth in 2014 (in %)

20

-35

-30

-25

-20

-15

-10

-5

0

5

-0,5

0

0,5

1

1,5

2

2,5 Consensus growth 2010 NBB-indicator (4m foreward, rhs)

2010

-15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9

1

1,5

2

2,5

Consensus growth 2011 NBB-indicator (4m forward, rhs) -19

-14

-9

-4

1

6

-1

-0,5

0

0,5

1

1,5

2

2,5

Consensus growth 2012 NBB-indicator (4m forward, rhs)

+2.3 %

-32

-27

-22

-17

-12

-7

-2

3

-4

-3

-2

-1

0

1

2 Consensus growth 2009 NBB-indicator (4m foreward, rhs)

-2.7%

+2.0%

Consensus forecast made in month

-0.3%

2009

2011 2012

Belgium - NBB-indicator & consensus forecast Inertia of the consensus forecast

21

-15

-14

-13

-12

-11

-10

-9

-8

0,8

0,9

1

1,1

1,2

1,3

Consensus growth 2014 NBB-indicator (4m foreward, rhs)

-16

-15

-14

-13

-12

-11

-10

-9

-8

-7

-0,5

0

0,5

1

1,5 Consensus growth 2013

NBB-indicator (4m forward, rhs)

KBC forecast: 0.1% 2013

KBC forecast: 1.2%

2014

Belgium - NBB-indicator & consensus forecast Inertia of the consensus forecast

Consensus forecast made in month

22

-400

-300

-200

-100

0

100

200

300

400

500

600

0 1 2 3 4 5 6 7 8 9

10 11 12 13 14 15

10-year OLO (lhs) Spread vs. Germany (basis points, rhs)

Long-term perspective Belgian interest rate (year averages, in %)

Belgium – Interest rates No major upward shock of long-term yields

Interest rate spreads Euro Area (10-year rate versus Germany, in basis points)

0

200

400

600

800

1000

1200

1400 Belgium France Italy Spain Portugal Ireland

23

Belgium – The road of fiscal consolidation Stability Programme 2013-2016 aims at budget surplus in 2016

-6

-5

-4

-3

-2

-1

0

1

Realized budget Target in former Stability Programmes Requirements EC & new Stability Programme 2013-2016 With unchanged policy

General government budget (as a % of GDP)

60

70

80

90

100

110

120

130

Realized & new Stability Programme 2013-2016 Former Stability Programme 2012-2015 EC projection for the Euro Area

Public debt ratio (as a % of GDP)

Euro Area

Belgium

24

Current consolidation (2010-2016) versus consolidation in the 80s and 90s

(as a % of GDP)

-16

-14

-12

-10

-8

-6

-4

-2

0

2

Structural balance Cyclically adjusted balance

1982-87: 7.8% of GDP

1993-98: 7.7% of GDP

2010-16: 4.6% of GDP

Belgium – The road of fiscal consolidation Still a relatively huge structural effort remains to be done

Path structural balance (as a % of GDP)

-1,8

0,5

-0,1

0,5

1 0,75

1,25

0,75

-4

-3

-2

-1

0

1

2

Change structural balance (= effort already realized) Structural effort still to be achieved Structural balance (MTO 2016 = +0.75% of GDP)

25

Belgium – The road of fiscal consolidation Still a relatively huge structural effort remains to be done

Path structural balance (as a % of GDP)

-1,8

0,5

-0,1

0,5

1 0,75

1,25

0,75

-4

-3

-2

-1

0

1

2

Change structural balance (= effort already realized) Structural effort still to be achieved Structural balance (MTO 2016 = +0.75% of GDP)

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

Structural effort already realized in 2010-2013 Effort still to be achieved till 2016 (MTO)

Budgetary consolidation (structural effort, as a % of GDP)

26

Belgium – Housing market development A long-lasting period of rising house prices

50

100

150

200

250

300

350

400

450

500 Belgium Germany France Netherlands Austria Ireland Italy Spain Portugal

Source: ECB

House prices in the Euro Area (1995Q1 = 100)

95

96

97

98

99

100

101

102

103

104

105

106

107 Belgium (ECB-index) Belgium (Eurostat-index) Belgium (FOD-index) EMU (Eurostat-index)

All types of dwellings

Recent development Belgian property prices (2011Q1 = 100)

27

-50

-30

-10

10

30

50

70

Average

Maximum

Minimum

ECB-estimates of the over/undervaluation of housing markets in selected EU countries (Q1 2013) (*)

Belgium - Housing market valuation ECB’s average estimate (+23%) biased by the two traditional measures

(*) Estimates based on four different valuation methods: price-to-income ratio, price-to-rent ratio and two model-based methods

(**) Q4 212 instead of Q1 2013

28

60

80

100

120

140

160 Price-to-income ratio (affordability) Price-to-rent ratio Interest-adjusted affordability Econometric regression (*)

Overvalued

Undervalued

Valuation measures Belgian housing market (long-term average = 100)

Source: own calculations

60.8

37.3

8.7 11.6

% overvaluation

Price-to-rent ratio (Q2 2013) Price-to-income ratio (Q1 2013) Interest-adjusted affordability (Q1 2013) Econometric regression (*) (Q1 2013)

Belgium - Housing market valuation We estimate the overvaluation at some 10%

Most reliable and comprehensive

approaches

(*) Deviation from the ‘fundamental’ price as determined by disposable income, mortgage interest rate, unemployment rate and number of households

29

3%

4%

5%

6%

7%

8%

9%

10%

11%

12% Belgium France Germany Ireland Netherlands Spain EMU

Share of construction in gross value added (in %)

Construction sector in line with the pattern of general activity

Source: FOD Economie, Eurostat

Belgium – Housing market characteristics No excessive building boom, no excessive debt accumulation

0

10

20

30

40

50

60

70

80

90

100

110

2000

2012

Household mortgage debt (as a % of GDP)

Source: European Mortgage Federation

30

Base scenario Adverse scenario In % 2012 2013 2014 2015 2016 2014 2015 2016 Real GDP growth -0.3 0.1 1.2 1.4 1.6 -0.5 -0.5 0.5

Corporate investment growth 0.1 -0.5 1.8 1.9 2.0 -1.3 -1.2 1.0 Residential construction growth -2.8 -3.5 0.8 1.4 1.8 -1.3 -1.0 1.2

Unemployment rate (eop) 8.1 9.0 9.2 8.8 8.4 10.2 11.0 11.2 Households disposable income (avg) 3.5 1.6 2.4 2.5 2.5 0.5 1.0 1.2 Household savings ratio (avg) 15.3 15.1 14.5 14.4 14.3 16.0 16.0 15.2 Inflation (avg y-o-y, CPI) 2,8 1,2 1,4 2,0 2,0 0.6 0.8 1.0 Housing prices, (avg, y-o-y) 2.3 0.0 -6.0 0.5 1.5 -10.0 -4.0 0.0 Housing prices (eop, y-oy) 1.8 -4.3 -3.0 1.0 1.8 na na na

Base scenario Adverse scenario In %, eop 2012 2013 2014 2015 2016 2014 2015 2016 Policy rate ECB 0.75 0.50 0.50 1.00 1.50 0.25 0.25 0.25 10-year government bond 2.06 2.50 3.20 3.25 3.60 3.25 3.25 2.75

Spread vis-à-vis Bunds (bp) 75 70 70 60 60 250 225 150

Belgium – APC scenarios Base scenario = very gradual, non-inflationary growth recovery

31

Belgium - Medium-term growth forecast Potential economic growth estimated at around 1.6% per year

Estimates medium-term potential growth(in %, period averages)

Period EMU Belgium Empl.growth Product.growth

Federal Planning Bureau (1) 2015-2018 1.6 1.7 0.8 0.9European Commission (2) 2015-2025 1.4 1.5 0.2 1.3OECD (3) 2012-2017 1.4 1.8 0.7 1.1IMF (4) 2015-2018 1.6 1.4 - -Oxford Economics (5) 2015-2018 1.2 1.4 - -Consensus (6) 2015-2018 1.5 1.8 - -

Average 1.4 1.6Range 1.2-1.6 1.4-1.8

(1) Regionale economische vooruitzichten 2013-2018 (July 2013)

(2) LT-outlook 2012 Ageing Report

(3) Potential growth estimate in Economic Outlook April 2012

(4) World Economic Outlook April 2013

(5) Thomson Financial Datastream

(6) Consensus Economics Inc. October 2012

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