Scaling Back Ambitions: Challenges for Belgian Economy and Declining Inflation

Ambitions scaled back

With just one year to go before the elections, coming up with clear and effective measures will likely prove a challenge

Secondly, while growth in activity is fuelling tax receipts, Belgian public finances continue to create problems. The measures taken to support households and businesses in recent years have weighed heavily on public finances and so far have not been offset. Given the deterioration in public finances, the government will have to take the first steps towards fiscal consolidation in order to comply with the requirements of the European Commission. However, with just one year to go before the elections and given that the coalition in place brings together parties that are opposed in socio-economic terms, coming up with clear and effective measures will likely prove a challenge.

Even so, we believe that consolidation will have to take place sooner or later. Most of the effort will probably be made after the elections and will follow the formation of a new majority, which is likely to weigh on the dynamics of the economy over the next few years.

On top of this, the federal government had originally planned to carry out two major structural reforms (pensions and fiscal). Pension reform was agreed at the beginning of July, but political hurdles have greatly reduced the initial ambitions included in the final agreement. In a nutshell, there will be an incentive to keep employees at work longer, and at the same time, the highest additional pension schemes will be required to contribute more to the legal pension system. This should satisfy the European Commission, which requested certain measures before releasing funds from the Recovery and Resilience Facility (RRF).

This agreement is certainly not the major structural reform that was announced. Moreover, it's becoming increasingly clear that the tax reform will not be achieved. Instead, it will be left to the next legislature, which once again limits the ability of the current majority to put public finances back on a sustainable track.

Further decline in inflation story

Inflation peaked at 12.3% in October 2022, and fell back to 4.2% in June, thanks mainly to lower energy prices (gas bills down by almost 64% YoY, and electricity bills down by more than 29%). We're now also seeing signs of easing in other areas – and particularly for food products. Overall, our leading inflation indicator (Net Acceleration Inflation Index – see chart below) tends to show that inflation should continue to fall over the coming months. This indicator uses all the categories of goods and services that are included in the consumer price index in order to determine whether upward pressure on inflation is broad-based or not. In June, the proportion of the consumer price index in a deceleration phase now far exceeds the proportion in an acceleration phase, which is a strong sign that the bulk of the inflation wave is behind us.