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Economic activity has been robust in the recent period. Real GDP growth is projected to continue at around 2 3/4 per cent a year, in both 1998 and 1999, with net exports losing some buoyancy but domestic demand gaining strength. Job creation has already accelerated, and the unemployment rate is expected to approach the structural rate - estimated at 11 1/2 per cent - in 1999. Inflation is set to remain low, partly as a result of subdued import prices. The general government deficit, which fell markedly in 1997 reflecting the rebound of the economy, is expected to decline further - to a little over 1 1/2 per cent of GDP in 1999. The debt-to-GDP ratio, though still very high, is on a firmly declining trend.

There is a continuing need to step up structural reform in order to make the economy more flexible and reduce the high structural rate of unemployment. Special consideration should be given to measures enhancing the return to the active labour force of older unemployed and persons of working age on social assistance and other welfare programmes. Over the longer term, the wage determination process should be liberalised and government involvement reduced.

Led by exports and private consumption, economic activity picked up in 1997. Real GDP growth was an estimated 2.7 per cent - broadly in line with the European Union (EU) average. Private consumption has benefited from stepped-up job creation and, in early 1998, from the biennial Brussels "car show". Business fixed investment has shown some volatility but has continued to support growth. Despite an acceleration in employment, the number of unemployed has declined only moderately and the unemployment rate - at around 12 1/2 per cent - remains about 1 percentage point above the OECD Secretariat's estimate of the structural rate. This, combined with the restraining influence of the law on employment and competitiveness,(1) has contributed to maintaining a generally favourable wage-cost performance - although the 1995-96 real wage freeze has been followed by an acceleration in the wage rate and in compensation per employee. Consumer price inflation fell to less than 1 per cent year-on-year in early 1998 - one of the lowest rates in the European Union.

Interest rates are expected to increase only moderately, as a result of robust economic growth in EU countries generally, with long-term rates remaining historically low. The general budget deficit fell markedly in 1997 - to an estimated 2.1 per cent of GDP, from 3.2 per cent in 1996 - largely as a result of stronger receipts on account of both direct and indirect taxes, some of this reflecting stepped-up efforts to fight fiscal fraud and evasion. Also, interest payments decreased, due to a lower average interest rate paid on the public debt. The 1998 Budget introduced only a few additional corrective measures, but tax receipts are likely to remain buoyant over the projection period and the deficit is expected to decline further - to a little over 1 1/2 per cent of GDP in 1999. On a cyclically adjusted basis, however, the deficit may increase slightly; this reflects the ending of a number of one-off corrective measures taken in 1997 and 1998. The debt-to-GDP ratio is slated to decline to 115 1/2 per cent in 1999, reflecting, among other factors, the recent sale of gold by the National Bank of Belgium (see box). Although Belgium does not seem to be particularly exposed to it, the Asia crisis may curb economic growth somewhat - mainly through weaker net exports. Nonetheless, as a result of the 1996-97 depreciation of the Belgian franc in effective terms, the continuing good cost-price performance of domestic firms relative to foreign competitors, and the projected sustained expansion in neighbouring countries, net exports should continue to support growth.


Despite some short-term volatility, the conjunctural indicators of the National Bank of Belgium - which lead economic activity by only a few months - have risen markedly in the recent period, pointing to broadly based strength in the economy and the continuation of the expansion in coming months. Beyond that, the latest survey shows that business fixed investment in manufacturing is expected to remain buoyant in 1998; and private consumption is projected to strengthen, as a result of a further improvement in labour market conditions and a pick-up in real disposable income. With this stronger picture for domestic demand, real GDP growth is projected to be around 2 3/4 per cent in both 1998 and 1999. With the usual lag, the unemployment rate may react to stepped-up economic growth and job creation, falling below 12 per cent in 1999 and approaching the estimated structural rate (NAWRU). With a declining but still significant output gap, the restraining effect of the law on employment and competitiveness, and subdued import prices, serious inflationary pressures are unlikely to arise. The increase in compensation per employee may remain below 2 3/4 per cent and private consumption inflation may decline from 1.6 per cent in 1997 to a little over 1 per cent in 1999. The current-account surplus of the Belgian-Luxembourg Economic Union is projected to widen moderately - from an estimated 5 1/2 per cent of GDP in 1997 to 6 1/4 per cent in 1999. The main risks and uncertainties concern, on the external side, the impact of the Asia crisis and, on the domestic side, the possibility that improved labour market conditions might induce households to reduce the saving ratio and spend more than projected.


The 1998-99 projections are based on the 1998 budget. It introduced new corrective measures - entailing both expenditure cuts and additional receipts - totalling BFr 17 billion (or 0.2 per cent of GDP). The measures included the extension of levies imposed in 1997 on pharmaceutical companies and electricity producers, and one-off initiatives such as the sale of a licence for a third mobile phone operator. In addition, multi-annual measures presented in the 1997 budget have been included, notably: the effects of pension reform in the private sector; and changes in the financing of the Post Office. The sales of publicly owned real-estate continue, but at a slower pace. Income tax brackets are frozen in 1998, but are assumed to be adjusted to inflation in 1999. In March 1998, the National Bank of Belgium announced that it had sold 9.6 million ounces of gold, realising a capital gain of BF 92 billion. It is assumed that the Government will use this amount to retire foreign currency denominated public debt - as it has done in the case of previous gold sales.

1. The law aims to limit, on an ex-ante basis, the maximum increase in compensation per employee in the private sector to the expected weighted average increase in the three reference countries, i.e. Germany, France and the Netherlands.
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Title Annotation:Developments in Individual OECD Countries; economic development
Publication:OECD Economic Outlook
Date:Jun 1, 1998
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