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The higher the rise, the harder the fall

During the second quarter of 2012, Belgium’s economy shrunk by 0.6%: the worst slump in three years. This is bad news for the government, which could soon be faced with a larger deficit than foreseen for 2012.

According to Geert Noels, Lead Economist at Econopolis, the second quarter results of 2012 were the worst in 19 years, with the exception of 2008-2009. Revised figures also show that the first quarter of 2012 was not as good as predicted, with the economy growing by 0.2% and not 0.3%.

The growth forecast suggests how the government was overly optimistic declaring an economic bounce-back. Based on the predictions of the Federal Planning Bureau and the National Bank of Belgium, the government was counting on an economic growth of 0.5%. This economic forecast can now no longer be upheld and economists at the large broker firms in Belgium (e.g. KBC, Petercam, ING and BNP Paribas) fear the economy will shrink by 0.2% during the whole of 2012.

The sharp decline in economic activity is due to the escalation of the euro crisis, which has led to a fall in business confidence. The uncertainty about the future of the euro zone is clearly not beneficial for foreign and domestic demand. The most important factor in the economic slump is the aftershock of the financial crisis of 2007. Since 2007, government debt has increased from €282bn to €382bn, or 100% of Gross Domestic Product (GDP).

Additionally, the crisis had a negative effect of €9.7bn on the purchasing power of families in Belgium and caused an extra 8,410 companies to go bankrupt.

The most remarkable and worrying figures, however, are those concerning employment. During the first quarter of 2012, the number of vacancies decreased by 8,200, which is mostly due to the government cutting 5,100 jobs in administration and education. On average, it takes employment six months to react to economic activity, which suggests the Belgian labor market will deteriorate further in the coming months, especially also because the government (in contrast to what was done in 2008-2009) will no longer be able to massively add jobs in the public sector. In the meantime, faced with ever decreasing employment opportunities, Belgium’s youth risks becoming a ‘lost generation’, as is clearly happening in other European countries.

Minister of Budget, Olivier Chastel (MR), is concerned about the growth prognosis. If the economy shrinks by 0.3%, the government will have to deal with a hole of €1.5bn in the 2012 budget. In light of the poor fiscal revenues of April and May, the government already froze €568m in expenditures during the July budget review. If necessary, the government will take additional measures during a third budget review. Until then, Minister Chastel calls for ‘extreme caution’.

AmCham Belgium’s position

AmCham Belgium urges the government to take responsibility and make progress on the much needed structural reforms that impede an unrestrained recovery of Belgium’s economy. The government will therefore have to take extra steps in reforming pensions and the labor market once the summer recess is over. To see the Chamber’s recommendations for economic growth and stability, please see the 2012 Priorities for a Prosperous Belgium.