Belgium in 2021: Testing the limits

The new Belgian government led by Alexander De Croo is facing a second wave of the pandemic, which is particularly virulent in Belgium. The number of people hospitalised has surpassed that of the first wave, even though the rate of absenteeism due to illness is high among healthcare staff. The limits of the Belgian health care system are clearly being tested.

This second wave has a whiff of collective failure, as it demonstrates the inability to control the pandemic by partial measures. The government therefore had to impose an almost complete lockdown, although still leaving some room for economic activity. This will probably result in negative growth in the fourth quarter. For 2020 as a whole, we are forecasting a contraction in GDP of around 7.5%.

It is highly likely that 2021 will still be marked by partial restrictions, as the Minister of Health has already warned that the strategy post lockdown will be stricter than after the first wave, as a third wave would be untenable for the economy and its healthcare system. As a consequence, the financial limits of many companies will be tested until a vaccine arrives: they will have to cope with consumer caution and strict health rules, sometimes hampering their operations. We, therefore, expect a sharp increase in bankruptcies as soon as the deferral of loan repayments and the bankruptcy moratorium are lifted.

In order to limit the damage caused by the crisis, the federal and regional governments are stepping up support measures: suspension of social security contributions, postponement of payments and an increase in benefits for the self-employed. Refinancing of health care is also planned. This should cushion the shock, but it will further deteriorate public finances. The public deficit, which is expected to reach 9.4% in 2020, should be lower next year, but it will remain huge, around 5.2%. The public debt ratio could peak at 115.5%, which is not far from the safe debt limit for the Belgian economy (120%) according to a recent study by the National Bank.

Once a vaccine is available and widely distributed, hopefully from the second quarter onwards, the Belgian economy should grow faster, thanks in particular to household consumption. According to the National Bank, a savings reserve of €20 billion has been built up by households through forced savings by the various confinement measures decided in 2020. This will partly be the key to the post-Covid recovery.

Household savings will partly play a role in the post-Covid recovery

However, we remain cautious with regards to this reserve. Admittedly, the figures do show an increase in household savings, but will it really be used for consumption in 2021? It could also be used to reduce household debt or to build up a reserve for pensions. On the other hand, let's not forget that a significant number of households will have to use the reserves built up to soften the shock of job losses. In fact, we expect the loss of almost 100,000 jobs by the end of 2021, which will raise the unemployment rate to almost 8.0% of the active population.

The other key to the post-Covid recovery will be the ability of the authorities to define a coherent recovery plan. Clearly, the current crisis has shown the limits of the Belgian federal system, through the many shortcomings in the management of the crisis (there are no fewer than nine ministers responsible for health across the different Belgian entities). Better coordination of the different levels of power will be necessary for a successful recovery.

So 2021 could therefore be a pivotal year in the transformation of the Belgian economy, both for companies, which will have to get through the crisis, often by reinventing themselves, and for the authorities, which will have to manage public finances that have been severely stretched by the crisis and a recovery that has yet to unfold.