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Country Commercial Guides FY 2000: Belgium Report prepared by U.S. Embassy Brussels, released July 1999 Note*

CHAPTER II. ECONOMIC TRENDS AND OUTLOOK

Major Trends and Outlook

Belgium possesses a highly developed market economy, the tenth largest among the OECD industrialized democracies. The service sector generates more than 70 percent of GDP, industry 25 percent and agriculture two percent. Belgium ranked as the eleventh-largest trading country in the world in 1998, with exports and imports each equivalent to about 70 percent of GDP. Three-quarters of Belgium's trade is with other European Union (EU) members. Five percent is with the United States. Belgium imports many basic or intermediate goods, adds value, and then exports final products. The country derives trade advantages from its central geographic location and a highly skilled, multilingual and industrious workforce. Over the past 30 years, Belgium has enjoyed the second-highest average annual growth in productivity among OECD countries (after Japan).

Throughout the late 1970s and the 1980s, Belgium ran chronic budget deficits, leading to a rapid accumulation of public sector debt. By 1994, debt was equal to 137 percent of GDP. Because of the high Belgian savings rate, Belgium has largely financed its budget deficits from domestic savings. Foreign debt represents less than 10 percent of the total and Belgium is a net creditor on its external account.

Belgium's macroeconomic policy since 1992 has aimed at reducing the deficit below 3.0 percent of GDP and reversing the growth of the debt/GDP ratio in order to meet the criteria for participation in Economic and Monetary Union (EMU) set out in the EU's Maastricht Treaty. On May 1, 1998, Belgium became a first-tier member of the European Monetary Union. The country narrowly achieved its status as an EMU member, since its cumulative debt of 122 percent of GDP was more than twice the maximum of 60 percent set forth in the Maastricht criteria established in 1992. However, since Belgium has made consistent progress towards the 60 percent target, and it continues to post an impressive primary surplus (net government revenue minus interest on the debt) of 6 percent of GDP, no additional macroeconomic requirements were imposed by the other Euro Zone members. The government's 1999 budget, presented in October 1998, projects a 1.2 percent deficit and a reduction in the debt/GDP ratio to 115 percent.

Economic growth in 1998 was about 2.9 percent. A comparable rate was expected in 1999 until an incident involving dioxin-contaminated animal feed seriously disrupted production and exports of a wide range of agricultural and food products. Since then, real economic growth is projected at around 2.5 percent of GDP. At 1.2 percent, inflation seems to be under firm control, and no inflationary pressures are apparent, since weak commodity prices keep imported inflation low. Belgium's current account surplus of 4.8 percent of GDP is one of the highest among OECD countries.

Belgium's unemployment situation improved slowly in 1997-98. Standardized EU data put Belgium's unemployment rate at 8.5 percent in June 1999, 1 percent below the EU's average. However, strong regional differences in unemployment rates persist, with rates in Wallonia and Brussels being two to three times higher than in Flanders. A further reduction in unemployment will probably be difficult to achieve since many businesses have sought to neutralize high labor costs through capital-intensive investments and hence increased productivity. Although wage growth has been very modest since 1994, wage levels and social contribution costs remain among the highest in Europe.

In 1993, Belgium completed its process of regionalization and became a federal state consisting of three regions: Brussels, Flanders and Wallonia. Each region was given substantial economic powers, including trade promotion, investment, industrial development, research and environmental regulation.

Principal Growth Sectors

Sectoral growth in the Belgian economy reflects macroeconomic trends. Industry sectors that are oriented towards foreign markets, in particular those in the semi-finished goods sector such as iron and steel, non-ferrous metals and chemicals are very sensitive to foreign business cycle developments. Industrial production rose by 3.1 percent in 1998, compared to 4 percent in 1997. The capital goods sector is benefiting from strong investment demand in Belgium. Stronger demand in the consumer product sector has helped the textiles, wood and food sectors. Apart from developments specific to the business cycle, there are also divergent developments affecting other sectors. For example, the paper and cardboard sector continue to be hit by the ongoing trend towards the use of less packaging.

Government Role in the Economy

On May 1, 1998, Belgium became a first-tier member of the European Monetary Union. Belgium will gradually shift from the use of the BF to the use of the euro as its currency by January 1, 2002. On January 1, 1999, the definitive exchange rate between the Euro and the BF was established at BF 40.3399.

Since 1993, the Belgian government has privatized BF 280 billion worth of public sector entities. Further privatization of the last two enterprises with a strong public sector stake, Sabena and Belgacom, will likely occur under the new coalition government. The federal government raised approximately BF 45 billion in 1998, compared to the BF 35 billion in 1997, as a result of these privatizations.

Balance of Payments Situation

Belgium's current account surplus widened in 1998: at 4.8 percent of GDP, it was well above the EU average of 1.5 percent of GDP, and the sixth largest in the OECD area. The increase in the surplus largely reflected a stronger trade balance: exports picked up in response to more buoyant economic conditions in EU countries, and to a significant improvement in cost-price competitiveness. The impact of the East Asian crisis was limited, given that Belgium's exports to these countries - including Japan - represent only 5 percent of total exports. In 1998, largely as a result of a decline in energy prices, the terms of trade improved somewhat. As a consequence, the growing impact of the crisis in emerging market economies did not greatly affect the volume of Belgium's exports or the trade surplus.

Infrastructure Situation

Belgium has an excellent transportation network of ports, railroads and highways, including Europe's second-largest port, Antwerp. Major U.S. cargo carriers have created at Brussels-Zaventem airport one of the first European hub-and-spoke operations.

The Belgian government set up a task force to sensitize the public and private sectors to vulnerabilities of computers and electronic systems to year 2000 disruptions.