Although the current economic situation causes many worries and uncertainties, there are also important positive points for 2023. Most likely, this year will be practically the opposite of 2022: a year that starts difficult, but where the situation is gradually improving.
Economically, the year 2022 started out promising enough, but it quickly started to go downhill. In the wake of the post-coronavirus recovery, the Belgian economy again recorded solid annual growth of just over 2% in the first half of the year. But rising energy prices, rising inflation and the added uncertainty caused by the war in Ukraine have held back the situation.
Thus, the year 2023 begins rather gloomy: inflation reaches 10% and the economy stagnates or contracts. In addition, there are major risks that could affect the economy even more: war, geopolitics, energy prices, covid-19 in China, the impact of interest rate hikes on the financial system… Yet there are economic positives for 2023. 2023 is very likely to follow the opposite trend of 2022: a year that starts gloomy, but where things gradually start to improve.
1. Mild recession
Despite all the bad economic news of recent months and especially the spectacular price increases, it now appears that the slowdown in economic activity will remain limited overall. In much of the global economy, activity is slowing, stagnating or even contracting slightly, but a sharp decline in activity does not appear to be expected. Most economic forecasters are unsure if the Belgian economy will go into recession this winter or not, but nobody expects a very deep recession. Furthermore, in the second half of the year, economic activity should already begin to recover. This recovery will be modest, given that the recession has also been very contained. For the full year, the Belgian economy would therefore be more or less flat, or only positive. Compared to all the bad news in recent months, this is probably a godsend.
2. Cooling down of inflation
The prices of most commodities on international markets have been declining since the spring. The price of European gas was cut in half last month and is now back to its pre-Russian invasion of Ukraine. This price development should result in a significant drop in inflation over the course of 2023 (to be clear, this does not mean a drop in the overall price level, but a slower rise). Inflation was still 10% in December, but according to the Bureau du Plan it should drop to about 2% by the autumn. Even if this implies that we will not return to pre-crisis price levels and will therefore have to learn to live with structurally higher prices, it would be a much more bearable economic situation. Our economy can easily cope with a level of inflation around 2%, but with 10% inflation it is much more difficult.
3. Sharp increase in purchasing power
Despite all the dark stories about people’s purchasing power, in Belgium it is exceptionally well protected by automatic indexing. This manifests itself with a limited delay, and will be felt above all in 2023. According to the National Bank, the average purchasing power of Belgian households will increase by just over 3% in 2023 (in addition to inflation, so to speak). This would more than make up for the limited decline in average purchasing power in 2022. The downside, of course, is that a large part of the bill would fall on businesses, but the positive impact of this increase in household purchasing power is there.
4. The labor market holds up
The combination of tough economic conditions and soaring labor costs means that some companies will be forced to lay off staff. However, dramatic conditions on the labor market should not be expected. In a context of persistent difficulties in finding suitable staff, companies will do everything possible to retain their staff. As a result, the labor market shock will remain quite contained. Also, there are still many vacancies. People who lose their jobs should be able to find alternatives fairly quickly. This also helps limit the extent to which the economy collapses in this crisis. After all, people are only really at risk of getting into trouble if they find themselves out of work. And that should be limited.
5. Accelerate the energy transition
In 2022, the energy crisis has already triggered all kinds of initiatives to strengthen our approach to energy, including a review of the nuclear option, further investments in renewable energy, efforts to use energy more efficiently, a greater international coordination in the field of energy, etc. This trend will no doubt continue in 2023 (and there is still much work to be done in this area). Therefore, this crisis will accelerate the transition to a more sustainable energy policy, which will ultimately make our economy stronger and more robust in the long run.
Bart Van Craeynest he is chief economist of Voka and author of the book “Terug naar de feiten”.