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Report 2009Economic and financial developments

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Forewordby Guy Quaden, Governor

A year ago, when presenting the Bank’s previous Report, I said that the recession which had begun in the second half of 2008, in the wake of the financial crisis, would probably be more severe than the other downturns in economic activity since World War II. But I also expressed the hope, and even the conviction, that thanks to the speedy and appropriate economic policy responses, this “great recession” would not degenerate, as in the 1930s, into a great depression, i.e. several years of negative growth.

The events of 2009 described in detail in this Report seem to confirm that scenario. However, there are no grounds to declare victory because, unless the recovery unexpectedly gathers speed, it will take quite some time to make up the loss of output suffered.

The authorities have learnt from the mistakes which followed the 1929 crash. Central banks responded to the escalating financial tensions, the risk of a credit crunch and the sudden deterioration in the economic situation by resorting to various non-standard measures and cutting their interest rates to extremely low levels (1 p.c. for the Eurosystem’s refinancing operations). Apart from the assistance given to numerous financial institutions, governments made a major contribution towards supporting activity via their fiscal policy, in allowing the automatic stabilisers to operate (rising expenditure on unemployment benefits, falling fiscal and parafiscal revenues) and by implementing recovery plans. They also largely resisted the temptations of protectionism.

At the very least, that response halted a negative spiral. True, the 2009 growth figures are seriously in the red : around –1 p.c. for the world, –4 p.c. for the euro area and “only” –3 p.c. for Belgium. Yet these annual averages mask an even more dramatic deterioration at the beginning of the year, followed by a degree of recovery in the second half.

However, the recovery is fragile because it is based largely on fiscal stimuli and the rebuilding of stocks. Moreover, since firms still have excess production capacity, the crisis is unfortunately continuing to take its toll on employment and investment.

Price stability is the only area in which the 2009 results were satisfactory : inflation disappeared and deflation was avoided.

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The priority must gradually shift away from crisis management towards future crisis prevention and consolidation of the foundations for sustainable growth.

Ending the exceptional measures too soon would risk a renewed decline in activity. Conversely, ending them too late would prepare the way for new financial derailment. In any case, a gradual approach is required.

Since the financial market situation has improved considerably, the Governing Council of the European Central Bank decided, at the end of 2009, to proceed with the initial dismantling of the non-standard liquidity management measures by announcing that certain longer-term operations would not be renewed in 2010. However, as the economic recovery is still precarious, and inflation expectations remain firmly anchored at a level consistent with the definition of price stability, the Governing Council did not adjust the particularly accommodating stance of its monetary policy, and kept the official interest rates at their very low level.

At budgetary level, governments will increasingly have to balance the desired economic stimulus against the budget deficits entailed, and the growing loss of confidence which they are liable to cause. Moreover, the restoration of growth will not be enough to wipe out these deficits, which are only partly due to the impact of the weakened economy.

In contrast to the 1980s, Belgium’s public deficit (6 p.c. of GDP) is no higher than the average for its European partners. However, just when our country is about to face the fiscal consequences of population ageing, the spectre of the snowball effect has returned, namely the automatic effect of interest charges swelling the public debt, which will again exceed 100 p.c. of GDP in 2010. The modest reduction in the deficit provided for in the 2010 budget is welcome, but to enhance the credibility of the government’s stated commitment to restoring a balanced budget by 2015, the proceeds from any economic growth windfalls in the years ahead will have to be used to speed up deficit reduction.

However, a long-term strategy cannot be based exclusively on fiscal consolidation. It must also include policies on innovation, employment and competitiveness to stimulate and support sustainable growth.

As noted by the Basel Committee on Banking Supervision, “the banking sector entered the crisis with an insufficient level and quality of capital, inadequate provisions, imprudent valuations, insuf-ficient liquidity buffers, compensation policies that encouraged excessive leverage and risk taking, and excessive concentration of exposures among major financial institutions”.

The words ‘insufficient’, ‘inadequate’ and ‘excessive’ clearly indicate the absolute necessity of improving the regulation and supervision of financial institutions and of the financial system. Various international bodies are addressing that issue, and that is indeed the level at which coordinated decisions should preferably be taken. In particular, the G20 has drawn up an ambitious road map, and the Basel Committee has proposed new regulatory requirements. However, the details of these proposals have yet to be defined.

I know that it will be anything but easy to return to greater simplicity in the banking world. Moreover, the solution to many technical questions will take time. Finally, there is clearly a need to introduce some of the new rules gradually – especially the additional capital requirements – so as not to impede the flow of lending necessary to sustain the nascent recovery. Nevertheless, as a result of the crisis, there is now acceptance of the urgent need for radical reform of the financial sector and we cannot allow that mood to evaporate.

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In fact, while the “exit strategy” concerning the public measures supporting demand and the financial sector is being hotly debated, we should also be aware of the need for an “entry strategy” for the introduction of new regulatory standards.

The rapid spread of the financial crisis must also serve as a lesson for the supervisory authorities. No supervisory architecture can offer an absolute guarantee against financial accidents. However, a growing number of countries has opted for the “twin peaks” system, in which the central bank takes charge of supervising individual financial intermediaries and the system as a whole, while another institution is responsible for supervising the smooth operation of the markets, and ensuring information and protection for investors and consumers of financial services. The Belgian government has decided to set up such a structure by 2011.

The dramatic events of 2008 showed that, in a serious liquidity crisis, there were mass appeals to the central banks (and as we know, there were many requests addressed to the National Bank of Belgium, in particular). Central banks therefore need to be kept constantly informed of the situation of the various financial institutions. European central banks have the additional advantage of forming a network, while the crisis also demonstrates the need to organise much better cooperation between national supervisory authorities for the purpose of supervising cross-border institutions.

Prudential supervision is a complex and thankless task, no matter which institution is in charge. When the Bank becomes responsible for this new duty, it will endeavour to perform it to the best of its ability.

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contEnts

Contents

Foreword 5

report preSented by the goVernor on behalF oF the council oF regency 13

chapter 1 : international enVironMent 3

Summary 3The development of the financial crisis 9 Main developments on the commodity and foreign exchange markets 11Advanced economies 13 China and other emerging economies 29

chapter 2 : the Monetary policy oF the euroSySteM 35

Summary 35Macroeconomic and monetary environment : implications for the monetary policy stance 36The monetary policy decisions of the Eurosystem 46Transmission of monetary policy 57

chapter 3 : output, expenditure and current tranSactionS in belgiuM 63

Summary 63Activity 68Real developments in the main sectors 75 Structural developments 87

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chapter 4 : labour Market and labour coStS 95

Labour market 95Survey of firms’ reactions to the crisis 108Labour costs in the private sector 110

chapter 5 : priceS 119

Summary 119 Energy and food : transmission of global commodity price impulses 123Underlying inflation trend 133

chapter 6 : public FinanceS 139

Revenue, expenditure and overall balance 139 Cyclically adjusted and structural budget balances 153 Debt of general government 154

chapter 7 : Financial accountS oF houSeholdS, enterpriSeS and general goVernMent 161

Consequences of the financial crisis 161Households 163 Non-financial corporations 168General government 177

chapter 8 : Financial Stability 183

International financial markets 183Changes to the regulation and supervision in response to the crisis 188Belgian banking sector 192Belgian insurance companies 202

annexeS

Statistical annex 209

Methodological note 235

Conventional signs 239

List of abbreviations 241

List of boxes, tables and charts 245

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rEport prEsEntEd by thE govErnor on bEhalf of thE council of rEgEncy

Report presented by the Governor on behalf of the Council of Regency

1. The severe global recession which had begun in 2008 persisted at the beginning of 2009. Thanks to the resolute action of central banks and governments, activity picked up – albeit modestly – thereafter. Yet some risks remain, and unfortunately the crisis is still affecting unemployment. To foster a sustainable recovery, it will be necessary, in a context of close international and European cooperation, to roll back at the appropriate moment and pace the measures to support the financial sector and stimulate demand, make improvements forthwith to the regulation and supervision of the financial sector, and move on from a recession exit policy to a strategy for growth and employment which the crisis has made more essential than ever.

Main macroeconomic and financial developments in 2009

2. Following the collapse of the Lehman Brothers investment bank in September 2008, the worst financial crisis since the Second World War reached its peak. It also triggered the deepest global recession of the past sixty years. Real GDP, which had started falling by the beginning of 2008 in the United States, in the spring in the euro area and in the summer in Belgium, contracted much more sharply in the last quarter of 2008 and the first quarter of 2009, owing to the slump in international trade and industrial output. Although the situation stabilised during the second quarter in the advanced economies, and a modest recovery emerged in the second half year, that severe recession explains why the figures for 2009 as a whole are decidedly negative, with global economic activity down by almost 1 p.c. ; the fall is estimated at 4 p.c. in the euro area, and 3 p.c. in Belgium. Despite its great sensitivity to international trade and the difficulties experienced by the big banks, the Belgian economy proved more resilient than that of the euro area as a whole. With the benefit of a relatively low level of debt, households and businesses in fact made less marked reductions in their investments.

3. Policy-makers throughout the world avoided repeating the errors made in the aftermath of the 1929 crisis. They took considerable steps to safeguard the financial system and support demand, and displayed a willingness for international cooperation. When the turbulence caused by the property crisis in the United States became widespread in August 2007, central banks

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had promptly expanded the supply of liquidity to the financial sector ; they then responded to the worsening financial tensions which emerged in September 2008 and to the recession by slashing their interest rates to levels close to zero and resorting to various unconventional measures in order to support bank lending and the operation of the financial markets. Governments provided aid for systemically important financial institutions by means of capital injections and asset acquisitions, and by granting guarantees. They also adopted recovery plans, thus further stimulating demand – which is automatically supported by the increase in unemployment-related expenditure, the insensitivity of other public spending to the business cycle, and the decline in fiscal and parafiscal revenues.

4. These responses halted a negative spiral and averted the spectre of the collapse of the financial sector and a new Great Depression. From the spring onwards, there were signs of stabilisation followed by economic recovery, appearing first in the emerging Asian economies. The recovery remains fragile since it is based largely on fiscal stimuli and the rebuilding of stocks. The crisis is liable to have a prolonged impact on investment and employment, as firms will continue to face excess production capacity. In particular, employment in the euro area has suffered relatively minor damage as a result of the slump in economic activity, which suggests the risk of further job losses in the coming quarters. All the same, unemployment had already reached 9.4 p.c. in 2009, against 7.5 p.c. in 2008. In Belgium, where extensive use was made of the system of temporary lay-offs – which are not included in the unemployment statistics – the figure increased from 7 to 7.9 p.c. Moreover, demand is likely to be dampened for some time by the need for financial institutions, businesses and households in many countries to consolidate their balance sheet. In any case, following an unprecedented shock, the uncertainty surrounding the economic forecasts is particularly great.

5. The downward pressure on prices resulting from the fall in global demand was also contained by the action of the authorities, and did not kindle deflation expectations. In the euro area, the rise in the harmonised index of consumer prices dropped from an average of 3.3 p.c. in 2008 to 0.3 p.c. in 2009, primarily but not solely as a result of energy price fluctuations on the international markets during 2008. In Belgium, owing to the more pronounced transmission of those fluctuations, the deceleration was more marked : having risen by 4.5 p.c. in 2008, the index remained stable overall in 2009.

6. By mid March 2009, a degree of optimism was returning on financial markets. In general, financial institutions succeeded in restoring positive profitability, mainly thanks to rising prices of financial assets and low short-term interest rates. That recovery remains similarly fragile : while the capital losses on portfolios of structured products seem to have been largely written down, the banks’ profit and loss accounts could yet be affected by losses on more traditional lending activities. Moreover, signs of prices getting out of control emerged towards the end of the year on certain markets, such as the stock markets of emerging Asian countries and the markets in gold and other commodities.

Economic policy at the crossroads

Resolving imbalances via international cooperation

7. The crisis demonstrated the strength of the real and financial linkages between nations : adverse shocks were rapidly transmitted, but it is clear that positive stimuli were also quickly passed on, as is evident from the contribution of the emerging Asian economies to the recovery in 2009.

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In these difficult times, it is vital not to give in to the temptation of protectionism, which did so much harm in the 1930s.

8. It is also essential to avoid the trap of competitive depreciation. Policy coordination does not imply the simultaneous abandonment of policies to support demand. The profile of the normalisation of macroeconomic policies has to be matched to the economic and financial conditions of each region of the world. That means, for example, that the emerging Asian nations should be among the first to adjust their monetary policy, which is currently highly expansionary, and should allow their currencies to appreciate. Stronger multinational cooperation, which recognises the ever-growing importance of these economies, notably via the G20, should serve to build a climate of confidence by assuring these creditor nations that the advanced countries will strengthen their financial system, withdraw in good time the exceptional measures taken to support demand, and maintain control over their public finances.

9. The appreciation of certain Asian currencies could help to reduce the current account imbalances and improve the distribution of global demand. That rebalancing should also result from structural reforms promoting consumption in the emerging economies and savings in the United States, and reinforcing potential growth, particularly in Europe. The international coordination which this implies could also allow exchange rates to reflect fundamental trends and differences in the cyclical position of economies without disorderly or excessive fluctuations.

10. The euro has protected the countries which adopted it against additional disruption due to fluctuations in exchange rates vis-à-vis their European partners, or even a loss of monetary policy credibility. Nevertheless, monetary union does not solve all problems, and the crisis has revealed the vulnerability of certain countries, in particular Greece, where the sharp deterioration in public finances has impaired the confidence of the financial markets. It is up to the national authorities to prevent or correct imbalances and to make their economies more shock-resilient. Yet the European dimension is essential in the definition of a coherent response to the crisis. It is fortunate that the Lisbon Treaty, intended to improve the operation of the EU institutions, has been ratified.

11. Of course, international cooperation is also crucial for addressing the major challenges presented by climate change and the battle against poverty. Disappointing though it is, the agreement concluded at the Copenhagen climate summit bears witness to a gradual awareness of the threats to our planet. The undertakings given must be respected pending a more ambitious and binding agreement. The economically least advanced countries must also be helped along the road to faster and more sustainable development. In that connection, the Belgian government decided to devote 0.7 p.c. of GDP to official development assistance in 2010, in line with the target agreed at national and international level.

A timely exit, at an appropriate pace, from the policies supporting the financial sector and stimulating demand

12. The crisis management measures will have to give way to a policy geared to the prevention of future crises and consolidation of the foundations of balanced growth. That is a delicate exercise requiring accurate assessment of the private sector’s ability to manage without public support. If the exceptional measures are terminated too soon, that will heighten the risk of another collapse : fresh problems for the financial institutions would interact with a further deterioration in the economic situation. Conversely, if the measures are retained too long, that will open the way to new financial excesses, as happened after the stock market bubble burst in 2000-2001. Since it is likely that the situation will only gradually return to normal, and uncertainty will

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remain high, it will probably be advisable to phase out the crisis measures in stages. In any case, an effective policy to support demand presupposes credible “exit strategies” entailing closer coordination, particularly in the European Union.

13. The Eurosystem’s monetary policy must continue to focus on the objective of price stability. From August 2007 to July 2008, interest rate policy was intended to ward off risks of inflation, while liquidity management dealt with the dysfunctional money market. The sudden worsening of the financial crisis and the resulting deflationary pressures next prompted the ECB Governing Council to mobilise all instruments at its disposal in the same direction and resort to non-standard measures to support bank lending, the main source of funding for the euro area’s economy. The Eurosystem’s key interest rate was cut in seven stages from 4.25 p.c. in October 2008 to the unprecedented level of 1 p.c. in May 2009. In addition, the ample supply of liquidity drove down money market interest rates, and the overnight rate moved closer to that of the Eurosystem’s deposit facility, namely 0.25 p.c. from April 2009. The enhanced credit support consisted in fulfilling all requests for liquidity from the banks at the key rate, conducting refinancing operations over longer terms – up to one year –, extending the list of eligible collateral, supplying liquidity in foreign currencies for euro area credit institutions, and buying covered bank bonds in order to revitalise that market.

14. This resolute policy helped to ease financial market tensions and ward off the risk of deflation. A new phase began at the end of the year, when the Governing Council announced that the December 2009 12-month refinancing operations and the March 2010 6-month refinancing operations would be the last with those maturities. Prompted by the improvement in financial conditions, that adjustment to some of the liquidity management arrangements was intended to encourage the banks to restructure their portfolios and rely more on the market for their finance. It was not intended to trigger an increase in interest rates, as the under-utilisation of production capacity continued to hold prices down and justify exceptionally accommodating monetary conditions, especially as lending remained weak.

15. Since the price stability objective is a medium-term goal, it also enables monetary policy to act against the accumulation of financial imbalances which do not immediately result in pressure on consumer prices. Monetary analysis, which is one of the components of the ECB Governing Council’s assessment of the risks to price stability, is useful in that regard. True, the link between the movement in the money stock M3 and prices appears to have weakened, but the expansion of the monetary and credit aggregates, if accompanied by a steep rise in asset prices, may herald the creation of financial bubbles which would endanger consumer price stability if they burst ; that applies in particular to debt-fuelled property booms. Those considerations will doubtless gain importance in deliberations on the monetary policy stance. However, the interest rate instrument cannot on its own guarantee both price stability and financial stability. Monetary policy therefore needs to be backed by prudential policies.

16. As regards fiscal policy, it will not be sufficient to withdraw the exceptional measures applied during the crisis since, in most countries, the crisis will have augmented public debt and reduced GDP below the expected level for a considerable time. Credible fiscal consolidation strategies are necessary to lay the foundations for sustainable growth. Moreover, they could allow monetary policy to remain accommodating for a longer period. Combined with the measures to rescue financial institutions whose survival was essential to safeguard the system, the effects of the automatic stabilisers and the recovery plans have swollen the public debt, which has also increased as a percentage of GDP on account of the contraction of activity. Together, all these interventions were effective in averting a negative spiral, supporting lending and limiting the decline in growth potential. However, their effects will vanish very quickly if doubts emerge regarding the control of the public debt, leading to interest rate rises and increased household savings, or even the risk of a public debt crisis. Furthermore, the adjustment burden must not be passed on to future generations.

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17. In the EU, the Treaty and the Stability and Growth Pact provide the framework for the consolidation programmes. The many countries facing an excessive deficit – in the euro area, the only ones not in that situation at the end of 2009 were Cyprus, Finland and Luxembourg – must draw up credible plans and take corrective measures as the economic climate improves, in order to bring that situation to an end and go on to attain the medium-term objectives ensuring the sustainability of public finances. On 2 December 2009, the Ecofin Council defined the consolidation course required for most of those countries.

18. When the crisis erupted, Belgium still had a substantial public debt, though well below its 1993 peak of 134.1 p.c. of GDP. In addition, the position of a budget close to balance, which prevailed during the period 2000-2007, concealed an erosion of the primary surplus, i.e. excluding interest charges, and the intention expressed back in the year 2000, concerning the gradual creation of a structural surplus to prefinance the costs of population ageing, was not carried out. In these circumstances, the crisis not only undermined the plans for preparing public finances for the serious implications of demographic trends, it also revived the “snowball effect” – the endogenous increase in the debt fuelled by interest charges – which had not been seen since 1997. The public debt ratio, which had already climbed from 84.2 to 89.8 p.c. of GDP in 2008 owing to government intervention in certain struggling financial institutions, leapt to 97.8 p.c. in 2009. That increase was due to the decline in nominal GDP, but also and primarily to a substantial general government deficit of 6 p.c. of GDP. The deterioration in the deficit against the previous year, amounting to almost 5 percentage points, was entirely attributable to the primary balance, converted from a surplus of 2.6 p.c. of GDP in 2008 to a deficit of 2.3 p.c. If the policy remains unchanged, and according to the most likely macroeconomic scenarios, the return to nominal GDP growth will not prevent the endogenous increase in debt triggered in 2009 from persisting in the years ahead.

19. The level of Belgium’s public deficit is clearly untenable. Restoring the sustainability of public finances is vital to retain the confidence of investors, consumers and entrepreneurs, and to ensure that the government is capable of addressing the effects of population ageing. The general government budget must therefore be restored to balance within a reasonable period, not only to halt the “snowball effect” but also to start reducing the debt ratio once more. That is why, in Belgium’s September stability programme, the government confirmed the goal which it had already set in April of a return to a balanced budget by 2015 at the latest. The federal budget covering the years 2010 and 2011 is a first useful step in this consolidation process. The reduction of the general government deficit planned for 2010 contrasts with the increase predicted for the euro area. However, it should be noted that the deterioration was more marked in Belgium in the year under review. If the economy does better than expected, any gains should be allocated to speedier deficit reduction. If the macroeconomic environment improves in line with the latest forecasts, it should be possible to meet the intermediate objective recommended by the Ecofin Council of bringing the deficit back below 3 p.c. of GDP in 2012.

20. The task will not be easy, because it is unlikely to be aided by an almost continuous decline in the average interest rate on the public debt, as in the past twenty years. Structural measures will be necessary on both the revenue and the expenditure side, motivated by a desire for efficiency and selectivity. Revenues could be increased by more efficient collection of taxes and social security contributions and by an enlargement of the tax base, while the battle against tax evasion and social security fraud must be vigorously pursued. Expenditure could be curbed in various ways, such as an efficiency drive. The trend of the past decade must cease : in the period 1998-2009, the real structural increase in primary expenditure came to 2.7 p.c. per annum, and even reached 3.5 p.c. in 2009, a rate well above trend GDP growth, which itself declined following the crisis. The experience of the years 1984-1990 and 1994-2000 shows that, in a small open economy like Belgium, burdened by a high public debt, a fiscal consolidation programme does not have to mean weaker growth. But such a plan entails difficult choices, and cooperation at all levels of government, sharing responsibility for a return to sustainable public finances.

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Radical reform of the financial sector to ensure dependable support for the economy

21. The financial crisis brought profound changes to the Belgian financial system and modified the structure of large systemic institutions. Not only have the latter scaled down their trading activities by reducing their portfolios of securities and their interbank transactions, they are also implementing massive restructuring plans, entailing their withdrawal from certain markets and disposal of large parts of their business. These measures should contribute to the lasting restoration of liquidity and solvency in the banking system. They should also enable the institutions in receipt of government aid to manage without that support, in accordance with the European rules on the maintenance of competitive conditions. Moreover, the banks must continue to play their full role in financing the economy. The easing of the Eurosystem’s monetary policy should be reflected in lending to households and businesses, particularly small and medium-sized enterprises.

22. Structurally, the gradual dismantling of the financial institution support measures will have to be combined with the gradual but resolute implementation of in-depth reforms which are needed to remedy the malfunctioning of the financial system and, in particular, to reduce the moral hazard involved in the systematic intervention by the authorities in cases where institutions over a certain critical size are at risk of failure. It is not acceptable to revert to the pre-crisis management models. The crisis demonstrated that the private sector had no incentive to take account of extreme systemic risks. It revealed the extent to which certain individual actions could generate collective effects owing to contagion and the interconnections between major market operators. It also highlighted tension between the national framework in which the supervisory authorities exercise their powers and the approach adopted by cross-border institutions, plus a lack of coordination between microprudential supervision and the effort to ensure macrofinancial stability. The difficulties of establishing a new structure for the supervision of the financial sector are both operational and conceptual. That warrants detailed deliberation and meticulous preparation, but cannot be used as a pretext for procrastination or for wasting the impetus and feeling of urgency generated by the crisis itself.

23. The defects which have appeared in the crisis management procedures have again emphasised the interactions between the three main pillars of control defined by the Basel Committee, namely regulation, prudential supervision and market discipline. Regarding legislation, in many countries, including Belgium, special recovery arrangements applicable to enterprises in the financial sector have recently been introduced or are pending to enable the government, in extreme cases, to proceed with the transfer of parts of the assets of credit institutions or securities issued by those institutions. On the supervision front, both the Financial Stability Board at global level and the European authorities are insisting that, for every large cross-border financial institution, there must be special coordination groups with representatives from the ministries of finance, central banks and supervisory authorities of the countries concerned. Finally, the financial institutions themselves should be obliged to set up structures and organisational arrangements which, in an emergency, will facilitate the dismantling of the institutions or their division into more homogenous entities.

24. Turning to crisis prevention, the three pillars of prudential control must be retained but the balance requires adjustment. In particular, recent events have engendered serious doubts about the markets’ contribution to the maintenance of discipline. While it is true that effective supervision and regulation are inconceivable without the active contribution of financial institutions, failures and shortcomings have sapped confidence in the financial system’s ability to regulate itself. Thus, in many cases, incentive schemes and pay structures were biased in favour of immediate results, at the expense of longer-term value creation, while the publication of clear and appropriate information – the cornerstone of the third pillar of the Basel framework – was often lacking.

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25. Without wishing to act as a substitute for the financial markets, the authorities need to revise the regulations in order to make the system work better for the benefit of the economy. The rules need to be broader in scope, extending to institutions, instruments or markets not previously covered, once they acquire systemic importance. In order to strengthen the solvency and liquidity of credit institutions, the Basel Committee wishes to step up the regulatory requirements. The new system currently under examination would combine an increase in capital, a stronger reserve creation mechanism, and specific liquidity constraints. The calculation of the risk-weighted capital requirements, one of the great innovations of recent years, would be revised, both to encourage the formation, during a boom period, of capital which could be mobilised during a recession, and to take account of the systemic risks associated with very large institutions or those holding a significant market share in certain segments of activity. An additional requirement would be introduced in the form of a leverage ratio, linking the capital base to the total assets held by the banks and designed, in particular, to curb the excessive use of the leverage effect. There must also be rules governing the remuneration systems of financial institutions, in order to ensure that bonuses based on short-term results never again encourage excessive risk-taking.

26. The implementation of this ambitious project will require rigorous planning. The many technical questions to be resolved must not be allowed to result, paradoxically, in the introduction of over-complicated rules, whereas the aim is to increase the transparency of the financial system. It will also be necessary to ensure that the structural changes which the reform aims to achieve, particularly a reduction in the size and complexity of financial institutions, do not lead to a shortage of credit, a fragmentation of markets – particularly the European financial services market – detrimental to their efficiency, or the exploitation by financial institutions of differences in regulations and a weakening of competitive positions.

27. A revised regulatory framework therefore needs to be implemented by resolute action on the part of the supervisors in order to tighten up the risk management standards applicable to financial institutions. Lessons must be learnt from the crisis, which originated much more from the propagation and generalisation of identical behaviour throughout the financial system than from the weakening of a small number of institutions. The need to safeguard the stability of the system as a whole must be reconciled with the need for efficiency, but also with better protection for the consumers of financial products and services. While no supervision model can offer an absolute guarantee against financial accidents, a growing number of countries are opting for the “twin peaks” system in which the central bank takes charge of supervising individual financial intermediaries and the stability of the system as a whole, while a separate entity is responsible for supervising the smooth operation of the markets, the conformity of financial products and services, and proper consumer information and protection. Such an arrangement has many advantages. It facilitates the independent performance of two key tasks, namely the maintenance of the soundness of individual institutions and the preservation of market integrity. It makes full use of the central banks’ strong points for the supervision of systemic risks : their day-to-day relationship with the money market, their activity within the payment and settlement systems, their macroeconomic analyses and, in the case of the EU central banks, their participation in a system which organises their cooperation. The Belgian government recently opted for such a dual structure which is to be established shortly in order to enhance the effectiveness of prudential supervision and market surveillance.

28. This new model will be integrated into an international institutional architecture which is itself in the midst of change. Following the recommendations of the de Larosière Report, a European Systemic Risk Board and a European System of Financial Supervisors will be established in the EU. At global level, the importance of the role of the IMF and of the Financial Stability Board in maintaining the smooth operation of the financial system has again been formally endorsed. Cooperation, at both national and international level, between the various parties responsible for maintaining financial stability presupposes the fulfilment of certain vital conditions. First,

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there must be speedy, full communication of the financial information and data forming the basis of prudential supervision. Next, the point of view of the supervisors, who place the emphasis on adherence to the rules and the establishment of risk management procedures and tools, must be reconciled with that of the central banks, which focus their approach on the examination of structural trends and cyclical developments throughout the system. Finally, the analysis of the financial stability conditions must lead to targeted recommendations and specific macroprudential policy measures.

More fundamental reforms to foster sustainable growth

29. The crisis must not be allowed to push the structural reforms into the background. On the contrary, it makes them all the more essential in heightening the risks which population ageing, globalisation and climate change already presented for growth and public finances. The crisis has in fact already placed a burden on public budgets, and in the absence of an adequate response it could curb potential growth for a number of years owing to a decline in the capital stock, a possible rise in structural unemployment, and less readily available funding for investment and expenditure on research and development. A long-term strategy therefore cannot be based exclusively on fiscal consolidation but must also include a policy on innovation, employment and competitiveness, providing sustainable support for growth. The fiscal choices can make a contribution by redirecting revenue and expenditure to promote investment and employment ; for example, it is a question of encouraging job creation by an active employment policy, especially in relation to vulnerable groups and – in the current circumstances, particularly favouring young people – providing them with better assistance and training geared to jobs, improving the infrastructures which benefit economic deployment, and boosting investment in education and in research and development.

30. The supply-side reallocation will demand considerable efforts : what is needed is a shift in resources from more traditional activities towards the branches of the future, particularly those which will meet the needs of a more environment-conscious economy. Like other economies, Belgium will have to demonstrate flexibility and dynamism in developing new activities, and that requires the participation of everyone : entrepreneurs, employees and the government.

31. The transition to an innovation economy entails increasing expenditure on research and development – which is still well below the level in Germany and the Nordic countries, and too heavily concentrated on certain large companies –, but also making better use of the technological spin-off from research, encouraging closer links between enterprises and university centres, participating in international networks and enhancing Belgium’s attractiveness for researchers. Innovation should make it possible to raise productivity and launch new products and services which are in demand on foreign markets. The need to produce and consume in ways that are less harmful to the environment should be seized as an opportunity for restructuring.

32. More generally, business leaders should constantly endeavour to modernise processes, products and outlets. Belgium is still over-specialised in capital-intensive products where there is competition from emerging countries, and has insufficient focus on new sophisticated products. Export firms, which need to increase in number, are still focused mainly on markets where growth is weak. Moreover, the conditions need to be conducive to the creation of new firms, a powerful source of innovation. However, there is not enough appetite for enterprise, the administrative formalities are still onerous, and appropriate funding for the various stages in the development of young businesses is sometimes lacking. Finally, the existence of legal or administrative obstacles and institutional complexity impede the access of new players on some markets.

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33. The process of transforming the production structures requires efficient support on the labour market. It is therefore vital to avoid the potential loss of skills and competence resulting from the current increase in unemployment by effective guidance and training for those who lose their job because of the crisis. Defensive measures, such as the system of temporary lay-offs, which has succeeded in mitigating the social impact of the recession, must be accompanied by training measures in preparation for the exit from the crisis. An active employment policy, making use of everyone’s talents via efforts concerning activation, training and mobility, will be the way to prevent cyclical unemployment from turning into structural unemployment, and to ensure that sufficient labour can be mobilised in the context of an ageing population. While the proportion of young people with higher education qualifications is relatively large, the number leaving school with poor qualifications is falling too slowly, and life-long learning is still inadequate. The important thing is to develop everyone’s capabilities throughout their career. Increasing the employment rate – for certain groups the rate is still particularly low compared to the European average – remains essential in order to support growth potential and the social security system. The participation of women in the labour market, which has already increased strongly, needs to be further encouraged, with respect for equality of treatment in relation to men. Finally, as elsewhere in Europe, it is necessary to ensure that the rise in life expectancy is accompanied by an extension of working life, while taking due account of the type of work in question and of the need to offer equal opportunities to older people and enable them to continue working for longer. It may take a long time to implement the measures necessary for that purpose, as is evident from the gradual raising of the retirement age for women, which has already been achieved.

34. The competitiveness of the Belgian economy and its ability to create jobs also depend on price- and wage-setting. Compared to the euro area, the negative inflation gap recorded in 2009 was smaller than the positive gap seen in the previous year. That is due in particular to permanent price increases in the gas and electricity sector, and the fact that prices of a number of food products responded even more asymmetrically than in the euro area to the movement in commodity prices. The Price Observatory established in 2009 is to provide detailed analyses for the Competition Council and the network industry regulators, which play a crucial role in combating monopoly rents. In addition, the influence of the adverse economic climate on prices of services and non-energy industrial goods seems to have been weaker in Belgium than in the euro area, probably owing in part to the existence of numerous formal and informal indexation mechanisms. On the other hand, since they incorporate lags for adjustment to movements in the reference price index, these mechanisms could exert a moderating influence on average inflation in 2010.

35. Measured by the relative movement in hourly labour costs since 1996 within the meaning of the law on the promotion of employment and the safeguarding of competitiveness, the wage handicap of Belgian firms is thought to have stabilised at around 3.5 p.c. in 2009. That figure takes no account of factors for which the data required for international comparison are lacking, such as wage subsidies in the form of reductions in payroll tax, which were granted in Belgium. However, in view of a more adverse movement in productivity in Belgium, unit labour costs have risen by much more than on average in the three main neighbouring countries over the same period. It will therefore be necessary to ensure that the expected slowdown in these costs – resulting from lower indexation, the pressure of unemployment on variable remuneration, and cyclical productivity gains – is sufficient to improve competitiveness and boost employment. Combined with the innovation efforts mentioned earlier, such cost moderation would help exporters to take full advantage of the global demand revival.

22

Conclusion

36. In the various regions of the world, the way in which the authorities in charge of monetary and fiscal policies responded to the most serious financial and economic crisis since the war was generally appropriate and avoided the worst. There is still a need to navigate between, on the one hand, the hazards represented by prolonged economic stagnation and a credit crunch, and on the other hand, new financial bubbles and ballooning government debt. Though the manœuvre is delicate, it is clear that a steadfast course must be maintained towards the long-term objectives. Far from giving in to self-fulfilling pessimism, we need to confront the new realities with courage and clear understanding. To consolidate the economic recovery, it is necessary to strengthen international and European cooperation, continue to pursue policies aimed at monetary stability, proceed with the gradual but resolute consolidation of public finances, implement fundamental reform of the financial sector and encourage innovation and employment. That is also the direction which economic policies in Belgium must take, while allowing for the specific characteristics of a high level of public debt and a very open economy. A coherent strategy will enable Belgium to capitalise on its many strengths, such as its position at the heart of Europe and its high level of skills, and to progress along the road to sustainable development.

Brussels, 3 February 2010

24

Board of Directors

3 guy Quaden, governor

7 luc coene, vice-governor

8 Marcia de wachter, director

2 Jan Smets, director

5 Françoise Masai, director

4 Jean hilgers, director

6 peter praet, director

1 norbert de batselier, director

25

board of dirEctors

Board of Directors

3 4 5 6 7 81 2

26

Council of Regency

19 guy Quaden, governor

17 luc coene, vice-governor

13 Marcia de wachter, director

10 Jan Smets, director

9 Françoise Masai, director

7 Jean hilgers, director

6 peter praet, director

12 norbert de batselier, director

15 gérald Frère, regent

18 Jacques Forest, regent

16 luc cortebeeck, regent

8 Michèle detaille, regent

14 Martine durez, regent

11 didier Matray, regent

4 rudi thomaes, regent

3 rudy de leeuw regent

2 karel Van eetvelt, regent

1 piet Vanthemsche regent

5 Jean-pierre arnoldi, government commisssioner

27

council of rEgEncy

3

1.

intErnational EnvironmEnt

International environment

1.1 Summary

At the end of 2008 and the beginning of the year under review, most of the advanced countries were embroiled in a deep recession owing to the escalating financial crisis and the slump in output and world trade. The drying up

of capital flows and the collapse of international trade also affected the emerging economies. These develop-ments caused global GDP to contract in 2009, for the first time in decades. That fall, by 0.8 p.c., marked a clear departure from the often very vigorous expansion which had been a feature of the global economy in recent years.

Table 1 GDPGrowthinthemaineconomies

(percentage volume changes compared to the previous year, unless otherwise stated)

2007

2008

2009

p.m. 2008,

share of world GDP (1)

p.m. 2009,

contribution to global GDP

growth (1)

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 0.4 –2.5 20.8 –0.52

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 –0.7 –5.3 6.4 –0.34

Euro area (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 0.5 –4.0 15.8 –0.63

Denmark, United Kingdom and Sweden . . . . . . . 2.5 0.3 –4.7 4.2 –0.20

Other EU Member States (3) . . . . . . . . . . . . . . . . . . . 6.1 3.5 –4.8 1.7 –0.08

Other advanced OECD countries (4) . . . . . . . . . . . . 3.2 1.3 –0.7 3.8 –0.03

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0 9.6 8.7 11.5 1.00

India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4 7.3 5.6 4.8 0.27

Other emerging Asian countries (5) . . . . . . . . . . . . . 5.8 2.9 –0.8 6.9 –0.06

Latin America (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 4.1 –2.5 8.2 –0.21

Main oil-exporting countries (7) . . . . . . . . . . . . . . . . 7.2 5.1 –3.3 7.9 –0.26

World (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 3.0 –0.8 100.0

p.m. World trade (8) . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 3.0 –12.5

Sources : EC, IMF, OECD.(1) The percentage point contribution to global GDP growth of the country or group of countries considered and their percentage share of global GDP are calculated

in the same way as global growth, on the basis of purchasing power parities.(2) Excluding Cyprus, Malta and Slovenia.(3) Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania and Slovenia.(4) Australia, Canada, Iceland, New Zealand and Switzerland.(5) Hong Kong, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan and Thailand.(6) Excluding Venezuela.(7) Oil-exporting countries recording a current account surplus in excess of 25 billion US dollars over the period 2006-2008 (Algeria, Angola, Iran, Kuwait, Libya, Nigeria,

Norway, Qatar, Russian Federation, Saudi Arabia, United Arab Emirates and Venezuela).(8) Average exports and imports of goods and services.

4

chart 1 balance Sheet total oF the central bankS oF the Main adVanced econoMieS

(monthly averages, percentages of average GDP during the period 2007-2009)

2007 2008 20090

5

10

15

20

25

30

0

5

10

15

20

25

30

United States

Euro area

Japan

United Kingdom

Sources : IMF, Bank of England, Bank of Japan, Federal Reserve, ECB.

Underpinned by large-scale fiscal recovery plans and very accommodating monetary policies, the global economy nevertheless recovered gradually from the worst crisis suf-fered since the Second World War.

Thanks to the firm economic policy reaction in response to the financial crisis, it was possible to avert a collapse of the financial system. During the year under review, the financial market tensions gradually eased and confidence revived, while economic activity – both in the advanced countries and in the emerging economies – received sub-stantial support from macroeconomic policy. Increasing signs of recovery became apparent and, during the year, the global economy began to pick up. The emerging economies of Asia, and especially China, were the first to recover, and other emerging countries benefited from the renewed rise in commodity prices during 2009. In the advanced countries, too, activity stopped contracting and modest growth was recorded in many cases during the second half of the year under review. That recovery was partly due to the reversal of the stock cycle following a phase of massive de-stocking at the height of the crisis.

On average, it was mainly exports, business investment and housing construction that were hard hit in the advanced countries. Consumption there also dropped, as households stepped up their savings, mainly in view of the deteriorating labour market situation and the desire to rebuild their assets, which had suffered significantly from the slump in house prices and financial asset values. Inflation slowed considerably in 2009, as a result of the under-utilisation of production capacity and the decline in commodity prices, on average, compared to 2008. A number of economies actually recorded negative inflation for a time during the year.

Combined with the dip in oil prices in relation to their 2008 peak, the increase in the household savings ratio in countries where the current account balance recorded substantial deficits each year largely explains the cor-rection of the imbalances on current accounts at the global level. Moreover, the weaker expansion of domestic demand in the deficit countries depressed economic activity worldwide. As discussed in more detail in box 1, the global rebalancing of demand is necessary to ensure sustainable growth and to permit a permanent solution to the world’s current account imbalances.

Summary of the main policies aimed at overcoming the crisis

During the year under review, governments in many countries intensified their efforts to restore the normal operation of the financial markets and support economic activity. While many national recovery plans had already been prepared by the end of 2008, most of them were not implemented until 2009. Furthermore, some of the measures were adjusted and new initiatives were taken. In view of the globalisation of the economy, it was vital to coordinate the recovery policy. Meetings of the Group of Twenty, or G20, comprising government representa-tives from the main advanced and emerging economies, contributed to that development. The speedy response first averted the collapse of the financial system, and then permitted an improvement in the operation of the various financial markets. A fragile recovery in economic activity also began.

Monetary policy remained very accommodating, with key interest rates close to zero in most of the advanced economies. The conventional instruments used by the monetary authorities had therefore reached their limits, so that those authorities had to make greater use of unconventional, targeted measures in order to support specific financial markets. It was essentially a question of

5


chart 2 Scale oF the FiScal recoVery MeaSureS and the autoMatic StabiliSerS in the g201 during the period 2009-2010

(percentages of GDP)

2009

2010

0

1

2

3

4

5

6

7

8

9

0

1

2

3

4

5

6

7

8

9FISCAL RECOVERY MEASURES AUTOMATIC STABILISERS

Sout

h K

orea

Saud

i Ara

bia

Chi

na

Russ

ia

Sout

h A

fric

a

Aus

tral

ia

Japa

n

Uni

ted

Stat

es

Ger

man

y

Can

ada

Mex

ico

Indo

nesi

a

Turk

ey

Uni

ted

Kin

gdom

Arg

enti

na

Fran

ce

Braz

il

Indi

a

Ital

y

G20

(2)

p.m

. Eur

o ar

ea

Uni

ted

Kin

gdom Ital

y

Ger

man

y

Fran

ce

Aus

tral

ia

Japa

n

Uni

ted

Stat

es

p.m

. Eur

o ar

eaEU

Sources : EC, IMF, OECD.(1) Apart from the EU which is represented as such, the G20 comprises nineteen countries, namely Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia,

Italy, Japan, Mexico, the Russian Federation, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States.(2) Weighted average for the G20 economies, calculated on the basis of GDP in purchasing power parities.

expanding and easing the supply of liquidity to banks, intervening on certain credit markets and acquiring long-term financial assets, generally by choosing the instru-ments according to the structure of the local financial markets. That policy held the balance sheet total of the leading central banks at an exceptionally high level, fol-lowing considerable expansion at the end of 2008. It also led to the inclusion of riskier assets on their balance sheet. Moreover, a number of central banks undertook to hold their key interest rates at a low level for a long period if circumstances justified it. The aim of these announce-ments was not only to promote the restoration of the traditional monetary transmission channels which were not yet operating adequately, but also to exert downward pressure on longer-term interest rates and thus stimulate domestic spending.

Fiscal policy also provided strong support for economic activity. According to the IMF, the discretionary measures announced in connection with the crisis came to 3.6 p.c. of GDP, on average, for the G20 countries during the period 2009-2010. The stimulus applied was strongest in South Korea, Saudi Arabia and China. In the last country,

it totalled around 6 p.c. of GDP for the period 2009-2010 and was concentrated largely on infrastructure projects. In the United States and the EU, the scale of the stimulus was assessed at 3.8 and 1.9 p.c. of GDP respectively. In most countries, the boost applied in 2009 exceeded that planned for 2010. As a general rule, it can be said that fiscal recovery plans are more substantial in economies with less powerful automatic stabilisers, or those where the government had greater fiscal scope.

Alongside these general programmes, governments set up schemes to support specific sectors. In many countries, it was the financial system that first saw intervention to safeguard its operation and restore confidence. The meas-ures included capital injections, asset acquisitions, liquidity advances and the grant of guarantees covering, on the one hand, toxic assets and, on the other, interbank loans and customers’ bank deposits. According to the IMF, from the start of the crisis up to the end of August 2009, the total cost of these aid measures, excluding guarantees, came to just over 2 p.c. of GDP for the G20 countries. Nonetheless, there is still great uncertainty over the finan-cial sector’s situation, so that the bill for the support given

6

chart 3 international trade in goodS

(seasonally adjusted monthly data, average volume of exports and imports, indices 2005 = 100)

2005 2006 2007 2008 200980

90

100

110

120

130

140

150

80

90

100

110

120

130

140

150

World

Advanced economies

Emerging and developing economies

Source : CPB.

could be even higher, at least in the short term; in the long term, once normality is restored, governments will be able to sell the assets thus acquired. A number of proposals for the reform of the financial sector and its supervision have been put forward, e.g. in the Financial Sector Reform Plan in the United States and in the “de Larosière” report in Europe. Chapter 8 on financial stability gives details of how they have been followed up in the EU. In a number of countries, governments have also supported the car industry, notably by scrappage allowances and, as in the United States, by acquiring a direct stake in the capital of car manufacturers.

At the global level, the economic and financial crisis prompted the authorities of the leading economies to consult one another in order to strengthen international economic cooperation, particularly via the meetings held at G20 level, where supplementary initiatives were adopted in 2009 in order to combat the crisis. Thus, at the beginning of April it was decided, in London, to increase the IMF’s capacity for lending to emerging and developing countries, and to support the financing of international trade. At the Pittsburgh summit in September, a new framework for strong, sustainable and balanced eco-nomic growth was proposed and common principles were devised for a crisis exit strategy.

International trade

International trade in goods recorded a steep decline from October 2008, in the context of the worsening financial crisis. From September 2008 to May 2009, the global volume of trade fell by around 20 p.c. overall. The decline was not only abrupt, but also widespread and simultane-ous for all countries and sectors. International trade was therefore a key transmission channel for the crisis.

There are various explanations for this steep decline. First, there is the marked, synchronised fall in global demand and the growing uncertainty over the economic outlook following the spread of the financial crisis in the autumn of 2008. According to the IMF, over 70 p.c. of the world’s countries were in recession in 2009. However, the slump in international trade proved much more severe than one would expect simply from the fall in demand, so that other explanations are needed. Thus, according to a study by the World Bank, international trade is more sensitive to fluctuations in demand during periods of crisis affecting the whole global economy, partly on account of protectionist measures which gen-erally tend to be introduced under such circumstances.

However, that tendency was modest during the current crisis. Moreover, the crisis mainly affected the manufac-turing industry, whose products hold a key position in international trade, and expenditure components with a high import content. The reduced availability of trade credit and the tightening of lending criteria also played a part, especially in the emerging Asian economies. Finally, the increasing globalisation of production chains may be one reason why the decline was so severe, sudden and synchronised.

Growth of international trade in goods began to pick up by the middle of the year, coinciding with the revival in economic activity. The improvement in trade flows was mainly bolstered by the Asian countries, particu-larly China where the recovery plan provided for major infrastructure projects requiring large quantities of commodities and investment goods. The rebuilding of stocks – concerning commodities in Asia and electronic consumer goods in the case of western importers – pro-vided an additional boost. Finally, there was the initiative mentioned earlier on the part of the G20 leaders at the London summit in April, supporting the financing of international trade by releasing 250 billion dollars for that purpose. However, the trade recovery was only modest overall, and the level of trade in November was still well below its pre-crisis figure.

7


Box 1 – Rebalancing global demand

Despite the recent global economic recovery, there is great uncertainty over when, or even whether, the economy will regain a growth rate comparable to that recorded before the economic and financial crisis, especially as its dynamism was based largely on global macroeconomic imbalances. Thus, some western economies faced rapid expansion of credit, asset price bubbles and exceptionally low savings ratios, while a number of emerging countries featured distorted relative prices, underdeveloped financial markets and excessive savings ratios. It was these imbalances that helped to trigger the financial crisis, and hence the serious recession in 2008 and 2009.

These imbalances were most glaring in the balance of payments current accounts. The dollar’s status as an international reserve currency undoubtedly made it easy for the United States to attract foreign investors to finance the current deficit, particularly among the Asian countries. The latter in fact displayed a marked preference for investing their surpluses, and hence the corresponding foreign exchange reserves, in risk-free assets in the form of American public sector bonds. In the United States, these enormous capital flows combined with an extremely accommodating monetary policy were reflected in excessive liquidity and very low interest rates, further reducing the savings ratio which was already relatively low for American households. Moreover, in view of the inadequate prudential supervision of the financial sector, these developments had led to excesses on the asset markets and the formation of speculative bubbles, and ultimately to the financial crisis.

The recent shifts in global demand following the financial crisis have brought a partial correction of the external imbalances between countries. Exporting countries with a surplus, such as Germany, China and Japan, were seriously affected by the collapse of world trade : in 2009, their current surplus thus recorded respective falls of 4, 2.5 and 0.7 percentage points of GDP. Following the 2009 decline in oil prices from their 2008 peak, the oil-exporting countries also saw a substantial reduction in their surpluses. In the United States, the weakness of domestic demand and its effect on imports – outweighing the impact of the fall in external demand on exports – combined with a depreciation of the exchange rate led to a noticeable fall in the current deficit, down from a peak of 6 p.c. of GDP in 2006 to 3 p.c. in 2009. Similar factors also explain the return of the current deficit to a more modest level in the United Kingdom and – without the exchange rate depreciation – in Spain and Italy.

A vigorous and sustainable global economic recovery requires balanced demand growth, which implies that the shift in demand between countries, seen since the start of the crisis, should continue. That condition was the reason for the resolute undertaking given by the G20 leaders at the Pittsburgh summit, at the end of September 2009, via the Framework for Strong, Sustainable, and Balanced Growth. It was agreed that the countries with a current deficit would take measures to boost private savings and initiate fiscal consolidation while keeping their markets open and strengthening their export sector, whereas the economies recording a current surplus must strengthen “their domestic sources of growth”. That necessitates the correction of domestic imbalances.

During the financial crisis, a considerable percentage of United States household assets went up in smoke, owing to the collapse of share prices and house prices. Those households therefore attempted to rebuild their assets, boosting their savings ratio in 2009 to around 4 p.c. of disposable income, whereas before the crisis it had been practically zero. Some observers, including the IMF, predict that the growth of private savings in the United States will be relatively structural, as those households should have become more aware of the risks associated with their portfolio investments and become more realistic in their expectations regarding yields on financial assets and property. However, the level of savings in the United States should improve further as a result of the drastic consolidation of public finances which the government of that country will have to undertake in the years ahead, as the fiscal recovery policy has resulted in a budget deficit of a clearly unsustainable level. A credible fiscal consolidation strategy is also essential if foreign investors are to continue considering American sovereign securities as safe investments, failing which it could prove more difficult to finance the external debt, with consequent sudden fluctuations in the dollar exchange rate.

4

8

Even though it is not possible to be certain about the degree to which the rise in the US household savings ratio is indeed structural, it is likely that the United States will cease to perform the role of “global consumer of last resort” for a number of years. There are therefore many who put their hopes in Asia to revive global demand, as Asian growth has stood up well, overall, during the crisis, and in recent years the region has made an ever-increasing contribution to the expansion of global economic activity: from 2000 to 2008, 32 p.c. of the expansion of global GDP was due to emerging Asia, while 31 p.c. was attributable to the G7. The share of China and India in global GDP increased significantly, reaching 11.5 and 4.8 p.c. respectively in 2008 (in terms of purchasing power parity – PPP). Nonetheless, that movement was accompanied by a steep rise in the household savings ratio and a growing share of investment in GDP. The most striking example is China: the household savings ratio there reached around 40 p.c. of GDP in 2008, and private consumption dropped from 46 p.c. of GDP in 2000 to 35 p.c. in 2008. For comparison, the share of private consumption is between 70 and 80 p.c. in many advanced economies, and between 50 and 60 p.c. in most Asian countries. The scale of private consumption in China therefore appears insufficient at present to compensate for the slowdown in American consumption growth, especially as the Chinese economy is only about half the size of that of the United States in terms of PPP. Moreover, the imported component of Chinese private consumption is much smaller, and the consumption goods imported into China and the United States are very different, so that the industrial production structure needs to be adjusted. India and Brazil may also make a contribution, but, in view of the size of their economy, they are also unable to compensate for the slackening pace of American consumption.

In the long term, in order to eliminate both internal and external imbalances, the stimulation of domestic demand in China requires not so much by way of public infrastructure projects, but rather intervention in the structural factors which determine the patterns of savings, investment and consumption in the economy. First, it is crucial to continue developing the financial markets: although SMEs provide the majority of jobs, principally in the service sector, they do not yet have easy access to capital and are forced to build up substantial reserves before embarking on investment projects. Conversely, the large public industrial enterprises geared towards exports can obtain cheap loans from the State banks. Moreover, their production costs are modest since the price of the production factors is distorted, e.g. by the energy and water subsidies and, until recently, the absence of any obligation to pay dividends. In recent years, these distortions in favour of the export-oriented industrial sector have encouraged an investment revival, and hence the expansion of production capacity, which has been massive and even excessive in certain sectors. In order to curb this tendency, the Chinese government introduced a new regulation in June 2009 concerning the transfer of dividends on government stocks to the National Social Security Fund. That rule will promote the development of social security and should therefore discourage precautionary household savings. The transition to more balanced growth at the expense of capital-intensive heavy industry and in favour of the more labour-intensive service sector is vital to boost the share of wages in national income, and thus to revive private consumption. The Chinese authorities have also drawn up regulations on the granting of consumer credit, in order to exert direct influence over private consumption.

A key variable in the rebalancing of global demand is the relative competitiveness of the countries with an external imbalance, and that depends partly on the exchange rate. From that point of view, there is growing pressure on China’s exchange rate policy, in particular: combined with dramatic export growth and the expansion of the trade surplus, the exponential growth of China’s foreign exchange reserves is generally interpreted as a sign that the renminbi is undervalued. China had allowed its exchange rate to appreciate gradually against the US dollar, by 6 p.c. per annum from 21 July 2005. However, since the summer of 2008, the Chinese currency has again been firmly anchored to the dollar. Following the Asian crisis, many other countries in the region have built up comfortable currency reserves to arm themselves better against a sudden reversal in investor sentiment and turbulence on the foreign exchange markets. In that framework, new mechanisms such as bilateral currency swaps between Asian central banks and the credit facilities of the IMF (as lender of last resort) could restrain their reserve formation and increase the flexibility of exchange rates, helping to establish a new international balance.

4

9


Owing to the very high oil prices recorded in 2008, the current account surpluses of the oil-exporting countries had outpaced those of Asia in 2008, representing over 600 billion US dollars. The average surplus had increased from less than 4 p.c. of GDP in 2002 to 13.5 p.c. of GDP in 2008. Part of the oil revenues, or petrodollars, reverted to the oil-consuming countries via imports or investments in assets. As a result of the decline in demand for oil and the fall in the price of Brent, the oil-exporting countries saw their surplus shrink by around 80 p.c. in 2009. It is still substantial, and those economies are therefore being asked to contribute to the rebalancing of global demand, in particular by increasing their imports and, in certain cases, applying more flexible exchange rates.

In other surplus countries such as Germany and Japan, the recent capital losses will probably continue to depress aggregate demand for some years yet. Moreover, these two economies face population ageing, and have limited budgetary scope. Yet they too have a role to play in implementing structural reforms in order to boost the growth potential of their economy and encourage a shift away from export-centred industry towards the service sector. That is also the way in which the euro area as a whole should contribute towards the rebalancing of global demand.

Since structural measures are only effective in the medium term at best, that rebalancing will probably be accompanied by a transitional phase in which the decline in American consumption will not be entirely offset by the increase in other countries’ expenditure. Progress towards a sustainable rebalancing is therefore liable to be a lengthy process, with a slackening of world growth in the meantime. In many countries, growth was hitherto supported by monetary policy and massive fiscal recovery measures. Those measures will eventually be abolished, and the centre of gravity will therefore have to shift away from public demand towards the private sector.

1.2 The development of the financial crisis

The financial crisis which had erupted in the summer of 2007 in the American subprime mortgage sector and had spread in the following year throughout the international financial system following the failure of the American investment bank, Lehman Brothers, persisted at the beginning of 2009.

Financial markets in fact remained tense during the initial months of 2009. Following a temporary improvement in sentiment among market players at the end of 2008, owing to the further easing of monetary policy and the announcement of additional government aid in the United States, the situation on most markets deteriorated at the beginning of 2009, when the figures for the fourth quarter of 2008 revealed the scale of the widespread slowdown in economic activity, and firms published disap-pointing results. In consequence, stock market prices con-tinued to fall, and yield differentials on corporate bonds in relation to government loans widened further. The per-sistent uncertainty over the health of the financial sector, and over the details of a number of measures introduced by the authorities in order to stabilise that sector, height-ened the tension on the stock and credit markets. The announcement of new government aid for a number of

institutions active in the financial sector in Europe and the United States made it clear that the stability in that sector had not yet been permanently restored. Finally, market operators began to realise that the substantial boost given by governments to revive economic activity would impose a burden on public finances for many years. On the money markets, the narrowing of the spread between interbank interest rates and the fixed rate of the Overnight Index Swaps (OIS), i.e. the rate paid in exchange for a payment based on overnight interest rates recorded over a given period, was interrupted in the initial months of the year. The yield on government bonds issued by emerging coun-tries also came under pressure as a result of the renewed decline in activity in those economies, resulting from the marked weakening of international trade.

From mid March, the situation began to ease on the financial markets. Thus, the extreme risk aversion began to wane, initially owing to the announcement of a number of additional measures by the authorities, such as the extension of unconventional monetary policy interventions, the publication of the details of plans to assist the financial sector in the United States and the United Kingdom, the reinforcement of the fiscal stimuli and the intensification of international cooperation in the G20. That easing of tension subsequently contin-ued in view of the smaller than feared contraction of

10

chart 4 Market conditionS

(daily data, unless otherwise stated)

Sources : JPMorgan Chase, Thomson Reuters Datastream, Federal Reserve, ECB.(1) Fixed rate paid by the counterparty of an interest rate swap receiving the overnight rate for a three-month term (Eonia for the euro area, effective federal funds rate for the

United States).(2) Wilshire 5000 index(3) Dow Jones Euro Stoxx Broad index(4) Topix index(5) MSCI Emerging Markets index.(6) EMBI+ indices, differentials on loans for similar terms, in dollar.(7) Average of the responses to bank surveys on lending to businesses and households.

2007 2009 2007 2009

2007 2009

2001

2003

2005

2007

2009

–100

–80

–60

–40

–20

0

20

2001

2003

2005

2007

2009

0

100

200

300

400

500

600

700

800

900

2007 2009

2008 2008

2008 2008

0

50

100

150

200

250

300

350

400

0

50

100

150

200

250

300

350

400

40

60

80

100

120

140

160

40

60

80

100

120

140

160

0

100

200

300

400

500

600

700

800

900

–100

–80

–60

–40

–20

0

20

–10

–5

0

5

10

15

–10

–5

0

5

10

15

SPREADS BETWEEN THE THREE-MONTH LIBOR/EURIBOR AND OIS (1)

(basis points)STOCK MARKETS(indices 29 December 2006 = 100)

Euro area

United States

Europe

Total

Latin America

Asia

CREDIT STANDARDS (7)

(quarterly data, net percentages of banks reporting a tightening (–) of credit standards)

BANK LOANS TO BUSINESSES AND HOUSEHOLDS(quarterly data, percentage changes compared to the corresponding period of the previous year)

Euro area

United States

Emerging countries (5)

Euro area (3)

United States (2) Japan (4)

YIELD DIFFERENTIALS BETWEEN CORPORATE BONDS AND BENCHMARK GOVERNMENT BONDS (basis points)

AAA ratingUnited States Euro area

BBB rating

AAA rating

BBB rating

Euro area

United States

Africa

YIELD DIFFERENTIALS ON GOVERNMENT BONDS BETWEEN EMERGING COUNTRIES AND THE UNITED STATES (6) (basis points)

0

100

200

300

400

500

600

700

800

900

1,000

0

100

200

300

400

500

600

700

800

900

1,000

11


economic activity, the improvement in the results of a number of financial institutions, the favourable outcome of the “stress tests” conducted in the United States to assess the capital needs of the main financial institutions, and the improvement in the economic outlook. The revival of interest in riskier investments was reflected not only in a weakening of the US dollar and rising govern-ment bond yields, but also in a sharp rise in share prices during the rest of the year. However, it was insufficient to offset the substantial losses suffered in 2007 and 2008. Risk premiums on corporate bonds declined significantly, reverting in Europe to a level comparable to that seen before the collapse of Lehman Brothers. Emerging countries also benefited overall from the reduction in risk aversion, receiving capital inflows which helped to narrow the interest rate spreads on their sovereign debt and to revive their corporate share prices. Finally, on the money markets the differential between the interbank rate and the fixed OIS rate in the United States was close to that seen at the beginning of the financial crisis, in August 2007.

The recovery was virtually continuous, although it was occasionally thwarted by a re-emergence of doubts about the persistence of the economic upturn, particularly during June and July, and in the second half of October. Another source of unease lay in fears about the public debt in Dubai and Greece, at the end of November and in December respectively. At the end of the year, the situation had clearly improved on most financial markets. However, it was still not comparable to that prevailing before the start of the financial crisis, as the normal operation of a number of markets was still dis-rupted, and some of them still depended on government intervention.

This recovery had considerable implications for firms and individuals. First, lower risk premiums and rising stock markets made it cheaper for companies to raise finance, generating a revival in issuance activity. For households, financing costs also declined, notably because of the fall in mortgage interest rates. However, the banks continued to tighten their lending criteria, though to a lesser extent than in 2008. Bank lending to non-financial corporations and households slowed further, the main reason being the marked contraction in demand for new loans. Moreover, the rise in share prices and, in some economies, the increase in property prices led to a slight expansion in household assets, following the marked fall in 2008.

1.3 Main developments on the commodity and foreign exchange markets

Commodity markets

Following a marked fall in the second half of 2008, com-modity prices stabilised at the beginning of 2009, before rising almost continuously in the wake of the financial market recovery and the improvement in the economic outlook, factors which led to stock building by firms and an increase in financial investments in commodities. Later in the year, the price rise was fuelled by the incipi-ent recovery of the global economy and the depreciation of the US dollar. The sudden rise in commodity prices rekindled the debate over the impact on those prices of the growing interest of financial investors in the com-modity markets. Although the activities of those investors may have contributed temporarily to heightened volatility and to the trend rise in commodity prices, recent publica-tions by a number of international institutions, namely the International Energy Agency (IEA), the United Nations Conference on Trade and Development (UNCTAD) and the International Organisation of Securities Commissions (IOSCO), show that there is currently no firm evidence that this type of investment has a persistent effect on prices, as the pattern of such investment appears to be closely linked to that of the underlying fundamentals. In

chart 5 coMModity priceS

(monthly data, US dollars, indices 2005 = 100)

2005 2006 2007 2008 20090

50

100

150

200

250

300

0

50

100

150

200

250

300

Total

Food commodities

Industrial commodities

Energy commodities

Source : HWWI.

12

view of their particularly high level during much of 2008, commodity prices expressed in US dollar declined by an average of 33.3 p.c. over the year, according to the HWWI index, despite a rise of 56.5 p.c. between the end of 2008 and the end of 2009.

There were notable variations in the price increases of the main product categories during the year. They were due both to differences in sensitivity to the business cycle – particularly high in the case of oil and basic metals – and to a number of specific factors.

It was energy commodities that recorded the most marked increase in 2009 compared to the end of 2008, namely 69.7 p.c.

Prices of Brent crude expressed in US dollars increased almost constantly, doubling from around 40 dollars at the end of 2008 to around 80 dollars at the end of 2009. At the start of the year under review, OPEC succeeded in curbing the price fall by adhering strictly to the output limit which it had imposed in the second half of 2008. That measure brought supply into line with demand, which had fallen sharply. During March, prices began rising again in view of the improving economic outlook. Following a brief lull in the first half of July, they contin-ued their upward trend, as demand – particularly from Asia – had increased. Compared to 2008, final demand for oil declined overall by an average of 1.5 p.c., while total output dipped by 1.9 p.c. Moreover, the strong depreciation of the US dollar exerted upward pressure on oil prices. At the end of the year, the fall in prices was due to weaker than expected demand and the appreciation of the dollar.

Prices of natural gas and coal contracted sharply until the summer, mainly owing to the combined effect of ample supply and declining demand, before climbing back to levels comparable to those at the beginning of the year. In consequence, natural gas and oil price movements tem-porarily diverged, whereas they are generally comparable, at least in Europe and Asia.

Industrial commodity prices increased by 33.5 p.c. com-pared to the end of 2008, mainly owing to the higher cost of certain metals such as lead, zinc and copper, caused by the slowdown in global output of these minerals and the rise in demand from Asia, an important factor being the rebuilding of stocks in China. The gold price, which is not included in the HWWI index, was up by 40.6 p.c., reaching the record level of over 1,200 US dollars per ounce at the beginning of December, before dropping to around 1,100 dollars. The main reason was strengthening demand for investment purposes, as gold traditionally

acts as a safe haven in periods of uncertainty. Moreover, its price was underpinned by the weakening of the green-back and the gold purchases effected by a number of central banks in emerging countries.

Food commodity prices increased by only 25.2 p.c. during the year under review. The strongest price rises concerned beverages (cocoa and tea) and sugar; they were due to disappointing harvests, while demand only declined slightly. The price of milk, which is not covered by the HWWI index, also increased sharply.

Exchange rates

The upward trend in the weighted average exchange rate of the US dollar, which had begun in the summer of 2008, was reversed in March. Owing to the easing of financial market tensions, the dollar was no longer supported by the large-scale flight of institutional investors into what they saw as the safe haven afforded by dollar investments. The relative improvement in the economic climate outside the United States also played a key role. Up to the begin-ning of December, the dollar weakened almost continu-ously against most other currencies, except the Chinese renminbi, thus depreciating by around 9 p.c. over the year as a whole. As an annual average, however, the dollar remained about 4 p.c. above its 2008 level.

During the first two months of 2009, the euro fell sharply against the dollar, as a result of the narrowing of interest rate spreads between the two currencies and the deterioration in the euro area’s relative growth pros-pects, taking account in particular of the presentation of the economic recovery plan by the new US administra-tion, the publication of adverse economic figures for the euro area, and concerns about public finances and the financial sector in certain euro area Member States. As a result, the dollar exchange rate dropped at the begin-ning of March to 1.2555 per euro (ECB fixing). From the second week in March, however, the euro began to appreciate strongly, boosted by the stabilisation of the financial markets and the consequent waning of the extreme risk aversion. In the following months, the euro maintained an almost constant appreciation – reaching 1.5120 USD per euro – supported in particular by the improvement in the relative economic outlook for the euro area. However, there was a blip in December when, in contrast, the dollar appreciated against the euro and most other currencies, following the disclosure of more favourable economic statistics across the Atlantic. At the end of the year, the exchange rate of the European cur-rency stood at 1.4406, 3.5 p.c. above its year-end level in 2008.

13


During the same period, the pound sterling strength-ened even more sharply against the US dollar, namely by 10.6 p.c., but remained well below its 2008 average, owing to the marked fall in the second half of that year. On the basis of the movement in interest rate spreads, relative growth prospects and risk appetite, the pound depreciated, like the euro, in the first two months of the year before bouncing back between March and the beginning of August. After that, sterling weakened slightly against the dollar.

The trend appreciation in the yen, which had begun in mid 2007, was halted temporarily at the beginning of 2009, owing to the sharp deterioration in Japan’s eco-nomic prospects, the yen falling by around 10 p.c. against the dollar. From the end of April, the yen appreciated almost continuously until the beginning of December. That rise was sustained by the narrowing of interest rate spreads. As a result, Japanese investors began to repatri-ate a growing proportion of their foreign investments, partly by unwinding their carry trade transactions. At the end of the year, the value of the yen was down by around 2 p.c. against the end of 2008.

The exchange rate of the Chinese currency remained practically constant throughout the year at an average of 6.83 renminbi to the US dollar, in accordance with the virtually fixed exchange rate regime reintroduced by the Chinese government during the summer of 2008. However, in its latest annual report, the People’s Bank of China indicated its intention to switch to a more flexible exchange rate regime. It also announced that it wanted to develop the renminbi foreign exchange market.

1.4 Advanced economies

1.4.1 United States

During 2009, the US economy began to recover from its most severe recession since the Second World War, essen-tially thanks to the support provided by the US central bank and the federal administration. Over the year as a whole, however, growth remained negative, at 2.5 p.c., owing to the substantial negative level effect from the previous year and the new contraction recorded in the first half of the year under review, during which only

chart 6 bilateral exchange rateS oF the leading currencieS againSt the uS dollar

(monthly averages, indices January 2005 = 100)

2005 2006 2007 2008 200970

80

90

100

110

120

130

70

80

90

100

110

120

130

Euro

Pound sterling

Chinese renminbi

Japanese yen

p.m. Nominal effective exchange rate of the US dollar (1)

Sources : BIS, Thomson Reuters Datastream.(1) Average exchange rate of the dollar against the currencies of twenty-one

advanced countries and four emerging Asian economies, weighted according to their share in US foreign trade.

chart 7 Quarterly proFile oF gdp and the Main expenditure categorieS in the united StateS

(seasonally adjusted data; contribution to the volume change in GDP compared to the previous quarter, percentage points, unless otherwise stated)

2006 2007 2008 2009

Net exports of goods and services

Final domestic demand

Change in stocks

GDP (1)

–2.5

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

–2.5

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

Source : BEA.(1) Percentage changes compared to the previous quarter.

14

net exports made a positive contribution. The steepest decline in activity on a quarterly basis was seen in the first three months of 2009, at 1.6 p.c. From the second quar-ter, numerous government initiatives provided massive support to revive economic activity, which nonetheless recorded a further small decline. Growth did not return to positive territory until the third quarter, at 0.6 p.c.; that growth was due mainly to the recovery of final domestic demand. Owing to the even slower pace of stock reduc-tion, growth accelerated in the fourth quarter to 1.4 p.c.

In response to the continuing collapse of the economy and the persistent financial market tensions at the begin-ning of the year, the Federal Reserve and the government took supplementary measures to restore normality on the financial markets and support economic activity.

The American central bank thus continued to pursue an extremely accommodating policy. It kept the target for the federal funds rate on hold, having cut it to between 0 and 0.25 p.c. at the end of 2008, and its governing body repeated on several occasions during the year that it wanted to keep that rate at a low level so long as the eco-nomic circumstances justified it. The Federal Reserve also pursued the implementation, begun in 2008, of uncon-ventional credit easing measures. In that regard, it inter-vened in three areas. First, it continued to supply abundant liquidity on flexible terms for financial institutions. Next, by such measures as the Term Asset-Backed Securities Loan Facility (TALF – finance for the purchase of asset-backed securities collateralised by student loans, car loans, credit card balances and other guaranteed loans), it expanded its direct provision of liquidity to operators on certain credit markets regarded as crucial, with the aim of reviving the market in consumer credit and corporate credit. Finally, in order to bring down long-term interest rates, particularly mortgage rates, and improve the functioning of the credit markets for the private sector, it also increased its acquisi-tions of high-grade long-term securities. The amount of debt taken over from American government-sponsored mortgage agencies was thus increased from 100 to 175 billion dollars, and the limit on the purchase of mort-gage-backed securities of those agencies was raised from 500 to 1,250 billion dollars. In addition, a 300 billion dollar programme for the acquisition of long-term government bonds was launched in March. The relative importance of these last measures became much greater during the year since, following the financial market recovery, demand for liquidity from financial institutions and operators on certain key credit markets diminished. Owing to the credit easing policy, the Federal Reserve’s balance sheet total stood at a very high level throughout the year, namely around 2,000 billion dollars, or twice as high as before the eruption of the financial crisis.

The new federal government installed after the presiden-tial elections at the end of 2008 also took a number of significant initiatives, such as the American Recovery and Reinvestment Act passed by Congress in February 2009. This multi-annual plan, entailing an estimated budgetary cost of 787 billion US dollars or 5.4 p.c. of GDP, consists essentially of tax cuts, financial aid for local authorities and expenditure on infrastructure projects, education and welfare programmes. The Central Budget Office estimated that just over one-third of the total stimulus should be felt in 2009, with an equivalent magnitude in 2010. The Financial Stability Plan involving the Federal Reserve and a number of other federal institutions was also published in February 2009. It encompasses a range of measures for the housing market and the financial sector. Notable examples are the Public-Private Investment Program with proposals for buying up toxic assets from financial institu-tions, and the Capital Assistance Program which provided for injections of capital into the said institutions according to the results of the “resistance tests” which they would have to undergo. Mention should also be made of the Car Allowance Rebate System applicable in July and August. In order to combat the malaise in the American car sector, this programme provided for an allowance for scrapping a used car and buying a more eco-friendly new one. The cost of this programme was estimated at 3 billion dollars. In addition, the government intervened directly to rescue the car manufacturers Chrysler and General Motors via capital injections.

In these circumstances, the general government budget deficit expanded further, ballooning from 6.5 to 11.2 p.c. of GDP, while the gross debt ratio climbed to 83.9 p.c. of GDP, against 70 p.c. in 2008.

The recovery measures adopted by the government con-tributed to the growth of the main domestic expenditure categories during the year, but as an annual average, most of these declined in relation to 2008. In 2009, according to official estimates, the impact of the fiscal stimuli on the annualised quarterly GDP growth rate was between 2 and 3 percentage points from the second quarter.

Household final consumption expenditure declined for the second year running, by 0.6 p.c. compared to 0.2 p.c. in 2008. Underpinned by various provisions of the Recovery and Reinvestment Act, such as tax cuts and an increase in unemployment support, and by the effect of the scrappage allowance on car sales, it slowly began to rise in the second half-year. The caution dis-played by American consumers may be due to various factors. First, their real disposable incomes increased by only 0.6 p.c., as the labour market situation deteriorated

15


significantly. Over the year as a whole, employment was down by an average of 3.8 p.c., while the unemploy-ment rate reached around 10 p.c. at the end of the year, its highest level since the early 1980s. Wage movements were also unfavourable to workers. Conversely, individu-als’ purchasing power was bolstered by the decline in the general level of consumer prices. Next, the criteria which financial institutions applied to household lending remained strict, even though they were eased a little from the end of 2008. The volume of loans to individuals continued to shrink, essentially owing to the decline in demand caused by households wishing to reduce their debt levels. Although their net worth grew from the second quarter in the wake of the stock market recov-ery and the rise in house prices, it still remained about 19 p.c. below the pre-crisis level during the third quarter, encouraging households to augment their savings. Their savings ratio therefore continued to pick up, rising from 2.7 to 3.9 p.c.

Private investment in housing weakened for the fourth consecutive year, namely by 20 p.c., but a recovery also emerged during the year, triggered by various government initiatives. The central bank’s programme for the purchase of mortgage-backed securities thus contributed to a sharp fall in mortgage interest rates. The federal government also supported the housing sector, e.g. by granting tax credits in case of a house purchase, and facilitating the

chart 8 actiVity and priceS in the reSidential property Market in the united StateS

(indices 2000 = 100 ; monthly data, unless otherwise stated)

2001

2003

2005

2007

200

90

20

40

60

80

100

120

140

160

180

200

0

20

40

60

80

100

120

140

160

180

200

Homes under construction

Homes sold (new and existing)

Prices of existing homes (1)

Sources : Standard & Poor’s, Thomson Financial Datastream.(1) National Case-Shiller index, quarterly data.

renegotiation of the terms on certain loans. Combined with the strong decline of property prices, these measures made house purchases more accessible. The number of homes sold therefore grew strongly from the beginning

Table 2 EconomicdEvElopmEntsinthEUnitEdstatEs

(percentage changes compared to the previous year, unless otherwise stated)

2007

2008

2009

Expenditure(volume) (1)

Final domestic demand . . . . . . . . . 1.7 –0.4 –2.6

Private consumption (2) . . . . . . . . 2.7 –0.2 –0.6

Public consumption (2) . . . . . . . . 1.4 3.0 2.0

Gross fixed capital formation –1.2 –3.6 –14.3

Housing . . . . . . . . . . . . . . . . . . –18.5 –22.9 –20.0

Enterprises . . . . . . . . . . . . . . . . 6.2 1.6 –17.8

General government . . . . . . . 3.2 3.4 2.4

Change in stocks (3) . . . . . . . . . . . . –0.3 –0.4 –0.7

Net exports of goods and services (3) . . . . . . . . . . . 0.6 1.2 1.2

Exports . . . . . . . . . . . . . . . . . . . . 8.7 5.4 –10.8

Imports . . . . . . . . . . . . . . . . . . . . 2.0 –3.2 –14.8

GDP . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 0.4 –2.5

labourmarket(4)

Employment . . . . . . . . . . . . . . . . . . 1.1 –0.5 –3.8

Unemployment (5) . . . . . . . . . . . . . . 4.6 5.8 9.3

pricesandcosts

Consumer prices (CPI) . . . . . . . . . . 2.9 3.8 –0.4

Unit labour costs . . . . . . . . . . . . . . 3.0 1.8 –1.1

Prices of imported goods and services . . . . . . . . . . . . 3.7 10.7 –11.3

Terms of trade . . . . . . . . . . . . . . . . –0.2 –5.2 6.3

Balanceofpaymentsandbudgetbalance(6)

Balance of current transactions . . –5.2 –4.9 –3.0

Budget balance of general government

Observed . . . . . . . . . . . . . . . . . . . –2.8 –6.5 –11.2

Structural (7) . . . . . . . . . . . . . . . . . –3.3 –6.0 –8.8

p.m.Privatesavingsratio(8) . . . . . . 1.7 2.7 3.9

Grossdebtratioofgeneralgovernment(6) . . . . . 61.8 70.0 83.9

Sources : OECD, Bureau of Labor Statistics.(1) Calendar adjusted data.(2) Final consumption expenditure.(3) Contribution to the change in GDP, percentage points.(4) According to the household survey.(5) Ratio between the number of unemployed and the labour force, percentages.(6) Balance or outstanding total expressed as a percentage of GDP.(7) Balance adjusted for the economic cycle and the effect of non-recurring measures.(8) Net savings expressed as a percentage of net disposable income.

16

of 2009, and the large stock of unsold properties began to diminish. Together with the improving outlook for property prices which emerged in the second quarter, this situation led to a modest revival in the number of hous-ing starts.

The gross fixed capital formation of American enter-prises slumped by 17.8 p.c., whereas it had risen by 1.6 p.c. in 2008. That decline was essentially due to the adverse economic situation and the uncertain, and relatively unencouraging, prospects. Investment in both non-residential construction and in equipment and soft-ware declined sharply on average, though the pattern diverged during the year. Expenditure on non-residential construction, which had surged up to 2008, was notice-ably depressed throughout 2009, owing to the growing number of empty properties and the resulting fall in rents. In contrast, spending on equipment and software dipped at the start of the year but then began rising again in response to the improvement in financing condi-tions and the economic outlook. During the year, firms reduced their stocks to a greater extent than in 2008, so that changes in stocks again made a negative contribu-tion to economic growth.

As in the previous year, net exports of goods and services, unlike domestic demand, contributed to eco-nomic growth. The reason is that imports contracted more sharply than exports, since domestic demand declined more steeply in the United States than in most of its trading partners, and US price competitiveness improved owing to the dollar’s depreciation in recent years. Exports and imports both began to pick up at the end of the second quarter. Moreover, the terms of trade improved strongly, essentially owing to the average fall in energy prices, and the trade deficit was almost halved. That led to a substantial fall in the negative bal-ance of the current account, which was down from 4.9 to 3 p.c. of GDP, the smallest deficit since 1999.

Inflation, measured by the change in the CPI, averaged –0.4 p.c. during the year under review, against 3.8 p.c. in 2008. This was the first time since 1956 that a nega-tive annual figure had been recorded. This sharp fall was due mainly to the decline in the prices of energy, food and housing. The fall in the general price level, which had been modest at the end of 2008, gathered momen-tum, to reach 2.1 p.c. in July; after that it slowed down, essentially owing to base effects caused by the year-on-year movement in energy prices, and disappeared from November, the month in which inflation returned to positive figures. In contrast, underlying inflation remained relatively stable, at around 1.7 p.c.

1.4.2 Japan

Feeling the full impact of the dramatic collapse of interna-tional trade, the Japanese economy, being heavily depen-dent on exports, suffered its most severe recession since the Second World War : on average, GDP was 5.3 p.c. below its 2008 level. As in the case of the United States, this nose-dive was due to the negative growth carried over from 2008 and was exacerbated by the further sharp decline in activity in the first quarter of 2009. The marked weakening of demand for consumer durables from the United States and Europe damaged both Japan’s exports and its industrial output, especially in the final quarter of 2008 and the following quarter. From the second quarter onwards, the Japanese economy climbed slowly back, supported by fiscal stimuli and an export recovery, driven mainly by the growing Chinese demand for investment goods. The infrastructure projects included in the Chinese recovery plan in fact made a major contribution to the revival of regional trade in Asia from the beginning of the year. However, owing to the strong appreciation of the yen since the eruption of the financial crisis, resulting from the unwinding of carry trade positions, Japan con-tinued to lose market share in favour of South Korea and Taiwan, in particular. Over 2009 as a whole, imports were more resilient than exports, so that net exports made a negative contribution to growth. The trade surplus also

chart 9 Quarterly proFile oF gdp and the Main expenditure categorieS in Japan

(seasonally adjusted data, percentage changes in volume compared to the previous quarter)

2005 2006 2007 2008 2009–25

–20

–15

–10

–5

0

5

10

–5

–4

–3

–2

–1

0

1

2

GDP

Final domestic demand

Exports of goods and services (right-hand scale)

(left-hand scale)

Source : ESRI (Japan).

17


contracted sharply despite the improvement in the terms of trade following the appreciation of the yen and the fall in commodity prices compared to the previous year. The strong yen depressed foreign investment income, so that the income account surplus declined further, augmenting the reduction in the current account surplus.

In 2009, all components of domestic demand except those of the Japanese government recorded negative growth on an annual basis. The government tried to counteract the recession by pursuing a vigorous counter-cyclical policy, which included increasing public invest-ment by almost 9 p.c.

In contrast, gross fixed capital formation of enterprises was extremely weak, contracting by 18 p.c. Owing in par-ticular to the mediocre demand prospects, business con-fidence in fact fell in March 2009 to a low point not seen since 1975. In addition, the return of deflation meant an increase in real interest rates, the appreciation of the yen squeezed profit margins, and the banks tightened their lending criteria. These factors prompted the large-scale postponement of investment plans.

The negative shock affecting businesses spread to house-holds via the labour market. In a context of pay cuts and rising unemployment, which would undeniably have been even higher without the employment subsidies granted to firms, consumer confidence was seriously dented and private disposable incomes diminished. Furthermore, the stock market crash caused substantial capital losses. Over the year as a whole, private expenditure therefore declined. The sale of consumer durables was about the only product category recording further positive growth during the year, thanks to the government measures to cut prices. Investment in housing also fell sharply, against the backdrop of heightened uncertainty and the tighten-ing of mortgage loan conditions.

Pay cuts, a strong yen and the reduction in commodity prices on average, compared to 2008, accentuated the deflationary pressure resulting from sluggish domes-tic demand. Consequently, the consumer price index recorded a negative movement on an annual basis throughout the year under review, and the price falls accelerated in the first half year. In October 2009, prices were 2.5 p.c. below the previous year’s level. Underlying inflation (excluding food and energy prices) also became increasingly negative, reaching a low point of –1.1 p.c. in October. At the end of the year, the deflationary pressure eased slightly, influenced not only by the global economic recovery but also by the modest rise in the prices of energy and other commodities. Nonetheless, the danger of a deflationary spiral was ever present.

Altogether, the Japanese government in office before the summer 2009 elections launched four fiscal recovery plans amounting to 4.8 p.c. of GDP, to be implemented between the end of 2008 and the end of 2009. The essential component of these plans, or about 4.2 p.c. of GDP, consisted in boosting public spending, notably

Table 3 EconomicdEvElopmEntsinJapan


2007

2008

2009

Expenditure(volume) (1)

Final domestic demand . . . . . . . . . 0.9 –0.7 –3.2

Private consumption (2) . . . . . . . . 0.7 0.6 –0.7


Gross fixed capital formation 0.8 –5.0 –12.8

Housing . . . . . . . . . . . . . . . . . . –9.7 –7.6 –13.3

Enterprises . . . . . . . . . . . . . . . . 5.7 –3.9 –18.0

General government . . . . . . . –7.3 –6.9 8.8

Change in stocks (3) . . . . . . . . . . . . 0.3 –0.2 –0.2

Net exports of goods and services (3) . . . . . . . . . . . 1.1 0.2 –1.8

Exports . . . . . . . . . . . . . . . . . . . . 8.4 1.8 –25.1

Imports . . . . . . . . . . . . . . . . . . . . 1.5 0.9 –14.7

GDP . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 –0.7 –5.3

labourmarket

Employment . . . . . . . . . . . . . . . . . . 0.5 –0.4 –1.8

Unemployment (4) . . . . . . . . . . . . . . 3.9 4.0 5.1

pricesandcosts

Consumer prices . . . . . . . . . . . . . . 0.1 1.4 –1.4

Unit labour costs . . . . . . . . . . . . . . –1.9 1.4 1.3


Terms of trade . . . . . . . . . . . . . . . . –4.6 –9.5 12.5


Balance of current transactions . . 4.9 3.2 2.5


Observed . . . . . . . . . . . . . . . . . . . –2.5 –2.7 –7.4

Structural (6) . . . . . . . . . . . . . . . . . –3.9 –4.7 –6.5

p.m.Privatesavingsratio(7) . . . . . . 3.3 2.7 2.8


Sources : OECD, Ministry of Foreign Affairs and Communication (Japan).(1) Calendar adjusted data.(2) Final consumption expenditure.(3) Contribution to the change in GDP, percentage points.(4) Ratio between the number of unemployed and the labour force, percentages.(5) Balance or outstanding total expressed as a percentage of GDP.(6) Balance adjusted for the economic cycle and the effect of non-recurring measures.(7) Net savings expressed as a percentage of net disposable income.

18

by means of non-recurring transfers to households. The third plan, approved at the end of May 2009, comprised – as key elements for consumers – measures to stimulate sales of domestic electrical appliances and ecological cars (“ecopoints” and reduction in car tax). In principle, these incentives were to be abolished in March 2010. The gov-ernment also approved a plan for new capital injections into banks and for encouraging lending to SMEs. In addi-tion, it set up a programme aimed at granting emergency loans to businesses.

As a result of these recovery measures, the public deficit – which had fallen to 2.5 p.c. in 2007 under the progres-sive fiscal consolidation pursued since 2002 – soared to 7.4 p.c. in 2009, and the gross government debt, which was already exceptionally high, surged to around 190 p.c. of GDP. In December, the government installed after the elections on 30 August 2009 announced a new recovery plan for the purpose of supporting what was considered a fragile revival ; that plan is set to swell the budget deficit further, to over 10 p.c. of GDP in 2011.

The Bank of Japan continued to pursue a very accom-modating monetary policy. It held its key interest rate at the low level of 0.1 p.c., which has prevailed since 19 December 2008. More specifically, it tried to make it easier for businesses to raise finance. To that end, it made unlimited liquidity available to financial institutions via special short-term loans so that firms could obtain loans on favourable conditions. As another move to support the credit markets, it proceeded to buy commercial paper and corporate bonds, extending that measure on two occasions. It also stepped up its purchases of government bonds.

1.4.3 Euro area

actiVity

In 2009, the euro area’s GDP shrank by 4 p.c., the big-gest fall in economic activity for several decades. Having already declined somewhat on a quarterly basis in the second and third quarters of 2008, it subsequently recorded an even sharper fall of 1.9 p.c. in the last quarter of 2008 and 2.5 p.c. in the first quarter of 2009. This severe decline had a very negative impact on aver-age annual growth in 2009. However, as time went by, the signs of improvement steadily multiplied and the recession gradually came to an end. Thus, the reduction in GDP came to only 0.1 p.c. in the second quarter of 2009, giving way to small increases of 0.4 p.c. in the third quarter and, according to the forecasts, 0.2 p.c. subsequently.

The recovery that thus emerged by the middle of the year under review is partly attributable to temporary factors, principally the reversal of the business stock cycle and the measures adopted by most of the euro area Member States under the European Economic Recovery Plan in order to contain the crisis.

That plan had been approved at the European summit in December 2008. It provided for coordination of the national efforts to revive the economy and a number of initiatives to be taken by Community institutions, sepa-rately from the massive rescue operations for the financial sector. The fiscal stimulus measures announced in this connection represented 1.5 p.c. of GDP for the Union as a whole, including 0.3 percentage point to be borne by the Community institutions. A substantial part of the fiscal resources was reserved for boosting household purchas-ing power, notably via tax cuts and support for vulner-able groups. Another part was earmarked for promoting investment. In addition, funds were made available to help businesses and certain sectors, such as the construc-tion industry and the car industry, where scrappage allow-ance schemes were among the measures introduced. Finally, budget resources were also deployed to support the labour market and improve its functioning, particu-larly by the introduction or relaxation of flexible working

chart 10 gdp, priVate conSuMption and buSineSS inVeStMent in the euro area (1)

(percentage volume changes compared to the previous year)

1973

1976

1979

1982

1985

198

8

1991

199

4

1997

200

0

2003

200

6

200

9

–7

–6

–5

–4

–3

–2

–1

0

1

2

3

4

5

6

7

–14

–12

–10

–8

–6

–4

–2

0

2

4

6

8

10

12

14

Business investment (right-hand scale)

Private consumption

GDP(left-hand scale)

Source : OECD.(1) Excluding Cyprus, Malta and Slovenia, and – until 1991 – East Germany.

19


time regimes, and measures to prevent the increase in structural unemployment. In addition to the initial amount budgeted, several Member States adopted measures in response to the further deterioration in economic condi-tions at the start of the year under review, and in order to support growth in the medium and long term. According to EC estimates, those efforts would bring the overall discretionary fiscal stimulus in the euro area to 1.3 p.c. of GDP in 2009 and 1.2 p.c. of GDP in 2010. As discussed in more detail in the section on fiscal policy in this chapter, apart from the said discretionary stimulus, the operation of the automatic stabilisers made a significant contribu-tion towards supporting economic activity.

Private consumption proved to be a stabilising factor during the crisis period. Although it declined during the year under review by 1 p.c., that reduction was lim-ited overall, compared to the fall in GDP and the other expenditure components. The only countries where final consumption expenditure of households fell sharply were Ireland and Spain, countries which faced a much steeper rise in unemployment. In the other Member States, the decline was only modest, and there was actually a small increase in France, Germany and Austria.

chart 11 Quarterly proFile oF gdp and the Main expenditure categorieS in the euro area

(data adjusted for seasonal and calendar effects; contribution to the volume change in GDP compared to the previous quarter, percentage points, unless otherwise stated)

2007 2008 2009–3.0

–2.5

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

–3.0

–2.5

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5


GDP (1)

Private consumption

Public consumption

Gross fixed capital formation

Change in stocks

Source : EC.(1) Percentage changes compared to the previous quarter.

The weakening of private consumption largely reflected the further marked increase in the private savings ratio. On average, consumer confidence was low during the year under review – it sank to a record low level in

Table 4 EconomicdEvElopmEntsinthEEuroarEa


2007

2008

2009

Expenditure(volume) (1) (2)

Final domestic demand . . . . . . . . . 2.4 0.4 –2.5

Private consumption (3) . . . . . . . . 1.6 0.3 –1.0


Gross fixed capital formation 4.7 –0.7 –10.6

Housing . . . . . . . . . . . . . . . . . . 0.9 –4.6 –10.3

Enterprises . . . . . . . . . . . . . . . . 6.2 0.6 –13.2

General government . . . . . . . 4.8 0.9 2.4

Change in stocks (4) . . . . . . . . . . . . 0.0 0.1 –0.6

Net exports of goods and services (4) . . . . . . . . . . . 0.5 0.0 –0.9

Exports . . . . . . . . . . . . . . . . . . . . 6.3 1.0 –14.2

Imports . . . . . . . . . . . . . . . . . . . . 5.5 1.1 –12.5

GDP . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 0.5 –4.0

labourmarket

Employment (1) . . . . . . . . . . . . . . . . . 1.8 1.0 –1.6

Unemployment (5) . . . . . . . . . . . . . . 7.5 7.5 9.4

pricesandcosts

Consumer prices (HICP) . . . . . . . . 2.1 3.3 0.3

Unit labour costs (1) . . . . . . . . . . . . . 1.7 3.6 3.8


Terms of trade . . . . . . . . . . . . . . . . 0.2 –1.2 3.0


Balance of current transactions (1) .. 0.5 –0.8 –0.6


Observed . . . . . . . . . . . . . . . . . . . –0.6 –2.0 –6.4

Structural (7) . . . . . . . . . . . . . . . . . –1.9 –2.8 –4.9

p.m.Privatesavingsratio(1)(8) . . . . 9.1 9.8 11.8


Sources : EC, OECD.(1) Excluding Cyprus, Malta and Slovenia, except for exports and imports.(2) Calendar adjusted data, except for exports and imports.(3) Final consumption expenditure.(4) Contribution to the change in GDP, percentage points.(5) Ratio between the number of unemployed and the labour force, percentages.(6) Balance or outstanding total as a percentage of GDP.(7) Balance adjusted for the economic cycle and the effect of non-recurring measures.(8) Net savings expressed as a percentage of net disposable income, except for

Spain and Portugal, where the aggregate used for calculation is available only on a gross basis.

20

March 2009 – and households thus decided to save a larger proportion of their income. More particularly, the rise in unemployment and in the public debt may have encouraged them to step up their savings, in view of the correspondingly less favourable and more uncertain pros-pects for their future disposable income. Furthermore, in so doing, they were possibly also trying to rebuild their financial assets following the substantial losses incurred between mid 2007 and March 2009.

The primary reason for the relative resilience of private consumption is the growth of household disposable income in real terms, which quickened pace slightly com-pared to 2008. Though the rise in their disposable income was significantly slower in nominal terms than in the pre-vious year, the effect was more than offset by the marked slowdown in consumer price inflation. It is true that nomi-nal disposable income received a boost from the measures taken under the European Economic Recovery Plan, aimed at supporting the labour market and household demand, and from the operation of the automatic stabilisers of public finances, but the effect of those factors was more than counterbalanced by the fall in employment and in the number of hours worked per employee.

Moreover, other measures in the European Economic Recovery Plan, such as the support for specific sectors – among which the car industry – also promoted the rela-tive stability of private consumption. Thus, following the sharp fall seen in 2008, the number of new passenger car registrations rose markedly in the first half of the year under review, indicating that the scrappage schemes set up in a number of Member States may have succeeded in stimulating domestic demand for new cars. This was particularly the case in Germany, where households may have brought forward some of their planned new car pur-chases. However, the impact of these schemes on private consumption was probably weaker than the new car reg-istrations might suggest, as a substitution effect may have occurred between vehicle categories in favour of cheaper models, or between categories of goods at the expense of other durable products.

Investments were particularly hard hit by the crisis in 2009. It was primarily business investment that suddenly plum-meted : after continuing to rise slightly in 2008, it dropped by 13.2 p.c. That was the biggest fall in many years, exceeding the scale of the contraction which occurred in the 1992-1993 recession following German reunification. Owing to the decline in industrial production up to April of the year under review, which at that time had fallen more than 20 p.c. below the level recorded a year earlier, industrial capacity utilisation slumped to a record low, well below the minimum recorded in the 1992-1993 recession.

chart 12 conSuMer conFidence, retail SaleS and regiStration oF new paSSenger carS in the euro area

(monthly data)

2001

2003

2005

2007

200

9

A

–40

–35

–30

–25

–20

–15

–10

–5

0

5

–3

–2

–1

0

1

2

3

4

Consumer confidence (1) (left-hand scale)

Retail sales (2) (right-hand scale A)

Registration of new passenger cars (3)

(right-hand scale B)

B

700

800

900

1,000

1,100

Sources : EC, ECB.(1) Balance of responses to the monthly survey, seasonally adjusted data.(2) Annual percentage changes, three-month moving average.(3) Number in thousands.

This substantial under-utilisation of industrial capacity, the sluggishness of activity in the service sector, the low level of profitability, more stringent lending criteria and initially very gloomy expectations regarding future demand seri-ously discouraged investment.

Despite the improvement in financial conditions in gen-eral, and the decline in bank lending rates in particular, the contraction of investment was reflected in a further weakening of corporate demand for loans. Moreover, the credit standards of banks for lending to businesses have tightened considerably since the financial crisis erupted – although the net percentage of banks reporting a tight-ening declined during the year. Overall, the growth of bank lending to businesses slowed significantly, dropping from almost 10 p.c. on an annual basis in December 2008 to barely 0.7 p.c. in August 2009, subsequently giving way to a year-on-year decline amounting to 1.9 p.c. in November.

Investment in housing also fell sharply by 10.3 p.c., the biggest fall in several decades. In contrast to gross fixed capital formation by enterprises, the decline had already

21


chart 13 buSineSS inVeStMent and buSineSS conFidence in the euro area

(seasonally adjusted data)

2007 2008 2009–15

–10

–5

0

5

10

65

70

75

80

85A

–40

–30

–20

–10

0

10

20

30B

Gross fixed capital formation by enterprises (1) (2)

(left-hand scale)

Capacity utilisation rate (3)

(right-hand scale A)

Business confidence (4)

(right-hand scale B)

Services

Manufacturing industry

Sources : EC, OECD.(1) Calendar adjusted data, percentage changes in volume compared to the

corresponding quarter of the previous year.(2) Excluding Cyprus, Malta and Slovenia.(3) Measured on the basis of the quarterly survey, percentages.(4) Balance of replies to the monthly survey.

begun in 2008. There were significant variations within the euro area, a particularly steep fall being recorded in Ireland and, to a lesser extent, in Spain. Investment in housing construction in fact reacted strongly to the cooling of the housing market, which occurred after a decade of unsus-tainable price rises in a number of countries. The slowdown was first felt in Ireland – where nominal house prices had already been clearly falling since 2007 – but from mid 2008 it spread to other countries such as Spain and France.

Apart from the cooling of the housing market, other fac-tors which resulted from the financial crisis and which also curbed private consumption, such as the deteriorating labour market situation or the decision by households to rebuild their financial assets, possibly prompted house-holds to postpone or scale down their plans for the con-struction of new homes.

The continued erosion of the property markets and the slump in investment in housing construction were reflected in bank lending for house purchase, which slowed further. Those loans, which had recorded a

year-on-year increase of 1.5 p.c. in December 2008, sta-bilised overall in 2009. Yet, according to the Eurosystem’s bank lending survey, an increasing number of banks have reported strengthening demand for mortgage loans.

Government expenditure, for its part, underpinned eco-nomic activity. Public consumption was up by 2.3 p.c., a rate of increase corresponding more or less to the average for the past ten years. Public investment grew by 2.4 p.c., notably as a result of expenditure on infrastructure, gener-ally transport facilities, effected by a number of euro area Member States under the European Economic Recovery Plan.

The change in stocks caused a marked contraction of GDP in the euro area in 2009, amounting to 0.6 percent-age point. The reduction in stocks was a major contribu-tory factor in the decline in activity in the first half year. Subsequently, however, stocks again made a positive con-tribution to growth when the prospects of a revival in eco-nomic activity encouraged firms to review their stock policy.

Like gross fixed capital formation, exports of goods and services recorded a sharp fall, dropping by 14.2 p.c., an unprecedentedly large decline for the euro area. As a result of that fall and the strong contraction of domestic demand, imports were also well down, by 12.5 p.c., but as that decline was smaller, net exports of goods and services contributed 0.9 percentage point to the reduc-tion in GDP.

Although the weighted average appreciation of the euro may have played a part in the movement in the volume of exports during the year under review, the collapse of world trade was the main reason for the steep decline at the end of 2008 and in the initial months of 2009. In view of the slump in industrial output, that fall was more marked for exports of goods, particularly manu-facturing industry products, than for exports of services. Both exports of goods to euro area members and those to countries outside the euro area recorded a sharp decline. As regards exports to countries outside the euro area, those to major trading partners such as the United Kingdom, the United States and the new EU Member States fell significantly, as did exports to Russia. In con-trast, exports to, for instance, China and the oil-exporting countries – export markets still of minor importance for the euro area – were less hard hit. Following the steep fall at the end of 2008 and in the initial months of 2009, which had a particularly negative impact on the average figures for the year as a whole, export volumes stabilised from about March onwards, and began to pick up in the summer months, especially in the case of manufacturing industry products.

22

chart 14 exportS oF goodS FroM the euro area

(volume data adjusted for seasonal and calendar effects, indices 2007 = 100, unless otherwise stated)

Source : EC.(1) Seasonally adjusted data.

2007 2008 2009

2008 2009

70

75

80

85

90

95

100

105

110

70

75

80

85

90

95

100

105

110

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140

INTRA AND EXTRA EURO AREA EXPORTS

Euro area

Countries outside the euro area

p.m. Industrial production (1)

United Kingdom

New EU Member States which have not adopted the euro

United States

Russian Federation

EXPORT STRUCTURE(percentages of the value of exports, averages 2007-2008)

EXTRA EURO AREA EXPORTS

Euro area (50.4 p.c.)

Others (17.9 p.c.)

Latin America (2.1 p.c.)

Russian Federation(2.4 p.c.)

OPEC countries(3.1 p.c.)

ASEAN countries(1.4 p.c.)

China (2.0 p.c.)

United States (6.2 p.c.)

New EU Member States which have not adopted the euro (7.3 p.c.)

United Kingdom (7.3 p.c.)

China

OPEC countries

The economic downturn affected the euro area coun-tries in general, as GDP declined in all Member States, albeit to varying degrees. Thus, Ireland experienced the sharpest fall, that country suffering not only from the consequences of the global economic crisis but also from the crisis on the housing market, which had already accounted for much of the reduction in GDP the previous year. Also in other countries which had recorded strong activity growth in recent years thanks to the vigorous expansion of their domestic demand, activity ran out of steam and domestic spending under-went a sharp correction. That was the case in Slovakia, Slovenia, and Spain, except that the fall in GDP in that last country was slightly more modest than the average for the euro area. As in Ireland, the housing market crisis also took a heavy toll on investment in housing in Spain. Moreover, in both Spain and Ireland, private consump-tion dipped sharply, in contrast to the rest of the euro area. The very high unemployment rate in those two countries was probably a contributory factor. The coun-tries where domestic demand had been the principal

Table 5 GDPGrowthintheeuroareacountries(1)

(non calendar adjusted volume data ; percentage changes compared to the previous year, unless otherwise stated)

2007

2008

2009

Germany . . . . . . . . . . . . . . . . . . . . 2.5 1.3 –5.0

France . . . . . . . . . . . . . . . . . . . . . . 2.3 0.4 –2.2

Italy . . . . . . . . . . . . . . . . . . . . . . . . 1.6 –1.0 –4.7

Spain . . . . . . . . . . . . . . . . . . . . . . . 3.6 0.9 –3.7

Netherlands . . . . . . . . . . . . . . . . . . 3.6 2.0 –4.5

Belgium . . . . . . . . . . . . . . . . . . . . . 2.9 1.0 –2.9

Austria . . . . . . . . . . . . . . . . . . . . . . 3.5 2.0 –3.7

Greece . . . . . . . . . . . . . . . . . . . . . . 4.5 2.0 –1.1

Finland . . . . . . . . . . . . . . . . . . . . . . 4.2 1.0 –6.9

Ireland . . . . . . . . . . . . . . . . . . . . . . 6.0 –3.0 –7.5

Portugal . . . . . . . . . . . . . . . . . . . . . 1.9 0.0 –2.9

Slovakia . . . . . . . . . . . . . . . . . . . . . 10.4 6.4 –5.8

Luxembourg . . . . . . . . . . . . . . . . . 6.5 0.0 –3.6

Slovenia . . . . . . . . . . . . . . . . . . . . . 6.8 3.5 –7.4

Cyprus . . . . . . . . . . . . . . . . . . . . . . 4.4 3.7 –0.7

Malta . . . . . . . . . . . . . . . . . . . . . . . 3.7 2.1 –2.2

Euro area (2) . . . . . . . . . . . . . . . . . . 2.7 0.5 –4.0

Sources : EC, OECD.(1) The euro area countries are ranked according to the size of their GDP in 2009.(2) Excluding Cyprus, Malta and Slovenia ; calendar adjusted data.

23


engine of growth in recent years were however not the only ones having to contend with a marked fall in GDP. Thus, economic activity also declined in Germany, more than in the euro area as a whole, essentially owing to the collapse of exports, particularly investment goods in which that country is highly specialised ; nonetheless, that fall was partly offset by the slight revival in private consumption. The steep decline in economic activity in Finland is also very largely due to the fall in exports. In several other countries, the reduction in GDP was fairly modest compared to the rest of the euro area. That was the case in France, where investments and exports recorded a relatively less marked fall and private consumption expanded to some extent. Even smaller reductions were recorded in Cyprus and Greece. Overall, the widespread decline in activity in the euro area was accompanied by a reduction in growth differentials between countries. Regarding developments during the year, Germany, France, Portugal, Slovakia and Slovenia saw a return to GDP growth from the second quarter, followed by most other Member States in the next quar-ter, except for a few countries including Spain.

labour Market

The downturn in economic activity affected the labour market. While employment in the euro area had not fallen, as an annual average, since the 1992-1993 recession, job losses began to proliferate from about mid 2008, initially in the construction sector, then in industry and, to a lesser extent, in the market services sector. In the first half of 2009, job losses accelerated, and employment declined by an average of 1.6 p.c. during the year under review. Unemployment, which had reached a low point in the first quarter of 2008, increased rapidly thereafter, to 10 p.c. of the labour force in December of the year under review, a level not seen in the past ten years.

Most of the job losses concerned temporary contracts, and workers with fewer skills or less experience. Thus, among young people, unemployment came to somewhat more than 20 p.c. in November 2009. Men, who account for a larger proportion of the workforce in construction and in manufacturing industry, were affected to a greater extent than women.

Despite the seriousness of the labour market situation, the decline in employment was modest until the end of the year under review, in comparison with what hap-pened in other periods of economic recession when the downturn in activity was less severe. That situation may have contributed to the stabilising role played by private consumption.

A comparison between Member States reveals that the labour market sometimes reacted in quite different ways. In some countries, job losses were relatively modest in relation to the marked fall in GDP. Examples include the Netherlands, and especially Germany. Moreover, unemployment there recorded only a moderate increase, remaining at a level below the average for the euro area. In other member countries, such as France and Belgium, employment and unemployment were also less seri-ously affected than in the euro area as a whole, but the decline in economic activity there was below the aver-age. However, employment and unemployment were not equally resilient elsewhere. Thus, Ireland and Spain recorded massive job losses, with soaring unemployment.

A first factor explaining these divergences may lie in the varying distribution of employment between sectors in the different countries, as the crisis affected the sectors in disparate degrees. Thus, job losses in Ireland and Spain were largely attributable to the collapse of activity in the construction sector, which represented a relatively high proportion of total national employment. Institutional factors may also have played a part. In that connection, the labour market in Spain features a clear segmentation between temporary and permanent jobs. That duality is maintained by the high degree of employment protection for workers in permanent jobs : new workers are often recruited under a temporary contract, and permanent jobs are not readily obtainable owing, in particular, to

chart 15 labour Market in the euro area

(percentage changes compared to the corresponding quarter of the previous year, unless otherwise stated)

1997

199

9

2001

2003

2005

2007

200

9

6

7

8

9

10

11

Employment (left-hand scale)

Unemployment (1) (right-hand scale)

–2.0

–1.0

0.0

1.0

2.0

3.0

–3.0

Sources : EC, ECB.(1) Ratio between the number of unemployed and the labour force, percentages.

24

the significant redundancy payments that workers could claim. Temporary employment contracts – which at the end of 2008 represented 29.3 p.c. of total employment, compared to an average of 16.4 p.c. for the euro area – therefore acted as a shock absorber, allowing employ-ment to adjust more rapidly to developments in economic activity than in some other euro area countries. The rather moderate rise in unemployment in Germany was possibly due in part to the improved functioning of the labour market following the major reforms of recent years.

However, the change in employment, expressed as the number of persons in work, and the change in unem-ployment do not offer a complete picture of the labour market’s response to the slump in economic activity. In the euro area as a whole, relatively limited job losses were in fact accompanied by a significant fall in the number of hours worked per employee. That fall clearly exceeded the average reduction recorded in recent years. Thus, in the second quarter of the year under review, according to the EC’s data, a full-time employee in the euro area worked an average of 40 hours per week, against 40.8 a year earlier. Moreover, the share of part-time work in total employment increased to 20 p.c., against 19.6 p.c. a year earlier. Consequently, the contraction in the total volume of labour during the period under review was not fully reflected in job losses, and was therefore more sizeable than suggested by employment expressed as the number of persons in work.

The number of hours worked per employee declined in almost all the Member States, albeit to varying degrees. In some countries, particularly Germany, the decline was relatively sharp, helping to limit job losses. The fact that firms were making increasing use of flexible working time regimes, one of the measures encouraged by the European Economic Recovery Plan, probably played a part here.

Under that plan, euro area Member States almost all adopted measures intended to directly limit the conse-quences of the crisis for the labour market, particularly in order to avoid a substantial rise in structural unemploy-ment and to promote the reintegration of job seekers, e.g. via retraining. An attempt was also made to stimulate demand for labour, notably by reducing social security contributions. Finally, some countries adopted measures to enable firms to retain their staff by temporarily reduc-ing working times and by systems of temporary lay-offs or other working time reduction schemes. To support systems of that type, those countries often introduced new forms of government aid or extended existing mechanisms compensating for the reduction in workers’ incomes.

However, the use of these flexible working schemes was very uneven. Such schemes and reductions in work-ing time have been extensively used by firms active in Germany. These firms were helped by the govern-ment’s decision to increase to two years the maximum period for paying compensation to workers on short time (Kurzarbeitergeld) and to grant additional financial incentives. Firms active in Italy, the Netherlands and Belgium, in particular, also made use of flexible work-ing schemes or temporary lay-offs with government support.

The relatively modest impact of the crisis on the number of jobs is due not only to the change in the number of hours worked, but also to the fall in hourly productivity. A reason could be that, in a crisis period, firms are reluctant to make staff redundant even if they cannot make full use of their labour force, given the loss of human capital and the costs associated with redundancies and possible sub-sequent recruitment which such a decision would entail, especially as population ageing may have fuelled fears of shortages of certain skills in some countries.

priceS and coStS

While inflation in the euro area, measured by the annual change in the harmonised index of consumer prices (HICP), had recorded a further marked rise in 2008 to

chart 16 inFlation, underlying inFlation rate and energy priceS in the euro area

(percentage changes compared to the corresponding month in the previous year)

–20

–15

–10

–5

0

5

10

15

20

2005 2006 2007 2008 2009–1

0

1

2

3

4

5

HICP

HICP excluding food and energy

Energy prices according to the HICP (right-hand scale)

(left-hand scale)

Source : EC.

25


3.3 p.c., during the year under review it dropped to a par-ticularly low level of 0.3 p.c. In the second half of 2008, the year-on-year rise in consumer prices gradually slowed. Partly owing to base effects, inflation continued to fall in the first seven months of the year under review. In June, for the first time since the creation of monetary union, the HICP was at a level below the previous year’s figure, and in July inflation reached a record low of –0.7 p.c. Thereafter, the fall in the general price level gradually moderated and consumer prices edged upwards again on an annual basis from November. As in the previous year, the pattern of inflation largely reflected the movement in energy prices and, to a lesser extent, prices of food. Underlying inflation, i.e. the change in the HICP excluding food and energy, also slowed from the end of 2008, and averaged 1.4 p.c. during the year under review, against 1.8 p.c. the year before. In services, inflation also declined, falling from 2.6 p.c. in 2008 to 2 p.c., while in the case of non-energy industrial goods it was down slightly, from 0.8 to 0.6 p.c.

In contrast, unit labour costs again increased more strongly during the year under review, rising by 3.8 p.c. compared to 3.6 p.c. in 2008. The principal reason lies in the movement in labour productivity, which was down by an exceptional 2.4 p.c. That fall should be interpreted in the context of the relatively moderate decline in employ-ment, compared to the marked contraction of economic activity in the euro area. While labour costs per worker continued to rise in the business sector, the increase came to only 0.8 p.c., which was more than two-thirds lower than the 2008 figure. That slower pace reflects, among other things, the reduction in the number of hours worked per employee. Hourly labour costs and negotiated wages maintained a relatively rapid increase during the first half of the year under review, but the rise subsequently slowed.

FiScal policy

In the euro area, fiscal policy played a central role in tackling the economic and financial crisis. On the one hand, governments shouldered the burden of the rescue plans for the banking system and helped to restore the intermediation function of the financial markets, e.g. by recapitalising failing financial institutions, purchasing or guaranteeing toxic assets in their portfolio, and standing guarantor for the financial sector’s liabilities. As well as that, owing to the depth of the recession, they not only had to give free rein to the automatic stabilisers of public finances, but also applied discretionary stimuli to compen-sate for the decline in aggregate demand.

As a result, the public deficit increased substantially in 2009, rising to 4.4 percentage points of GDP for the euro area as a whole. Over half of that increase was due entirely to the influence of the automatic stabilisers of public finances, while discretionary measures adopted under the European Economic Recovery Plan contributed just over 1 percentage point to the deterioration in the budget balance.

Overall, primary expenditure was up by 3.6 percent-age points of GDP in 2009. However, that increase was an automatic reflection of the fact that nominal GDP declined, while expenditure continued to grow steadily. That was, of course, compounded by the cyclical rise in unemployment expenditure and the effects of the stimuli applied to revive the economy, such as those aimed at promoting investment and supporting household pur-chasing power. Public revenues recorded a fall equivalent to 0.8 percentage point of GDP, mainly as a result of the progressive character of taxation and the decline in sec-tors of activity such as property and construction, which had generated sizeable tax revenues in many countries. That was especially the case in Spain and Ireland, which suffered a severe blow from the bursting of the property bubble.

The budget deficit expanded considerably in all euro area Member States except Malta. The increase was particu-larly worrying in three countries where the deficits surged to well over 10 p.c. of GDP in 2009, namely Greece, Ireland and Spain. On the other hand, the slippage was relatively modest in Germany and Italy, at only about 3 percentage points of GDP.

For the euro area as a whole, the public debt grew by 8.9 percentage points of GDP in 2009, thus reaching 78.2 p.c. of GDP. Of course, that deterioration is primarily due to the high level of the public deficits, but the fall in nominal GDP is also a factor. Moreover, financial sector recapitalisation measures, whose effect – according to accounting conventions – is not generally included in cal-culating the budget deficit, added 1.7 percentage point of GDP to the increase in the public debt.

The strong expansion of the public debt and future costs connected with population ageing create the need for coordinated fiscal consolidation in order to ensure the sustainability of public finances (see also box 2 on this subject). Without a clear and credible strategy for restor-ing the normal process of public deficit reduction, long-term interest rates could rise, increasing the debt burden and financing costs for households and businesses, thus hampering economic growth itself. At the European Council of Ministers of Economics and Finance (ECOFIN)

26

in October 2009, it was decided that the consolidation must take place within the framework of the Stability and Growth Pact, without endangering the implementation of measures to support the economic recovery in 2010.

The ECOFIN Council decided that, apart from Cyprus, Finland and Luxembourg, all euro area countries faced an excessive deficit in 2009, i.e. a borrowing requirement in excess of 3 p.c. of GDP. The public deficit probably exceeded 3 p.c. in 2009 in Cyprus too, but when this report went to press the Commission had not yet initiated an excessive deficit procedure in relation to that country. While the decision on most of the countries in contraven-tion was taken on 2 December 2009, the Council had already decided in April and July on the cases relating to France, Greece, Ireland, Malta and Spain. Regarding France, Ireland and Spain, the ECOFIN Council considered, on 2 December, that the more severe deterioration in

the economic situation justified a review of the existing recommendations relating to them, and a one-year post-ponement of the deadline previously set for bringing the budget deficit back below 3 p.c. of GDP, namely 2013 for France and Spain and 2014 for Ireland. For these last two economies, the adjustment required will be very large. At the end of January 2010, the EC proposed that the ECOFIN Council should treat Malta in a similar way to the other three countries mentioned, by extending the deadline for rectifying the excessive public deficit by one year, until 2011.

Regarding Greece, the ECOFIN Council considered the actions taken by the government to be inadequate. Moreover, Eurostat expressed reservations about the quality of the data supplied by that country’s statistical authorities, and refused to validate them. At its meeting on 19 January 2010, the Council reiterated its request to

Table 6 GeneralGovernmentbudGetbalanceintheeuroareacountries(1)(2)

(percentages of GDP, unless otherwise stated)

Budget balance

Fiscal consolidation efforts recommended under the excessive deficit procedure (EDP)

Gross debt

2006

2007

2008

2009 (3)

Correction period (4)

Average annual rate of structural adjustment (4) (5)

2008

2009 (3)

Germany . . . . . . . . . . . . . . –1.6 0.2 0.0 –3.4 2011-2013 0.5 65.9 73.1

France . . . . . . . . . . . . . . . . –2.3 –2.7 –3.4 –8.3 2010-2013 1.25 67.4 76.1

Italy . . . . . . . . . . . . . . . . . . –3.3 –1.5 –2.7 –5.3 2010-2012 0.5 105.8 114.6

Spain . . . . . . . . . . . . . . . . . 2.0 1.9 –4.1 –11.2 2010-2013 1.75 39.7 54.3

Netherlands . . . . . . . . . . . . 0.5 0.2 0.7 –4.7 2011-2013 0.75 58.2 59.8

Belgium . . . . . . . . . . . . . . . 0.3 –0.2 –1.2 –6.0 e 2010-2012 0.75 89.8 97.8 e

Austria . . . . . . . . . . . . . . . . –1.6 –0.6 –0.4 –4.3 2011-2013 0.75 62.6 69.1

Greece . . . . . . . . . . . . . . . . –2.9 –3.7 –7.7 –12.7 n. n. 99.2 112.6

Finland . . . . . . . . . . . . . . . . 4.0 5.2 4.5 –2.8 – – 34.1 41.3

Ireland . . . . . . . . . . . . . . . . 3.0 0.3 –7.2 –12.5 2010-2014 2.0 44.1 65.8

Portugal . . . . . . . . . . . . . . . –3.9 –2.6 –2.7 –8.0 2010-2013 1.25 66.3 77.4

Slovakia . . . . . . . . . . . . . . . –3.5 –1.9 –2.3 –6.3 2010-2013 1.0 27.7 34.6

Luxembourg . . . . . . . . . . . 1.3 3.7 2.5 –2.2 – – 13.5 15.0

Slovenia . . . . . . . . . . . . . . . –1.3 0.0 –1.8 –6.3 2010-2013 0.75 22.5 35.1

Cyprus . . . . . . . . . . . . . . . . –1.2 3.4 0.9 –3.5 – – 48.4 53.2

Malta . . . . . . . . . . . . . . . . . –2.6 –2.2 –4.7 –4.5 2010-2011 0.75 63.8 68.5

Euro area . . . . . . . . . . . . . . –1.3 –0.6 –2.0 –6.4 – – 69.3 78.2

Sources : EC, NBB.(1) The euro area countries are ranked according to the size of their GDP in 2009.(2) Including, under the rules laid down for the excessive deficit procedure (EDP), net interest gains on certain financial transactions such as swaps or forward rate agreements (FRAs).(3) According to the EC’s economic projections in November 2009, except for Belgium, for which figures are based on the Bank’s estimate.(4) Balance adjusted for the influence of the economic cycle and non-recurring measures.(5) Percentage points of potential GDP.

27


the Greek government for improvement in the processing of data on public finances.

For the euro area countries recently subjected to an exces-sive deficit procedure, the correction should be achieved by 2013, provided that the economic growth prospects are in line with the EC’s autumn 2009 forecast. In general, the fiscal consolidation effort which the ECOFIN Council

has stipulated for the various countries will be less in those which were in a sound fiscal position before the crisis, such as Austria, Germany and the Netherlands, and can begin in 2011 instead of in 2010 as recommended for the other economies concerned. For Belgium and Italy, where the level of the public debt and the associated costs are relatively higher, the date for resolving the exces-sive deficit position was set at 2012.

Box 2 – The sustainability of public finances

Although the consequences of the economic and financial crisis for the public finances of the EU countries will not be entirely clear until the economy returns to normal growth and the discretionary measures have ended, the increase in the public debt was already substantial at the end of the year under review. The structural increase in interest charges resulting from that development will further complicate the task of the fiscal authorities in the years ahead, as they already have to face the major challenge of the impact on public finances of the future ageing of the population. Without a change of policy, age-related public expenditure would rise by an average of 4.3 percentage points of GDP in the EU between now and 2060. Furthermore, the financial crisis has created lasting problems for financing that cost, in view of the resulting structural contraction of the level of potential output in the economies, or even the risk that this may lead to a weaker rate of economic expansion in the long term.

Against that backdrop, the ECOFIN Council asked the EC to produce an update of its 2006 report on the sustainability of public finances in the EU. This box presents the main messages implied by that update.

The concept of sustainability refers to a country’s ability to assume the financial burden of its debt in the future. The EC based its assessment of that on long-term projections of public expenditure and revenue, country by country, taking account of dynamic effects of demography and debt accumulation. That was a particularly difficult exercise in the context of a deep recession, partly because it was harder to estimate potential GDP, and partly because the dividing line between temporary fiscal measures and permanent economic recovery measures was still unclear.

Various characteristics of an economy affect the sustainability of its public finances. The main factors are its initial budgetary position – in the report under review, the structural budget balance predicted for 2009 by the EC in its June economic forecasts –, its social protection system and its potential growth rate, which depends partly on demographic changes. On the basis of these multiple indicators, the EC grouped the Member States into three long-term risk categories for the sustainability of their public finances.

The group in the best position in that regard comprised Bulgaria, Denmark, Estonia, Finland and Sweden. The budgetary position of those countries is better than elsewhere, and they have undertaken comprehensive reforms of their pension systems in recent years. In contrast to the other countries in this group, Finland has higher age-related expenditure than the EU average, but a large stock of financial assets will provide a cushion against the corresponding deterioration in the government’s accounts.

The risk is estimated as average for a second group of countries comprising, on the one hand, Austria, Belgium, Germany and Luxembourg, and on the other, France, Hungary, Italy, Poland and Portugal. For the first countries mentioned, the costs of ageing are equal to or above the European average, but their initial budgetary position was fairly sound. The opposite applies to the second sub-group of countries. For the first sub-group, the EC estimates that, apart from a medium-term fiscal consolidation effort, reform of the social security systems is

4

28

indispensable to make them more resilient to demographic changes, while the main requirement for the second sub-group is a serious fiscal consolidation effort.

Finally, the risk to the sustainability of public finances is considered high for the other countries, namely the Czech Republic, Cyprus, Greece, Ireland, Latvia, Lithuania, Malta, the Netherlands, Romania, Slovakia, Slovenia, Spain and the United Kingdom. In the great majority of cases, that situation is due to a strong rise in future age-related expenditure compounded by serious fiscal imbalances. According to the EC, this means that in the years ahead those countries will have to implement ambitious fiscal consolidation programmes simultaneously with fundamental reforms of the social protection system. Moreover, if the crisis is prolonged, that will have serious repercussions on the budgetary position of those economies and their medium-term growth prospects.

In order to avoid excessive public debts due to ageing in the coming decades, the Stockholm European Council in 2001 had devised a strategy based on three pillars : (i) reducing the budget deficit and the public debt, (ii) increasing the employment rate, and (iii) reforming the social protection system.

Regarding the first pillar, the ECOFIN Council of 2 December 2009 defined the fiscal consolidation path required for many countries under the excessive deficit procedure. In the case of the second pillar, apart from the structural labour market reforms required in order to increase the employment rate, in the EC’s opinion it will be necessary to ensure that certain short-term measures designed to soften the impact of restructuring in the context of the crisis, such as those favouring early retirement, do not thwart the medium- and long-term objectives aimed at supporting economic growth. There is also a risk that, following the crisis, higher unemployment may persist and be accompanied by a decline in labour market participation rates. However, the strategy’s third pillar is the most important for guaranteeing the sustainability of public finances, particularly in regard to pensions and health care. In its new sustainability report, the EC emphasises the increase in the effective retirement age as a particularly appropriate field of reform, not only for reducing the budgetary cost of pensions but also for expanding the labour force and curbing the decline in potential output resulting from population ageing.

1.4.4 United Kingdom

During the year under review, the United Kingdom suf-fered its worst recession of the post-war era. The contrac-tion of the British economy by 4.7 p.c. in 2009 followed a decade of strong growth accompanied by a number of imbalances which have accentuated the consequences of the financial crisis. These include the housing market boom, with prices tripling between 1997 and 2007, a rise encouraged by the strong expansion of bank lending to the private sector.

This led to high household debt levels which seriously depressed private expenditure throughout the year under review. Households also had to contend with the adverse impact on their assets of the slump in prices of finan-cial assets and property, the deterioration of the labour market – where unemployment reached 7.8 p.c. at the end of the year – and tighter credit access conditions. These various factors prompted them to make severe cuts in their building projects and to step up their savings ratio substantially, from 1.7 p.c. of their disposable income in

2008 to 5.3 p.c. in 2009. Thus, gross fixed capital forma-tion in the form of housing was down by almost 28 p.c. and private consumption declined by 3 p.c.

The steep fall in gross fixed capital formation by enter-prises in 2009 is due partly to firms’ dependence on bank credit, the supply of which was significantly restricted, and partly to the worsening prospects for growth and the decline in capacity utilisation rates. It was accentuated by substantial de-stocking which further amplified the recession.

The sharp depreciation of the effective exchange rate of the pound sterling in the second half of 2008 was one reason why net external demand made a positive contri-bution to economic growth in 2009, as imports fell more steeply than exports.

Public consumption provided only modest support for domestic demand, while transfers from the government and the temporary cut in VAT rates bolstered household purchasing power. The budget deficit soared from 5 p.c.

29


of GDP in 2008 to over 12 p.c. in 2009. Over half of that deterioration was due to a decline in revenues caused by the fall in GDP, and the reduction in prices and volume of trading on the financial and property markets. On the other hand, the discretionary measures which were announced, totalling almost 1.5 percentage points of GDP, and the increase in social security transfers aug-mented the ratio of expenditure to GDP.

The combination of the large budget deficit, measures to support the financial sector, and the contraction of GDP caused the public debt to surge by more than 16 per-centage points of GDP, bringing the outstanding total to 68.6 p.c. of GDP at the end of 2009.

Following the spike caused in 2008 by rising commodity prices, inflation gradually subsided from 3.6 to 2.2 p.c. in 2009. That fall, due to the sluggishness of domestic demand, deteriorating labour market conditions and the cut in VAT rates, would have been larger had it not been weakened by the impact of the depreciation of the effec-tive sterling exchange rate.

In mid January 2009, the British government estimated that supplementary measures were necessary in order to ensure the stability of the national financial system and to support lending. There were initiatives in three areas. First, to reduce uncertainty over the adequacy of the banks’ capital, the Asset Protection Scheme was launched whereby, in return for a fee, the government protected the toxic assets of credit institutions against future losses. Next, the government tried to ensure easier access to the wholesale market for financial institutions, e.g. via the Asset-Backed Securities Guarantee Scheme, designed to stimulate activity on the securitisation markets. Finally, the third aspect concerned stimulating loans to households and enterprises. That was the purpose of launching the Asset Purchase Facility, authorising the Bank of England to acquire high-grade assets from the private sector, par-ticularly corporate bonds and commercial paper. Later in the year, a new Banking Act was passed. Among other things, it introduced the Special Resolution Regime creat-ing a framework for the orderly management of financial sector bankruptcies.

The Bank of England eased its monetary policy further in 2009. Thus, during the initial months of the year, the key interest rate was cut again in three stages from 2 p.c. at the end of 2008 to 0.5 p.c. This instrument gradually reached its limits, and from March onwards the authori-ties pursued a policy of quantitative easing via the Asset Purchase Facility mentioned above, by allowing the cen-tral bank to purchase government bonds. This measure aimed to ease the conditions for lending to enterprises

and, ultimately, to stimulate domestic demand and ensure that the 2 p.c. inflation target could be achieved in the medium term. The budget for this programme was increased in three stages from 75 to 200 billion pounds during the year under review.

1.5 China and other emerging economies

1.5.1 China and other Asian countries

The Asian economies were the first to recover from the international economic and financial crisis. This acceler-ated the ongoing shift in the centre of gravity of the global economy towards that region.

At the start of the crisis, a number of importers decided to run down their stocks before placing new orders, in view of the decline in demand and the financial famine. In Asian countries focusing strongly on exports, this led to a drastic decline in industrial output, which persisted until the start of the year under review. Conversely, domesti-cally oriented Asian countries, such as India, recorded only a moderate slowdown in their industrial production, which contracted slightly at the beginning of 2009. The picture was reversed in March 2009. As the uncertainty ebbed away, the rebuilding of stocks in other countries caused a surge in Asian exports, especially electronic products in which many Asian economies have developed a comparative advantage. Regional trade also picked up, thanks to strong demand in China. It was the region’s exporters of commodities and investment goods that benefited most from the major infrastructure projects launched by China as part of its massive recovery plan.

Another factor in the region’s dramatic recovery was the speedy and vigorous response by governments, which were able to take advantage of their sound economic fundamentals. Many emerging Asian countries in fact had sufficient budgetary scope to revive activity. They were also able to rely on a credible monetary policy, which was eased considerably during the crisis, and on a profitable private sector. They had learnt the lessons of the 1997 financial crisis. Since then, local banks had augmented their capital and adopted a prudent investment strategy, which enabled them to resist the attractions of toxic assets from the United States. The faster than expected restoration of capital flows to Asia from March onwards boosted stock markets there and increased the upward pressure on exchange rates. Several emerging Asian economies addressed that pressure by building up their foreign exchange reserves. In contrast, Indonesia and

30

South Korea, which have a floating exchange rate regime, allowed their currency to appreciate.

China, the largest emerging economy, made the biggest contribution to the volume growth of the global economy in 2009. Its GDP grew by 8.7 p.c., almost equalling the previous year’s figure.

At the end of 2008, the slump in international trade had dragged down Chinese exports. That fall consider-ably inhibited the expansion of economic activity, which declined to an annualised figure of 6.1 p.c. in the first quarter, but a strong recovery set in from the second quarter, thanks to increased domestic expenditure. Owing to the accompanying rise in the volume of imports and the fairly hesitant revival of exports, the trade surplus was down by 3.4 percentage points in 2009, with an accom-panying decline in the current account surplus from 9.8 to 6.4 p.c. of GDP. As a result, the accumulation of foreign exchange reserves slowed significantly.

The Chinese government made a major contribution to the economic recovery. Having sufficient budgetary scope and a low level of public debt on the eve of the crisis, it could afford to implement an ambitious recovery plan and inject massive resources into large-scale infrastructure

chart 17 Quarterly proFile oF gdp, exportS and iMportS in china

(non seasonally adjusted data, percentage changes compared to the previous year)

2005 2006 2007 2008 20090

2

4

6

8

10

12

14

–40

–30

–20

–10

0

10

20

30

40

Volume of GDP (left-hand scale)

Value of exports

Value of imports(right-hand scale)

Sources : National Statistical Office (China), General Administration of Customs (China).

Table 7 MacroeconoMicindicatorsforeMergingasia


GDP in volume

Consumer prices

Current account balance (1)

General government budget balance (1)

Official foreign

exchange reserves (2)

2008

2009

2008

2009

2008

2009

2008

2009

2009

China . . . . . . . . . . . . . . . . . . . . . . . 9.6 8.7 5.9 –1.1 9.8 6.4 1.1 –1.8 2.300

South Korea . . . . . . . . . . . . . . . . . 2.2 –1.0 4.7 2.6 –0.7 3.4 1.2 –2.8 259

Hong Kong . . . . . . . . . . . . . . . . . . 2.4 –3.6 4.3 –1.0 14.2 10.7 0.1 –3.4 235

India . . . . . . . . . . . . . . . . . . . . . . . . 7.3 5.6 9.1 7.8 –2.5 –1.9 –7.3 –10.3 269

Indonesia . . . . . . . . . . . . . . . . . . . . 6.1 4.5 10.4 4.0 0.1 0.9 –0.1 –1.8 61

Malaysia . . . . . . . . . . . . . . . . . . . . 4.6 –3.6 5.4 –0.1 17.9 13.4 –4.6 n. 93

Philippines . . . . . . . . . . . . . . . . . . . 3.8 1.0 9.3 2.8 2.5 3.2 –1.0 n. 37

Singapore . . . . . . . . . . . . . . . . . . . 1.2 –3.3 6.5 –0.2 14.8 12.6 6.3 2.5 181

Taiwan . . . . . . . . . . . . . . . . . . . . . . 0.1 –4.1 3.5 –0.5 6.4 7.9 –0.8 –4.3 335

Thailand . . . . . . . . . . . . . . . . . . . . . 2.6 –3.5 5.5 –1.2 –0.1 4.9 –0.5 n. 130

Vietnam . . . . . . . . . . . . . . . . . . . . . 6.2 4.6 23.1 7.0 –11.9 –9.7 n. n. n.

Sources : IMF, OECD.(1) Expressed as a percentage of GDP, tax year ending in March for India.(2) Billions of US dollars, October 2009.

31


projects. Thus, it gave the go-ahead for projects which had been postponed in recent years, and work began straightaway. In the second half of 2009, private invest-ment also regained momentum, primarily in the property sector, underpinned by an extremely accommodating monetary policy. Investment in the export-dependent sec-tors (textiles, clothing, furniture) grew more slowly, owing to excess capacity, lower profit margins and uncertainty over foreign demand.

Private consumption increased strongly. Apart from a rise in their real disposable income generated by nega-tive inflation, further pay increases and the revival of job creation, households also benefited from tax cuts and subsidies.

In 2008, the key interest rate of the People’s Bank of China had been cut from mid September in several stages to 5.31 p.c., and the reserve requirements for banks had been revised downwards, thus injecting large quantities of liquidity into the banking system. The restrictions imposed on bank credit during a period of overheating were also eased. The amount of new lending over 2009 as a whole was 30 p.c. higher than in 2008. This raised concerns in view of such factors as the rate of price increases on the property market and the stock market, and signs of excess investment in certain sectors already facing surplus capacity.

In view of the strengthening economic growth in the third quarter, the Chinese authorities started to apply selective brakes to the monetary expansion by taking steps to limit lending – in particular by raising the capital ratios – and by expanding government bond issues ; in addition, the People’s Bank of China arranged new issues of securities to sterilise the influx of foreign exchange.

From a fiscal angle, too, the central government was quick to respond. In November 2008, it launched a pack-age of discretionary measures consisting essentially of an investment plan for 2009-2010 totalling 4,000 billion renminbi (more than 6.5 p.c. of GDP over two years). Of that total 1,500 billion was earmarked for major projects (energy infrastructure, railways, roads and airports). Other decisions taken in this connection included price reduc-tions for certain domestic appliances, a cut in the VAT on property transactions, subsidies for the purchase of small, economical cars, plus measures relating to agricultural subsidies, support for exports, and welfare benefits (pen-sions, health care, low-income households). June brought the announcement of new projects allocating 820 billion renminbi to health care infrastructure and extending health care coverage to 90 p.c. of the population in the next three years.

The deterioration in public finances was relatively limited, the 2008 surplus of 1.1 p.c. of GDP being converted to a deficit of 1.8 p.c. In view of the small budget deficit and the low level of the public debt – around 20 p.c. of GDP at the end of 2009 –, the Chinese authorities have enough budgetary scope to continue funding the mea-sures implemented.

1.5.2 Emerging EU member countries which have not yet adopted the euro

Like the EU countries belonging to the euro area, the new EU Member States of Central and Eastern Europe were affected by the financial crisis and the collapse of inter-national trade. In general, they were harder hit because, unlike the countries most seriously affected in the euro area, they did not have the benefit of membership of a monetary union to protect them against the risk of a seri-ous foreign exchange crisis. Nonetheless, the impact of the shock was very uneven for these economies, varying according to their dependence on external financing and their degree of openness.

On the one hand, the global financial crisis put an end to a period of strong expansion of domestic credit, gener-ated by a massive inflow of private capital and very low interest rates. In many countries, such as the Baltic econo-mies, Romania and Bulgaria, these capital inflows had been a major factor contributing to very sustained but unbalanced economic growth in recent years, encourag-ing excessive expansion of sheltered sectors and the boom in property prices and wages. This had led to very high current account deficits which had been largely financed by foreign debts, particularly cross-border bank credit.

After the collapse of the US investment bank Lehman Brothers, the widespread increase in risk aversion among international investors triggered a rapid reduction, or even reversal, of capital flows, causing liquidity to dry up and credit conditions to become tighter in the countries examined in this section. In these economies, that caused a slump in share prices, often accompanied by a collapse of property prices, and a sharp contraction in domestic demand.

The downturn was all the more acute the higher the external borrowing requirements and domestic imbal-ances, as was the case primarily for the countries which had unilaterally opted for a fixed exchange rate regime in relation to the euro, namely the three Baltic countries and Bulgaria. Not having the option of depreciating their currency, they had to adjust their external imbalances by “internal devaluation” based on a downward adjustment

32

of prices of locally produced goods and services and wages, and a contraction of domestic demand.

Moreover, the global economic slowdown caused a slump in exports. That is due in particular to their high content of intermediate products and investment goods, for which demand fell steeply in 2009 owing to the investment cut-backs and de-stocking. The most open economies and those most closely integrated into the production chain of the rest of the EU, such as the Czech Republic and Hungary, and those exporting more intermediate prod-ucts, such as the Baltic countries and Bulgaria, therefore recorded a sharper fall in their exports.

In all, however, despite the reduction in exports, there was a universal decline in external deficits, owing to the predominant impact on the current account balance of the fall in domestic demand resulting from the financial crisis. The rebalancing was much more marked in the Baltic countries, hardest hit by the financial shock, where the current account balance returned to positive terri-tory in 2009, improving by almost 20 percentage points of GDP in Latvia and 13 points in Estonia, and around 12 points in Lithuania. The improvement in the current account balance was less spectacular in the economies with a floating exchange rate regime, despite the depre-ciation of their currency caused by the global financial crisis. The main reasons are that they were less dependent on external finance and their domestic demand was less affected by the slackening pace of expansion of bank credit. Moreover, the exchange rate depreciation did little to support exports, in a context of a slump in global external demand. Among these economies, the improve-ment in the current account balance was stronger in those which had suffered most from the financial crisis, such as Hungary and Romania, which had to resort to interna-tional aid to finance their balance of payments.

Poland and the Czech Republic seemed to be the econo-mies of Central and Eastern Europe best prepared to tackle the consequences of the global financial crisis, in view of the absence of major macroeconomic imbalances. Thus, thanks to the limited openness of its economy, mea-sures to ease the tax burden on households, and pension indexation, plus the implementation of a programme to revive public investment, Poland was the only EU country to avoid recession in 2008 and 2009. In contrast, with a real contraction in its GDP of around 4.8 p.c., the Czech Republic suffered severely as a result of its export-led growth strategy. The slowdown in the Czech economy was already perceptible in 2008, caused by cooling exports and a marked deceleration in investments. That tendency was sharply accentuated in 2009 owing to the tightening of domestic credit conditions. Yet domestic

demand recorded only a slight fall, thanks to the modest rise in private and public consumption and the govern-ment support measures worth an estimated 2 p.c. of GDP.

In Hungary, another country with a very open economy, the foreign trade shock caused by the global recession also had a severe impact. The downturn in activity here was steeper than in the Czech Republic, at 6.5 p.c. in 2009, because the economy was in a fragile state when the financial crisis erupted, partly on account of a high level of public and private external debt. In the autumn of 2008, the Hungarian government actually faced difficulty in refinancing the public debt, and that led it to seek aid from the EU, the IMF and the World Bank totalling 20 billion euro. That aid was conditional upon reinforce-ment of the fiscal austerity measures, thus preventing the authorities from taking steps to cushion the contraction of domestic demand in the private sector. The depreciation of the forint against the euro, of around 38 p.c. between its summer 2008 peak and its low point in February 2009, also had a significant effect on the asset position of households and enterprises, since almost 64 p.c. of the total outstanding loans to the private sector was denomi-nated in foreign currencies at the end of 2008, represent-ing 42 p.c. of GDP.

In Romania, despite a fairly low degree of openness and a relatively smaller decline in exports, GDP shrank by 8 p.c. in 2009 owing to the strong contraction of domestic demand. Outstanding loans to the private sector con-tracted, with a very adverse impact on investment and consumption, and the depreciation of the leu against the euro, averaging around 15 p.c. between 2008 and 2009, had significant balance sheet effects for households and enterprises, since 36 p.c. of the total outstanding domes-tic loans to the private sector was denominated in foreign currencies at the end of 2008. In a more risk-averse environment, the parlous state of public finances and the balance of payments deficit fuelled the loss of confidence on the financial markets. That situation prompted the Romanian government to take the precaution of seeking international aid, similarly amounting to 20 billion euro, granted by the EU, the IMF, the EIB, and the EBRD in May 2009.

Bulgaria, having accumulated recurrent budget sur-pluses, was able to keep public consumption almost unchanged, thus limiting the contraction of domestic demand. Moreover, there was no sudden end to the inflow of capital in the form of foreign direct investment. Consequently, domestic demand was able to adjust more slowly than in the Baltic countries, so that the current account deficit was still substantial in 2009 at around 14 p.c. of GDP.

33


Table 8 Economicsituationin2009ofthEnEwEumEmbErstatEsincEntralandEastErnEuropE(1)


GDP

Domestic demand

Exports

HICP

Balance of current

transactions

Public finances

Overall balance

Gross debt

(in volume)

(percentages of GDP; in brackets,

change in percentage points compared to 2008)

Poland . . . . . . . . . . . . . . . . 1.2 –0.5 –11.2 4.0 –1.9 (+3.2) –6.4 (–2.8) 51.7

Czech . . . . . . . . . . . . . . . . . –4.8 –4.6 –16.5 0.6 –2.5 (+0.8) –6.6 (–4.5) 36.5

Republic Hungary . . . . . . . –6.5 –9.0 –13.1 4.0 –1.3 (+5.3) –4.1 (–0.3) 79.1

Romania . . . . . . . . . . . . . . –8.0 –12.7 –8.9 5.6 –5.5 (+6.8) –7.8 (–2.3) 21.8

Bulgaria . . . . . . . . . . . . . . . –5.9 –11.7 –13.3 2.5 –13.7 (+9.2) –0.8 (–2.6) 15.1

Lithuania . . . . . . . . . . . . . . –18.1 –27.8 –20.6 4.2 +0.1 (+12.3) –9.8 (–6.6) 29.9

Latvia . . . . . . . . . . . . . . . . . –18.0 –26.9 –17.5 3.3 +6.8 (+19.8) –9.0 (–4.9) 33.2

Estonia . . . . . . . . . . . . . . . . –13.7 –24.7 –15.2 0.2 +3.9 (+13.0) –3.0 (–0.3) 7.4

p.m.Euroarea . . . . . . . . . –4.0(2) –3.1(2) –14.2 0.3 –0.6(2)(+0.1) –6.4 (–4.4) 78.2

Sources : EC, OECD.(1) The countries are ranked in groups according to the size of their GDP in 2009.(2) Euro area excluding Cyprus, Malta and Slovenia.

In the three Baltic states, the freezing of the financial mar-kets from the autumn of 2008 led to a contraction in out-standing loans to the private sector. At the same time, the sudden slump in exports and deterioration in the external economic outlook amplified the decline in investment and de-stocking, so that the fall in domestic demand which followed this dual shock was on a scale unprecedented

in the EU. GDP declined by around 18 p.c. in Latvia and Lithuania. The contraction was smaller in Estonia, at 13.7 p.c., thanks partly to a much more favourable initial budgetary position. In all these countries, the scale of the contraction in activity permitted a speedy correction of their current account balance, which went into surplus in 2009.

35

2.

thE monEtary policy of thE EurosystEm

The monetary policy of the Eurosystem

2.1 Summary

For the second consecutive year, the global economic and financial crisis confronted the Eurosystem with the dual challenge of respecting the primary objective of price sta-bility and contributing towards safeguarding financial sta-bility. During the initial months of the year under review, it became apparent to what degree the worsening financial crisis at the end of 2008 had exerted a downward influ-ence on activity and inflation. The interaction between the banking crisis and economic activity depressed consump-tion and investment, while the international character of the crisis triggered a marked deterioration in foreign trade. That situation prompted an exceptional succession of downward revisions to the economic forecasts, lead-ing to the assumption of a baseline scenario featuring a relatively long period of weak growth and unusually low inflation. It was not so much the sharp fall in headline inflation in 2009, which actually moved into negative ter-ritory during the summer, following the steep decline in commodity prices, but rather the rapid waning of the risks to medium-term price stability that was relevant for the conduct of monetary policy. Despite these developments, however, the baseline scenario never took account of the possibility of a deflationary spiral, not even when the recession reached its lowest point, since inflation expecta-tions always remained positive and firmly anchored.

In that context, the ECB Governing Council drastically reduced the key policy interest rate during the initial months of 2009, slashing it to 1 p.c. in May whereas it had already been cut from 4.25 to 2.5 p.c. between October and December 2008. As inflation expectations remained firmly anchored, that fall implied a resolutely expansionary monetary policy stance. While the policy of granting abundant liquidity, applied from October 2008, was initially maintained at the beginning of 2009, the Governing Council saw the need to approve a package of

supplementary measures in May 2009 to provide further support for bank lending, given the fundamental role played by the banks in financing the euro area’s economy. This policy of “enhanced credit support” consisted initially in the announcement of three refinancing operations with a term of one year which were to be conducted at the end of the second, third and fourth quarters. At the same time, an attempt was made to support bank lending to the economy via the acquisition of a portfolio of covered bonds amounting to a total of 60 billion euro over a one-year period from July 2009 to June 2010. Moreover, at the beginning of July, the EIB became an eligible counterparty for Eurosystem monetary policy operations. The use of this new arsenal of measures led to a further easing of the monetary policy stance, which was already particularly accommodating.

It was not until the end of the first half year that the macro economic context showed signs of stabilisation, while economic activity began to pick up in the second half. However, the temporary nature of the principal support factors continued to generate serious doubts about the longer-term prospects for economic growth, and thus presented a major challenge for the monetary policy-makers. In regard to price developments, although inflation in the euro area returned to positive territory from November, the considerable under-utilisation of pro-duction capacity in the economy, which is likely to persist for some time, was one reason why expectations or fore-casts of a relatively long period of inflation well below the upper limit of the Eurosystem’s definition of price stability remained unchanged in the second half of the year.

Against that backdrop, the Governing Council constantly reiterated that the particularly accommodating monetary policy stance continued to be appropriate, but at the end of its early December meeting, it also announced that some non-standard measures would be gradually phased

36

chart 18 real gdp and conFidence indicator in the euro area

(percentage changes compared to the previous quarter, unless otherwise stated)

2003 2004 2005 2006 2007 2008 2009–40

–30

–20

–10

0

10

20

Real GDP (left-hand scale)

EC Economic Sentiment Indicator (1)

(right-hand scale)

–3.0

–2.5

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

Source : EC.(1) Balance of replies to the monthly survey, deviation from the average 1985-2009.

out during 2010, in view of the considerable improvement in the financial market situation. That announcement of non-renewal or gradual reduction of certain non-standard measures was no surprise since, when the new monetary policy instruments were first introduced, the Governing Council had stressed that these were temporary measures and that it was important to have a credible exit strategy. The credibility of the Eurosystem, measured partly by the anchoring of long-term inflation expectations, was there-fore never under threat, thus permitting the pursuit of a particularly expansionary monetary policy stance during the year under review.

2.2 Macroeconomic and monetary environment : implications for the monetary policy stance

In 2009, the performance of the euro area economy was not only very mediocre, it was also very uneven. These contrasting developments during the year were also reflected in the monetary policy decisions taken by the ECB Governing Council.

First half year dominated by the economy in freefall

It was not until the initial months of 2009 that the extent to which the escalating financial crisis had spread to the real economy became clear. Thus, in February, it emerged that the economic activity of the euro area had fallen by 1.5 p.c. in the fourth quarter of 2008, compared to the previous quarter. Moreover, there was every indication that it would continue in freefall at the start of the year under review, as available monthly indicators had dropped to record low levels, suggesting that the economic situa-tion would remain depressed for some time.

The banking crisis was not only the primary cause of the deep recession, it was also the main threat to future activity. Thus, against a background of sharply increasing risk aversion, the financial crisis led to a tightening of finan cing conditions on the financial markets, discourag-ing new investments. Moreover, the securitisation market dried up as a source of funding for the banks. The slump in share prices and house prices and the erosion of con-fidence had an adverse effect on private consumption and investment. The contraction in employment also depressed consumption, and furthermore, investments were inhibited by the reduction in profit margins and the sharp deterioration in the demand outlook on both the domestic market and the export markets. Since the crisis was international in character, world trade also recorded a

sharp fall. Finally, the severe deterioration in the economic climate threatened to have repercussions on the banks, as they were liable to face a steady increase in bad debts which could cause them to restrict their supply of credit. Although the exact impact of all these individual factors was hard to assess, it was clear that each of the finan-cial crisis transmission channels had exerted downward pressure on economic activity, triggering the most severe recession in decades. Initially, the fall in commodity prices was the only stabilising factor, whereas the very accom-modating macroeconomic policy – both monetary and fiscal – might have been expected to provide support at a later stage.

The rapid, continuous deterioration in the economic situ-ation – in May came the news that the euro area’s GDP had fallen by 2.5 p.c. in the first quarter of 2009 – gave rise to an exceptional series of downward revisions to the growth outlook for 2009. Whereas in December 2008, the Eurosystem’s projections were still predicting a rela-tively moderate recession, with a decline in real GDP of between 0 and 1 p.c. in 2009, in June the range for the contraction of activity was increased to between 4.1 and 5.1 p.c. The forecasts produced by the main international bodies and professional forecasters displayed a similar pattern.

37


chart 19 proJectionS oF real gdp growth and headline inFlation in the euro area

(percentage annual changes according to the projection publication dates)

B

B

B

B

J

J

J J J

F

F

F F

Ñ

Ñ

ÑÑ

K

K

KK K

K

K

K K K

2009

B

B B

B

JJ

J

JF

F

FÑ Ñ Ñ

ÑK

K KK

K

K

K KK

K

2010

BB

J J

J J J

F

F

F

ÑÑ Ñ Ñ

K

K K K K

K

KK K

K

2009

B

B

J J

J JF

FF

ÑÑ

Ñ ÑK

K KK K

K

K KK K

2010

F

–6

–5

–4

–3

–2

–1

0

1

2

–6

–5

–4

–3

–2

–1

0

1

2

REAL GDP GROWTH

Consensus Economics

IMF

ECB Survey of Professional Forecasters

EC

OECD

Eurosystem

INFLATION (HICP)

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

Dec

. 20

08

Feb.

20

09

Apr

. 20

09

June

20

09

Aug

. 20

09

Oct

. 20

09

Dec

. 20

09

Dec

. 20

08

Feb.

20

09

Apr

. 20

09

June

20

09

Aug

. 20

09

Oct

. 20

09

Dec

. 20

09

Dec

. 20

08

Feb.

20

09

Apr

. 20

09

June

20

09

Aug

. 20

09

Oct

. 20

09

Dec

. 20

09

Dec

. 20

08

Feb.

20

09

Apr

. 20

09

June

20

09

Aug

. 20

09

Oct

. 20

09

Dec

. 20

09

Sources : EC, IMF, OECD, Consensus Economics, ECB.

The forecasts for 2010 were also revised downwards. The Eurosystem’s June projections thus expected real GDP growth in 2010 ranging between –1 and +0.4 p.c. A slow and limited recovery was predicted since no rapid improvement in world trade, confidence and financing conditions was expected. That prognosis was based on the observation that, in the past, recessions associated with a banking crisis had been not only deeper but also longer. Moreover, there would be no real deterioration in employment and unemployment until during 2009, and that process was set to continue in 2010.

During the first half of the year under review, inflation measured by the HICP dropped from 1.1 p.c. in January to –0.1 p.c. in June. That decline, which had already begun in the summer of 2008 after inflation had peaked at almost 4 p.c., essentially reflected the fall in commod-ity prices attributable to the weakness of global demand. From the start, the ECB Governing Council drew attention to the fact that the substantial drop in inflation would be temporary, in view of its origin. The decline in underlying inflation, i.e. the movement in consumer prices excluding food and energy, was far less marked, the figure falling

38

Box 3 – “Negative inflation” or “deflation” : not just a question of semantics

When it became clear, from September 2008, that the intensification of the financial crisis would have a severe impact on the real economy, there was a danger of that exerting strong downward pressure on prices. Moreover, commodity prices dipped sharply in the second half of 2008, ultimately leading to a period of negative inflation. For both the authorities and public opinion, the question was therefore whether the economy of not only the euro area but also other advanced countries might be heading for a period of deflation. This box defines deflation and concludes that the negative inflation recorded in the euro area between June and October 2009 cannot be regarded as deflation.

In the broad sense, deflation could be defined as the simple observation of negative inflation. However, that definition has the disadvantage of disregarding both the cause of the negative pressure on prices and its consequences for economic activity. Thus, at the beginning of the last century and in earlier periods, it was not unusual to record reductions in the price level, often even during relatively buoyant economic periods, whereas deflation is generally associated with periods of a sharp economic downturn, such as the Great Depression of the 1930s, or stagnation, like that afflicting Japan during the 1990s and the present decade. According to a narrower but more accurate definition of deflation, the fall in the general price level must display three essential characteristics : (a) it must be generalised, and should not concern only certain product groups ; (b) it must be persistent, extending over a fairly lengthy period, and not just a few months ; and (c) it must be expected (1). According to this view, deflation is generally connected with a substantial negative demand shock, in which the decline in activity generates such severe downward pressure on prices that it is accompanied by a decline in the general price level and leads to expectations of further falls. Thus defined, deflation is extremely worrying in that it triggers three specific economic mechanisms leading to a downward spiral, and hence substantial costs for the economy.

The first nominal rigidity is the fact that the nominal key interest rates cannot fall below zero, a more or less absolute lower limit. Once nominal interest rates reach zero, the central bank cannot ease monetary policy any further via the traditional interest rate instrument, since everyone will prefer to keep their liquidity rather than lend

4

from almost 2 p.c. at the end of 2008 to 1.4 p.c. in June of the year under review, but that movement was expected to be more persistent. The explanation lies in the significant fall in demand in the economy, which had led to particularly high under-utilisation of capacity, a situ-ation likely to persist for some time.

The inflation projections for the euro area underwent significant downward adjustment from the end of 2008. Thus, in December 2008, the Eurosystem still expected the HICP to rise by between 1.1 and 1.7 p.c., whereas in June of the year under review, the predicted range was only between 0.1 and 0.5 p.c. The forecasts of the main international bodies and professional forecasters were also fairly close to these percentages. However, the downward revision of the inflation projections for 2010 was less marked. The prospect of deflation was therefore never part of the baseline scenario, even at the time of

the gloomiest economic forecasts (see box 3 on deflation and its determinants).

However, during the first half of the year, the vast major-ity of inflation forecasts for 2010 were well below the upper limit of the quantitative definition of price stability used by the ECB Governing Council. Inflation expectations derived from financial instruments confirmed not only that a sharp fall in inflation was expected in the short term, but also that inflation in the medium term would be significantly below 2 p.c. A situation in which inflation would only very gradually edge back towards levels corre-sponding to price stability was liable to cause a downward deanchoring of inflation expectations. In that context, the ex ante risk of deflation was considerably greater, requir-ing an expansionary monetary policy, following which the Governing Council was able to state that long-term infla-tion expectations were still firmly anchored.

(1) Bini Smaghi L. (2008), Careful with (the “d”) words !, Lecture at the European Colloquia Series, Venice, November.

39


money at negative interest rates (liquidity trap). Although the monetary policy debate often focuses on nominal key interest rates, it is the real interest rates which are the most significant for the economy and for inflation. The emergence of negative inflation expectations is an essential feature of periods of deflation, when real interest rates may become increasingly positive, inducing the postponement of expenditure, whereas the substantial negative demand shock which triggered the deflation specifically implies that the real natural interest rate is very low or even negative. Owing to this difference between the actual real interest rates and their equilibrium level, the scarcity of demand may persist, augmenting the downward pressure on prices and engendering a further rise in negative inflation expectations etc., thus creating a genuine deflationary spiral.

Second, the real cost of debts contracted previously increases in the event of deflation, since most debt contracts are concluded in nominal terms. As deflation often follows a period of excessive lending, it hampers the process of debt reduction which, all other things being equal, leads to a renewed increase in the propensity to save and exacerbates the erosion of demand. Since the economic situation has already deteriorated sharply, repayment problems and defaults then proliferate, and that is often also accompanied by a fall in asset prices, seriously diminishing the value of the collateral backing the loans. These developments force the banks to tighten their lending criteria and may impair their solvency, therefore causing the crisis to worsen still further. In such circumstances, avoiding deflation and safeguarding financial stability become complementary goals.

A third significant rigidity concerns the difficulty of reducing nominal wages. In the short term, a relatively high degree of downward nominal wage rigidity may prove fairly favourable in that it supports demand in the economy

4

inFlation and inFlation expectationS in the euro area

(percentage changes compared to the corresponding period of the previous year)

2005

2007

200

9

2011

2013

2015

2005

2007

200

9

2011

2013

2015

–1

0

1

2

3

4

5

–1

0

1

2

3

4

5

INFLATION EXPECTATIONS DERIVED FROM FINANCIAL MARKET DATA (1)

HICP excluding food and energy

Headline HICP

HICP inflation expected in :

September 2008

December 2008

March 2009

December 2009

ECB Survey of Professional Forecasters conducted in :

3rd quarter of 2008

4th quarter of 2008

1st quarter of 2009

4th quarter of 2009

INFLATION EXPECTATIONS DERIVED FROM SURVEY DATA

Sources : EC, Bloomberg, ECB.(1) Measured on the basis of the implicit forward rate of a 1-year inflation swap. Since consumer price indices are published with a time lag, inflation swap contracts

reflect the inflation expected for the month three months ahead of their maturity date. Thus, September 2008 contracts reflect the inflation rates expected for the months of June in subsequent years.

40

and initially helps to alleviate the problem of the repayment of loans contracted previously. However, the existence of rigidities makes it more difficult for the real economy to adapt, especially if the downward shock is persistent. Thus, the downward rigidity of nominal wages combined with deflation leads to an excessively high level of real wages, causing higher unemployment and reinforcing the downward pressure on demand.

In view of the potentially disastrous consequences, it is of the utmost importance for monetary policy to prevent deflation. In periods when deflation does not present any immediate threat, preventive measures may already be applied during the definition of the monetary policy strategy by building in a buffer zone against the risks of deflation. Central banks therefore generally define price stability as low but strictly positive inflation. Thus, the ECB Governing Council defined price stability in the euro area as an annual rise in the HICP of the euro area of less than – but close to – 2 p.c. in the medium term. When the clarification “but close to 2 p.c.” was added in May 2003, that was an explicit reference to the risks of deflation. An inflation target also offers a clear benchmark for inflation expectations so that they can be more firmly anchored, reducing the risk of a deflationary spiral. Central banks which have an explicit inflation target, such as the Eurosystem, are therefore in principle better equipped to combat deflation.

When, following a sudden, sharp slowdown in economic activity, a real risk of deflation arises, the monetary authorities have to respond proactively by making speedy and significant cuts in the key interest rates. If that action means that nominal interest rates fall more quickly than inflation expectations, monetary policy can, by lowering real interest rates, remain sufficiently expansionary, exerting a stabilising effect on the economy. Prevention is better than cure : the existence of a lower limit for key interest rates implies that the interest rate instrument should be used more aggressively. Apart from cutting the key rates, central banks can also apply non-standard monetary policy measures. In fact, monetary policy can not only use the traditional instrument – short-term interest rates – but it can also resort to other levers, such as the size of the monetary base, the size and composition of the central bank balance sheet, the steering of longer-term interest rates or the reduction of spreads in order to drive down the interest rates relevant for the various economic sectors.

It is clear that the brief period of negative inflation seen in the euro area between June and October 2009 does not count as deflation according to the definition given here. It was a particularly short period, and the price falls were not generalised : they concerned only a small number of products, primarily energy. Although underlying inflation did fall, it still remained positive at all times. Moreover, even at the height of the crisis, expectations never proved negative over a longish period. Both inflation expectations based on financial market instruments and those derived from the ECB Survey of Professional Forecasters indicate that, since the start of the crisis, analysts have predicted a relatively long period of low, but strictly positive inflation, and that their longer-term inflation expectations have remained firmly anchored at levels corresponding to the definition of price stability. However, that does not imply that, without the drastic easing of the monetary policy stance, there would have been no risk of deflation. On the contrary, that easing was a major factor in maintaining the anchoring of inflation expectations in the euro area.

The sharp contraction of economic activity and the marked decline in inflationary pressure were also reflected in movements in lending and the money supply. Net flows of loans to the private sector, which had hither to been robust, went into a really steep decline from November 2008, driven down initially by the fall in lend-ing to insurance companies and pension funds and to other non-monetary financial intermediaries. At the time, this bore witness to the concentration of tensions in the financial sphere, best illustrated by the slump in lending

between monetary financial institutions (MFIs) recorded in the autumn of 2008 (for more details, see box 4). In January, net flows to households fell to very low levels in historical terms, but still remained positive. Net flows to non-financial corporations moved into negative territory from February. As revealed by data from the Eurosystem’s bank lending survey, demand for loans fell sharply fol-lowing the unprecedented deterioration in the general economic outlook, and particularly the outlook for the property market. The role of demand in the contraction of

41


chart 20 loanS to the priVate Sector (1) in the euro area

(monthly data, billions of euro, unless otherwise stated)

2008–8

–4

0

4

8

12

16

–8

–4

0

4

8

12

16

20092008200920082009–60

–30

0

30

60

90

120

–8

–4

0

4

8

12

16

–60

–30

0

30

60

90

120

–60

–30

0

30

60

90

120

Percentage changes compared to the corresponding month of the previous year

Idem, adjusted for securitisation

Monthly net flows adjusted for securitisation (left-hand scale)

TOTAL PRIVATE SECTOR NON-FINANCIAL CORPORATIONSof which : HOUSEHOLDS

(right-hand scale)

Source : ECB.(1) Households, non-financial corporations, insurance companies, pension funds or occupational pension institutions and other non-monetary financial intermediaries.

lending is borne out, in the case of non-financial corpora-tions, by the finding that short-term loans were the most affected, a phenomenon due to substantial de-stocking by firms during that period. However, at the same time, the banks reported a tightening of their lending crite-ria, both on account of refinancing and capitalisation problems and in view of the rapid deterioration in the economic situation, which was beginning to impair the quality of their borrowers.

In parallel with the decline in loans to the private sector, the monetary dynamism weakened sharply at the end of 2008, and the annualised quarterly growth rate of M3 actually became negative at the beginning of 2009. That development confirmed the rapid disappearance of the upside risks which had previously threatened price stability. Nonetheless, it also reflected the influence of the configuration of interest rates. The particularly steep upward slope of the yield curve in fact encouraged arbi-trage in favour of financial assets not included in M3. At the same time, the relative movement in interest rates lay at the root of the substitution shifts within M3, in favour of the holding of overnight deposits whose opportunity cost had fallen sharply compared to short-term deposits and marketable instruments. The slower growth of M3

was thus attributable solely to the decline in these last two components of the aggregate M3.

On the basis of its economic and monetary analysis, the Governing Council essentially implemented two types of instruments to try to stop the negative feedback loop between the bank crisis and economic activity, and thus to ensure price stability in the medium term and contribute to the maintenance of financial stability.

First, the key policy interest rate was drastically reduced to 1 % from May 2009. After cutting the rate from 4.25 to 2.5 p.c. between October and December 2008, the Governing Council reduced it further in four stages, first by 50 basis points at a time in January and March, and subsequently by 25 basis points, first in April and then on a second occasion in May. It also announced that 1 p.c. was not necessarily the lowest level for the key policy rate, but that it was appropriate to the prevailing macroeco-nomic environment.

42

Box 4 – Reduction in debt leverage by euro area monetary financial institutions

As a result of the financial market tensions, the euro area’s monetary financial institutions sector, excluding the Eurosystem, referred to as MFIs in this box, faced serious liquidity problems, with a decline in asset values and losses on loans. Analysis of the sector’s aggregate balance sheet permits assessment of the extent to which the sector reduced its debt leverage, i.e. the ratio between its total assets and its capital, providing a better understanding of how the financial tensions spread to the real economy.

In the event of severe financial turbulence, credit institutions have to contend with pressure on their capital, and are generally also forced to cut the size of their balance sheet. Of course, that process is due to the need to meet the requirements of the Basel Committee regarding their prudential ratio, but apart from any regulatory constraints, it is also intended to ensure that financial institutions retain the confidence of investors and access to the capital market at reasonable cost. Debt leverage reduction encompasses a range of strategies concerning both the liabilities and the assets side of the balance sheet. On the liabilities side, a first option consists in accumulating profits and cutting dividends in order to rebuild capital internally. An alternative is to increase the capital in order to increase the potential for absorbing losses. On the assets side, a frequent strategy is to sell off assets, thus immediately providing part of the finance needed by credit institutions and reducing their exposure to balance sheet risk. Restrictions on lending to customers may also promote the adjustment of the balance sheet.

4

chart 21 M3 and itS coMponentS

(contribution to the change in M3 compared to the corresponding month of the previous year, percentage points, unless otherwise stated)

2004 2005 20092006 20082007

–6

–4

–2

0

2

4

6

8

10

12

14

–6

–4

–2

0

2

4

6

8

10

12

14

–8 –8

p.m. Annualised quarterly growth of M3

M3 (1)

Marketable instruments

Other short-term deposits

Currency in circulation and overnight deposits

M1M2

M3

Source : ECB.(1) Percentage changes compared to the corresponding month of the previous year.

In addition, the policy of enhanced credit support – which since October 2008 had led to the ample provision of liquidity in both euro and foreign exchange – was stepped up. Additional measures were announced on 7 May, with details issued at the beginning of June. The main measures concerned the purchase of a portfolio of covered bonds – i.e. bonds guaranteed by both the issuer and a pool of mortgage claims and /or loans to the public sector – totalling 60 billion euro over the period July 2009-June 2010, and the decision to conduct longer-term refinancing operations in June, September and December 2009, with a maturity of twelve months, at fixed rates and with full allotment.

43


A “qualitative” version of debt leverage reduction consists more simply in reallocating part of the portfolio to less risky assets.

The first two strategies mentioned are generally difficult to implement and may take a considerable time in an adverse economic and financial environment, as at the end of 2008 and the beginning of 2009, when ultimately it fell to the governments to rescue a number of banks in many euro area countries. The strategy of selling off assets or restricting lending may have serious macroeconomic implications. For one thing, the sale of assets exerts downward pressure on asset values, with a risk of a spiral and rising credit costs for businesses. Also, a credit squeeze applied to households and enterprises depresses private consumption and investment. If MFIs reduce their asset holdings, that can therefore trigger numerous adverse effects and jeopardise the effective transmission of monetary policy.

From the emergence of tensions to their intensification

Between the outbreak of the turbulence affecting the financial markets and November 2008, the aggregate balance sheet of euro area MFIs continued to grow at a sustained rate, although less strongly from the beginning of 2008. At most, there were changes in its composition. Thus, from August 2007, the growth of claims on non-residents decelerated, giving way to a slight fall from the second quarter of 2008. At first, the turbulence

leVerage ratio and Main aSSetS oF euro area Monetary Financial inStitutionS

2009200820072001 20092003 2005 2007–300

–200

–100

0

100

200

300

–300

–200

–100

0

100

200

300

Claims on the Eurosystem

Other loans

Loans to MFIs excluding the Eurosystem

Claims on non-residents

Other securities

Equities

Main assets

Bonds issued by MFIs

16.0

16.5

17.0

17.5

18.0

18.5

Leverage ratio (1) (right-hand scale B)

Balance sheet total (right-hand scale A)

Capital and reserves (left-hand scale)

LEVERAGE RATIO OF MONETARY FINANCIAL INSTITUTIONS EXCLUDING THE EUROSYSTEM(quarterly averages, outstanding amount in € billion, unless otherwise stated)

MAIN ASSETS OF MONETARY FINANCIAL INSTITUTIONS EXCLUDING THE EUROSYSTEM(monthly net flows, in € billion, three-month moving average, seasonally adjusted data)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

A B

Source : ECB.(1) Balance sheet total compared to capital and reserves.

4

44

had a positive impact on the holding of securities other than equities. That was due partly to credit institutions retaining their own securitised assets on their balance sheet, for use as collateral for the Eurosystem’s liquidity operations. These developments were also due to the absorption by a number of MFIs of securities originating from securitisation vehicles.

After Lehman Brothers

Despite all the exceptional measures taken by monetary authorities and governments of the euro area to provide liquidity and recapitalisation for the financial sector, the aggregate balance sheet of the MFIs began to contract from November 2008. Between November 2008 and December 2009, the aggregate assets of those MFIs thus declined by 4.4 p.c.

The assets most affected were claims on non-residents and loans between MFIs, owing to the fact that the loss of confidence between banks had virtually paralysed the interbank market. The large reduction in holdings of external assets contrasts with a period of intense accumulation which contributed significantly to the expansion of MFI balance sheets between 2004 and 2007. The main counterparties affected were foreign banks operating from the major financial centres. The debt leverage reduction was therefore accompanied by a sharp decline in the degree of financial globalisation. During the initial months following the collapse of Lehman Brothers, MFIs also sold off equities while their holdings of other securities continued to grow. This was due partly to the continuing high level of securitised assets retained in the portfolio, but also to the strong growth of assets in the form of government bonds, in a context of high risk aversion and a growing government borrowing requirement. This reallocation in favour of sovereign securities illustrates a “qualitative” aspect of the leverage reduction.

The leverage reduction was tempered by the fact that the Eurosystem acted as a substitute for the paralysed interbank market. This took the form of an abundant supply of liquidity to the consolidated banking sector, so that MFIs greatly increased their use of the standing deposit facility in the final quarter of 2008 – when the financial market crisis was at its peak – and in the second half of 2009, during which the Eurosystem conducted its one-year refinancing operations. The buttressing of bank credit which resulted from the policy of enhanced support was also reinforced by the guarantees issued by governments and by the recapitalisation of certain banks which had been particularly hard hit. Moreover, the continued provision of financial resources for the non-financial sectors of the economy was often a condition for receiving government aid. Those measures certainly helped to limit the impact of the leverage reduction process on net flows of lending to the non-financial sectors. Although those flows contracted sharply from the autumn of 2008, they nonetheless remained positive overall during the year under review, if securitisation operations are taken into account.

Ultimately, the leverage ratio defined as the total assets of MFIs in relation to their capital and reserves, dropped to 16.2 in December 2009, the lowest level since financial and monetary statistics became available on the basis of a harmonised methodology for the euro area, namely February 1997. That level contrasts with the peak reached at the end of 2008, resulting from the substantial losses recorded by many institutions following the intensification of the financial market tensions. However, the reduction in asset holdings was fairly modest in comparison with the balance sheet growth seen in recent years. Moreover, credit institutions adjusted the size and composition of their balance sheets mainly by reducing their claims on other resident and non-resident MFIs. Monetary financial institutions gave priority to disposing of the most liquid assets and those least connected with their core activity, whereas the more strategic assets such as loans to the resident private sector were relatively little affected. That is due not only to their lack of liquidity but also to the fact that financial institutions often want to preserve a relationship of trust with their resident customers. Moreover, the measures adopted by the monetary and fiscal authorities were specifically intended to avoid lending to the real economy being seriously affected by the MFIs’ debt leverage reduction process.

45


Signs of stabilisation and hesitant recovery

During the summer, it became clear that the economy had ceased to deteriorate and was showing a stabilisation, albeit very feeble. However, it soon became evident that the economic recovery would be slow and bumpy, even though the GDP figures for the second and third quarters of 2009 were better than expected. That was largely due to temporary factors, such as the fiscal recovery measures – more particularly the introduction of a vehicle scrappage allowance in several Member States – and a positive con-tribution from the inventory cycle.

The economic growth forecasts were therefore revised upwards from the summer. This was undeniably a break with the long series of downward revisions, but the adjustments were nevertheless relatively small. Thus, according to the Eurosystem projections published in December, activity in the euro area was expected to fall by between 3.9 and 4.1 p.c. in 2009, and to expand by between +0.1 and +1.5 p.c. in 2010. However, the forecasts for the growth of domestic demand remained meagre, in view of the need to continue consolidating the balance sheets of the financial and non-financial sectors. The December projections published by the Eurosystem thus predicted that the change in private consumption and gross fixed capital formation would amount to only between – 0.2 and +0.8 p.c. and between –3.1 and

– 0.1 p.c. respectively. December also saw the publication of the first forecast for 2011 : growth would remain rela-tively weak at between + 0.2 and + 2.2 p.c.

These rather sombre Eurosystem projections for 2010 are in line with those of other international institutions, while other forecasters are a little more optimistic, as is evident from the average predictions of Consensus Economics. The temporary nature of the supporting factors and the difficulty of assessing the factors which should contribute to a struc-tural recovery imply many question marks over the growth rate to be expected for 2010. That exceptionally great uncertainty is reflected not only in the variations between the estimates of international institutions – including the Eurosystem – and the average prediction of Consensus Economics, but also in the large standard deviation of the individual estimates published by Consensus Economics. In such a climate of uncertainty, the Governing Council con-sidered that the upside and downside risks to the economic growth prospects were balanced. According to its analysis, the recovery could gather momentum owing to a speedier improvement in confidence, a more pronounced revival of foreign demand and stronger than expected effects of the expansionist macroeconomic policy. Conversely, the persist-ence of negative interactions between the financial sector and the real economy plus an intensification of protection-ist tensions and a possible sudden correction of the global imbalances could damage the still fragile recovery.

chart 22 uncertainty oVer the next calendar year in the indiVidual ForecaStS collected by Consensus eConomiCs For the euro area

(percentage points)

BB

BB

B B B

BB

B B

B

JJ J J J J

J J J JJ J

B B B

B BB

BB B

B B BJ J J J J J J J

J J J J

Standard deviation of individual forecasts for 2010

Corresponding average standard deviation of individual forecasts for the next calendar year in the period 2003-2008 (1)

REAL GDP GROWTH

0.0

0.2

0.4

0.6

0.8

1.0INFLATION (HICP)

Jan.

Feb.

Mar

.

Apr

.

May

Jun.

Jul.

Aug

.

Sep .

Oct

.

Nov

.

Dec

.0.0

0.2

0.4

0.6

0.8

1.0

Jan.

Feb.

Mar

.

Apr

.

May

Jun.

Jul.

Aug

.

Sep .

Oct

.

Nov

.

Dec

.

Source : Consensus Economics.(1) The average standard deviation of the individual forecasts of GDP growth or inflation for the next calendar year tends to diminish as the current forecasting year progresses,

since the information available gradually increases and the uncertainties over the next calendar year gradually fade.

46

Negative inflation rates were recorded from June to October inclusive. In July 2009, the decline in the general price level peaked at 0.7 p.c. That was in line with previ-ous expectations, and largely reflected the movement in commodity prices. From November, inflation strengthened to reach 0.9 p.c. in December. Inflation excluding food and energy continued to fall slowly, dropping to 1.1 p.c. in December, owing to the widespread under-utilisation of the production factors. True, the exact scale of that under-utilisation is hard to determine, in view of the uncertainty over estimated potential output, but the ero-sion of demand was so severe and the forecasts were so modest that this under-utilisation is likely to persist for some time to come, contributing to wage moderation. The Eurosystem’s December projections put HICP inflation at between 0.9 and 1.7 p.c. for 2010 and between 0.8 and 2 p.c. for 2011. The middle of these ranges is thus still well below the upper limit of the definition of price stability.

Although the uncertainty over the inflation forecasts was less than that relating to activity growth, it was neverthe-less considerable for this key monetary policy variable. The Governing Council felt that the risks were balanced over-all. They were connected mainly with the strength of the economic recovery, the movement in commodity prices, and possible increases in indirect taxes and administered prices for the purpose of the fiscal consolidation which is absolutely vital in the coming years.

Inflation expectations over the horizon relevant for mon-etary policy, such as those derived from financial instru-ments, continued to revert steadily, albeit less slowly than in the first half of the year, to inflation rates consistent with price stability. The expansionist monetary policy in fact made a major contribution towards attenuating the ex ante risk of deflation, so that long-term inflation expec-tations remained firmly anchored.

During the second half year, monetary dynamism was weak and the substitution shifts between M3 compo-nents seen in the first half continued. Loans to house-holds displayed an upward trend in the second half year. Conversely, loans to non-financial corporations recorded a further fall, particularly short-term loans. However, the Eurosystem’s bank lending survey indicated that the decline in demand and tightening of lending criteria were on the wane. Despite their very low level, the movements in lending per sector remained in line with historical observations during the activity cycle. Generally speaking, the revival of net flows of lending to households in fact occurs, on average, three months ahead of the revival of economic growth, while lending to non-financial corpora-tions picks up about nine months later. The uncertainty persisting over the scale of the losses which the MFI sector

would ultimately have to recognise nevertheless meant that excessive optimism over future lending growth was unjustified.

Monetary analysis therefore confirmed the economic analysis in general, and the existence of positive signs. However, it also indicated that those signs were highly vulnerable, and – given the weak dynamism of the money supply and lending – suggested low risks of both inflation and a speculative bubble.

From June to the end of the year under review, the ECB Governing Council decided to keep the key interest rate on hold at 1 p.c. Furthermore, as explained in more detail in section 2.3, the additional measures concerning enhanced credit support were implemented as announced. The maintenance of a particularly expansionist monetary policy stance was entirely in line with the expectation of a hesitant revival of economic activity, and hence a low level of HICP inflation in the medium term. Given the improve-ment in the financial market situation, the Governing Council nevertheless announced, at the close of its early December meeting, that it would not renew a number of longer-term refinancing operations in 2010.

2.3 The monetary policy decisions of the Eurosystem

The financial crisis and the accompanying downturn in economic activity date back to the summer of 2007. In August 2007, the Eurosystem had already had to inter-vene on the money market to safeguard financial stability and prevent the financial tensions from affecting the real economy. In September 2008, the financial tensions had worsened, heralding a second and far more serious phase of the financial and economic crisis, and therefore requir-ing more vigorous action.

The first phase of the financial crisis

In the wake of the problems facing certain financial insti-tutions, tensions had emerged on the financial markets by the summer of 2007, and more particularly on the money market where the interest rate spread between the secured and unsecured segments had widened signifi-cantly. Since that presented a threat to financial stability, it had been decided to ease the conditions for grant-ing liquidity during that period. At the same time, the Governing Council had considered that, in the context of a sharp rise in commodity prices, the risks to price stabil-ity were essentially upside during the second half of 2007 and the first half of 2008. Thus, it was necessary to ensure

47


that this easing of the liquidity supply did not also give rise to the relaxation of the monetary policy stance itself, which is geared to the maintenance of price stability, the primary objective of monetary policy. During this first phase of the financial crisis, the Eurosystem had therefore explicitly opted to make a clear distinction between the provision of liquidity and the definition of the monetary policy stance. In so doing, it made sure that the easier supply of liquidity did not exert downward pressure on the overnight interest rate, so that the latter remained stable, as before, around the central key rate.

This was achieved by adjusting the provision of liquidity during the reserve maintenance periods. At the start of these periods, lasting about a month, more liquidity had thus been provided than was necessary on the basis of the banks’ consolidated liquidity need. However, that situation

was neutralised at the end of those periods so that the total amount provided during each one was little different from the consolidated need. As a result, the overnight interest rate hovered around the central key rate. The Eurosystem had also granted a larger proportion of its refinancing via longer-term operations, initially for a term of three months and later, from April 2008, for a term of six months. This had given the banks additional comfort because they could be sure of having the necessary liquidity for a longer period.

Worsening of the financial crisis and reversal of the risks to price stability

In September 2008, the financial crisis entered a new phase, bringing unprecedented challenges for the main-tenance of financial and macroeconomic stability, and

chart 23 deterMinantS oF the tightening oF conditionS For lending to non-Financial corporationS in the euro area, 2003 to 2009 (1)

(quarterly data)

–20

–10

0

10

20

30

40

50

60

70

80

–20

–10

0

10

20

30

40

50

60

70

80

2007 Q3 2007 Q4 2008 Q1 2008 Q2 2008 Q3

2008 Q4 2009 Q1 2009 Q2 2009 Q3

Risks onrequired collateral

Outlook atsectoral and

firm level

Expectationsregarding

general economicactivity

Bank’s liquidityposition

Access tomarket financing

Cost of bankcapital

Direct impact of the financial crisis Impact of the economic situation

Eurosystem

Governments

– Extended liquidity provision– Purchase of covered bonds– Emergency liquidity assistance

– Recapitalisation– Guarantees on deposits and

issues of debt securities– Impaired asset relief

– Key interest rate cuts– Additional decreases in

market interest rates

– Automatic stabilisers ofpublic finances

– Economic recovery plans

2003 Q1 until 2007 Q2

2009 Q4

Source : ECB.(1) Net (unweighted) percentage of replies by credit institutions to the Eurosystem’s bank lending survey, indicating the degree of tightening or easing (–) of lending criteria.

48

particularly price stability. The financial market situation had deteriorated significantly, the banks had seen a further dwindling of their financing options, and it had become obvious that the financial crisis would also affect the real economy. At the same time, the upside risks pre-viously threatening price stability had rapidly faded and even turned into downside risks. The economic recession had also given rise to the danger of a vicious circle of negative interactions between the real economy and the financial sphere. On the positive side, however, it is pre-cisely in such an environment that the measures designed to safeguard financial stability and those intended to temper the downside risks to price stability complement one another and could therefore be more effective.

The balance sheet problems of financial institutions may in fact lead to a tightening of credit standards and thus depress lending. That situation in turn gives rise to prob-lems for households and enterprises, and thus affects the real economy ; which can then lead to an increase in defaulting loans just at the time when collateral is harder to turn into cash, thus adding to the financial institutions’ problems. In order to prevent or halt such a negative spiral, the Eurosystem – like other central banks – applied a set of measures explained in detail below, in order to help safeguard financial stability and at the same time to maintain price stability. In addition, the fiscal authorities intervened to stabilise the financial system and to halt the slump in economic activity. Central banks can only tackle the banks’ liquidity problems and have no authority to deal with the solvency problems facing certain financial institutions. If private capital is insufficient to restore the level of their own funds, financial stability can only be pre-served via recapitalisation by the fiscal authorities. In many advanced economies, such intervention proved essential. In addition, governments helped struggling banks to attract new funds again by granting them guarantees to cover both deposits formed with those institutions and the issue of new debt securities. Similarly, they facilitated the balance sheet consolidation of those institutions by taking over their toxic assets – e.g. via special purpose vehicles – or by guaranteeing possible losses on those assets. Furthermore, they contributed to the stabilisation of the economic situation via the moderating effect of the automatic stabilisers of public finances and by the additional recovery measures which they applied in view of the serious economic recession.

For its part, the Eurosystem mobilised supplementary instruments to take account of the fundamental change in the situation. On the one hand, the monetary policy stance was drastically eased via an unprecedented series of interest rate cuts. In addition, the provision of liquidity was greatly expanded to the point where the Eurosystem

abandoned the distinction between the provision of liquidity and the monetary policy stance, a distinction which it had stressed in the initial phase of the financial crisis. Together, these exceptional measures were referred to as a policy of enhanced credit support.

In a climate of deep mutual mistrust between the banks, trade on the interbank market had practically come to a standstill in September 2008. There was therefore a real risk that the banks’ very survival could be threatened simply on account of a shortage of liquidity. The ECB Governing Council had therefore decided, on 8 October, not only to cut the key interest rate by 50 basis points as part of a coordinated move by several central banks, reducing it to 3.75 p.c., but also, from 15 October, to introduce a system of fixed-rate tenders at the central key rate for all its refinancing operations, with full allotment. The Eurosystem thus played a vital role as intermedi-ary on the euro money market whereas, under normal conditions, the market performs that role itself, as banks can readily trade their liquidity surpluses and deficits. In satisfying the whole of the banks’ demand for liquidity, the Eurosystem became the main counterparty destined to absorb the liquidity shocks affecting individual banks : it thus placed itself between banks with surplus liquidity and those facing deficits. The simultaneous decision to reduce the interest rate differential between the marginal lending facility and the deposit facility to 100 basis points from 9 October 2008, compared to the usual 200 points, had further reinforced that role. This had enabled banks to finance their liquidity deficits on more favourable terms via the standing facilities, but also and above all to deposit their surplus liquidity with the Eurosystem.

In order to ensure that banks could also obtain longer-term financing, the Eurosystem had decided to step up its provision of liquidity via longer-term operations. Thus, from 29 September 2008, alongside the existing three-month and six-month operations, it conducted a monthly operation for a term corresponding to one reserve maintenance period. Moreover, in October 2008, it had decided that all the longer-term refinancing operations would also be conducted at a fixed rate – more specifi-cally, the central key interest rate – with full allotment. This led to a strong increase in the outstanding volume of long-term refinancing, particularly for terms of three and six months.

Owing to the severe tensions on the international money markets, European financial institutions had also had difficulty in obtaining financing in foreign currencies, and more especially in US dollars. The market in foreign exchange swaps, which used to be an important source of financing in foreign exchange, had in fact dried up.

49


For that reason, dollar transactions were set up under a swap agreement specially arranged with the US Federal Reserve. The provision of liquidity in US dollars had already begun in December 2007, but was limited to a maximum of 20 billion dollars. In October 2008, how-ever, financing in dollars had been greatly expanded in volume and duration, essentially following the decision to satisfy all bids at a fixed rate from 16 October 2008. This caused a substantial increase in the outstanding volume, to a maximum of around 293 billion dollars in December 2008, but recourse to this source of financ-ing declined considerably during 2009, dropping to only around 6.5 billion by 31 December 2009.

From 20 October 2008, foreign exchange swaps in Swiss francs were also concluded, enabling Eurosystem coun-terparties to obtain Swiss francs in exchange for euros. The outstanding volume of financing in Swiss francs peaked at around 38 billion Swiss francs in February 2009, but subsided to 2.5 billion by 31 December. These francs were made available under a swap agreement between the Eurosystem and the Swiss National Bank. The Eurosystem also concluded agreements with the central banks of several European countries and with the Federal Reserve, enabling them to lend euros to their respective banking sectors.

chart 24 conSolidated liQuidity need and euroSySteM open Market operationS (1)

(daily data, billions of euro)

16/1

13/2

13/3

17/4

14/5

12/6

10/7 7/8

11/9

9/10

13/1

1

11/1

2

15/1

12/2

11/3

15/4

13/5

10/6

8/7

12/8

9/9

7/10

11/1

1

9/12

20/1

10/2

10/3 7/4

12/5 9/6

7/7

11/8

8/9

13/1

0

10/1

1

7/12

19/1

2007 2008 2009 2010

Main refinancing operations

Fine-tuning operationsConsolidated liquidity need of the banks

Six-month operations

Special term operations (2)

Before the crisis First phase of the financial crisis Second phase of the financial crisis

Eurosystem open market operations, of which :

Three-month operations

Twelve-month operations

–200

0

200

400

600

800

1,000

–200

0

200

400

600

800

1,000

Source : ECB.(1) Excluding the liquidity-providing effect resulting from the purchase of covered bonds.(2) The term of these operations corresponds to that of the reserve maintenance periods, i.e. approximately one month.

In the light of the improvement on the financial markets, the provision of liquidity in US dollars and Swiss francs had declined significantly at the end of the year under review. Thus, it was decided – by mutual agreement between the central banks concerned – to terminate these transactions after 31 January 2010.

The provision of liquidity via the open market opera-tions and use of the marginal lending facility must be backed by appropriate collateral in order to protect the Eurosystem against financial risks. However, the financial crisis had exerted pressure on the instruments which the counterparties could offer as collateral. On the one hand, the Eurosystem’s increased role as an intermediary in euro and foreign exchange had meant greater use of the avail-able collateral. Also, investors were demanding stricter guarantees on the secured loans market. Finally, many assets normally used as collateral had fallen significantly in value in a financial environment featuring strong risk aversion. For that reason, the Eurosystem had decided, on 15 October 2008, to extend the list of eligible assets. First, the minimum rating for debt securities other than asset-backed securities had been cut to BBB-. Next, a wider range of marketable debt instruments was accepted, if need be with application of additional haircuts, i.e. reductions with respect to the market value of the eligible

50

assets applied by the Eurosystem. Finally, securities in US dollar, the pound sterling, and the Japanese yen were also accepted, provided they were issued in the euro area.

Despite all these measures, some financial institutions still had to resort to Emergency Liquidity Assistance (ELA). These operations do not come under monetary policy but are the responsibility of the national central banks of the Eurosystem. They are in fact solely intended to safeguard financial stability in order to prevent the banks from encountering potentially fatal liquidity problems. Although the amounts made available – in both euro and foreign currencies – were relatively small at the level of the Eurosystem, they were crucially important to these individual institutions, most of which were “systemic”, i.e. of such a size that their failure could seriously endanger the financial system as a whole. Shortly after reaching a record level during the autumn of 2008, recourse to ELA subsided significantly.

Since bids were satisfied in full at a fixed rate in all open market operations, the provision of liquidity was entirely dictated by demand. On average, the consolidated

banking sector thus recorded a liquidity surplus, which exerted downward pressure on the Eonia overnight inter-est rate. Unlike during the period before the crisis deep-ened in September 2008, that downward deviation was not a problem ; it was even desirable in that it meant a further easing of the monetary policy stance. This down-ward pressure on Eonia therefore reinforced the effective-ness of the Governing Council’s decisions on key interest rates. As already stated, the ECB Governing Council in fact cut the central key rate by a total of 325 basis points between 15 October 2008 and 15 May 2009, thus reduc-ing it to 1 p.c.

Even when the provision of liquidity is very ample, Eonia cannot decline indefinitely : the interest rate on the deposit facility in fact forms a floor for the overnight interest rate, since the banks can use it to deposit their surplus liquidity overnight. The overnight interest rate can therefore still be steered in a situation of abundant liquid-ity. Use of the deposit facility expanded strongly after the decision had been taken to fulfil all bids at the fixed rate, so that from 8 October 2008 to 20 January 2009 an aver-age of 209 billion euro was placed via the deposit facility.

chart 25 uSe oF the depoSit Facility and Money Market intereSt rateS in the euro area

(daily data)

0

1

2

3

4

5

6

7

2007 2008 2009 20100

50

100

150

200

250

300

350

Use of the deposit facility (in billions of euro) (left-hand scale)

Interest rate on the deposit facility

Eonia

Interest rate on the marginal lending facility

Central key rate

Three-month Euribor

Before the crisis First phase of the financial crisis Second phase of the financial crisis

(right-hand scale)

Sources : Thomson Reuters Datastream, ECB.

51


On 21 January 2009, the spread between the rate on the marginal lending facility and that on the deposit facility was restored to 200 basis points, thus making the deposit facility less attractive. The aim was to increase the cost of intermediation by the Eurosystem and hence to encour-age the banks to renew their interbank market activities. As the operation of that market was steadily improving, demand in refinancing operations, and therefore the amount placed via the deposit facility, thus declined. Between 21 January and 24 June, an average of 66 billion euro was placed via the deposit facility. However, when cutting the central key rate by 25 basis points in May, the Governing Council decided to reduce the size of the cor-ridor again by leaving the deposit facility rate unchanged at 0.25 p.c., i.e. a strictly positive interest rate, and cut-ting the rate on the marginal lending facility by 50 basis points. The purpose of this was to try to prevent interbank market activity from coming to a halt if overnight interest rates were too low.

Expansion of enhanced credit support

In the spring, in view of the key role of the banks in financing the economy of the euro area, and the persist-ence of downside risks to price stability, the Eurosystem approved a package of supplementary measures to enable the banks to perform their role to the full. The aim of that decision was to supplement the enhanced credit support measures, which already included refinancing operations in the form of fixed-rate tenders with full allotment, the extension of the list of eligible collateral, the expansion of the volume of longer-term operations and the provision of liquidity in foreign currencies. Three new measures are important here.

First, the Governing Council expanded the scope for longer-term refinancing by announcing three fixed-rate operations with a term of one year and full allotment. The ECB stated that the fixed rate for the first opera-tion, allotted on 24 June, would be the central key rate but, depending on the circumstances at the time of the operations on 30 September and 16 December, a pre-mium might then be added to the rate. The September operation was conducted at the key policy rate prevailing at the time of the allotment, as was the June operation, whereas the interest rate for the December operation will be the average key policy interest rate prevailing during the period of the operation. The offer of one-year fixed-rate financing was warmly welcomed by the banking sector. Via the June operation, the ECB allotted 442 billion euro, and the banks bid for 75 and 97 bil-lion euro respectively in the September and December operations.

There was a further substantial rise in the surplus liquid-ity on the money market following these supplementary twelve-month operations, although that increase was subsequently offset to some extent by a fall in demand for the other open market operations. Thus, the deposit facility collected an average of 127 billion euro between 25 June and 31 December. Consequently, Eonia declined further to an average of 0.35 p.c. from 25 June – except for the last day in each reserve maintenance period when the Eurosystem systematically conducted a liquidity-absorbing fine-tuning operation –, or 65 basis points below the central key rate and barely 10 basis points above the rate on the deposit facility. This illustrates how the rate on the deposit facility, rather than the central key rate, became the benchmark for overnight interest rates in periods of permanent surplus liquidity. The ECB Governing Council also stated that it was satisfied with the outcome of the twelve-month operations and the levels reached by the money market rates, which in turn influenced expectations regarding short-term interest rates. Expectations of a rise in the overnight interest rate therefore shifted further into the future, exerting down-ward pressure on longer-term money market rates.

chart 26 Short-terM intereSt rate expectationS in the euro area (1)

May

20

09

Jun.

20

09

Sep.

20

09

Nov

. 20

09

Jan.

201

0

Mar

. 201

0

May

201

0

Jun.

201

0

Sep.

201

0

Nov

. 201

0

Jan.

201

1

Mar

. 201

1

May

201

1

Jun.

201

1

0.0

1.0

2.0

3.0

4.0

6 May 2009

3 July 2009

4 September 2009

Expectations on :

4 December 2009

0.0

1.0

2.0

3.0

4.0

Sources : Bloomberg, NBB.(1) Measured on the basis of the implicit one-month interest rate derived from rates

on Eonia swaps with varying maturities.

52

chart 27 SpreadS between euribor and the oVernight index Swap (oiS) (1)

(daily data, basis points)

2007 2008 20090

50

100

150

200

250

0

50

100

150

200

250

At one month

At three months

At six months

At twelve months

Source : Thomson Reuters Datastream.(1) Fixed rate paid by the counterparty of an interest rate swap receiving the

overnight interest rate (Eonia) for a given term.

The downward trend in short-term interest rates was encouraged by the decline in risk premiums on the unse-cured segment of the money market. The fall in unse-cured interest rates, such as Euribor, which play a key role in the transmission of monetary policy stimuli to the real economy, was therefore more marked than the decline in secured interest rates. This reduction in the risk premium on various maturities is in line with a general improvement in the economic and financial situation, thanks partly to the decisive actions taken by central banks worldwide.

Second, the ECB decided to buy a portfolio of covered bonds for a total of 60 billion euro. The purchases would be spread between July 2009 and June 2010, buying on both the primary and secondary market. The covered bond portfolio totalled almost 29 billion euro at the end of December 2009, corresponding to a balanced spread of purchases over time. There were two reasons for choosing covered bonds.

On the one hand, these instruments are issued mainly by banks. By increasing liquidity on this market segment, seriously affected by the financial crisis, and by reducing the spreads in relation to risk-free rates, the aim is to improve the long-term financing of the banks and thus to support lending to the non-banking sector. Since the

banking sector had also become a substantial holder of these instruments, purchases on the secondary market supply additional liquidity to the banks, or enable them to reduce their leverage without depressing the volume of loans to the non-banking sector.

On the other hand, covered bonds have a low risk profile since their holder has a dual claim : a claim on the bond issuer and, in the event of the latter’s default, a claim on a pool of underlying assets (often mortgage loans or loans to the public sector) which the issuer must hold as col-lateral. Thus, the risk entailed in these purchases remains manageable for the Eurosystem.

Third, from the beginning of July, the EIB became an eli-gible counterparty for Eurosystem monetary policy opera-tions on the same terms as any other counterparty. This enabled the ECB to supplement its credit support meas-ures, as the EIB is a key European institution particularly active in lending to euro area SMEs.

Announcement of the gradual phasing-out of certain exceptional measures in 2010

The question is whether all these measures, which led to low interest rates and very abundant liquidity for the banking sector, did not result in an excessively expan-sionary monetary policy stance which, sooner or later, could drive up inflation or create an asset price bubble. That seems unlikely since the Eurosystem’s measures aimed specifically to counteract the negative interactions between a deteriorating economic situation and a vulner-able banking sector in order to maintain the creation of money and credit at a normal level. In that context, the Governing Council reiterated on several occasions that, by means of the monetary policy measures adopted, it had ensured that liquidity and credit remained available and, more generally, it had contributed to the recovery of economic activity. However, it also pointed out that the recovery was still too recent and too fragile, and there was therefore no need as yet to abandon the particu-larly accommodating monetary policy stance. When this Report went to press, the inflationary risks were indeed still limited, given the continuing rather gloomy outlook for economic activity. Moreover, lending to the real econ-omy was still weak, so that there was little risk of financial imbalances developing.

However, that does not mean that such an expansionary monetary policy will continue to be justified in the future, if the economic prospects improve and if upside risks once again threaten price stability. Regarding the extraordinary measures relating to liquidity, the Governing Council

53


stressed from the start that they would be temporary, and in the second half of the year stated that, with the con-tinuing improvement in the economic and financial envi-ronment, not all the measures will remain equally useful and that some may be phased out. On that basis, against the backdrop of a recovery on the financial markets and an improvement in the economic outlook, the Governing Council announced at its early December meeting that it did not wish to renew a number of longer-term operations previously introduced. It thus decided that the longer-term refinancing operation with a maturity of twelve months, conducted on 16 December, would be the last of that type, and the same applies to the six-month operation conducted on 31 March 2010. It was also announced that the number of three-month operations would be reduced in the first quarter of 2010 from two to one per month. These three- and six-month operations in the first quarter of 2010 will continue to be conducted in the form of fixed rate tenders with full allotment. At the same time, it was made clear that the shorter-term operations – the weekly main refinancing operations and the special term opera-tions – would continue to be conducted at a fixed rate with full allotment for as long as necessary, and at least until the end of the third reserve maintenance period in 2010, namely 13 April. The announcement of this gradual phasing-out of the exceptional measures came as no sur-prise, and did not affect interest rate expectations.

A credible exit strategy for the future, embedded in the Eurosystem’s monetary policy strategy, enhances the effectiveness of the policy pursued. Long-term inflation expectations thus remain firmly anchored and long-term nominal interest rates can decline, as can real interest rates when inflation risk premiums are low. During the financial crisis, the long-term inflation expectations of professional forecasters and market operators remained

chart 28 long-terM intereSt rateS and inFlation expectationS

(daily data, unless otherwise stated)

BB BBB B

BB B BBB B BBB B BBB BBBBBBBBBBBBB B

BBBB

0

1

2

3

4

5

6

199

9

2001

2003

2005

2007

200

9

0

1

2

3

4

5

6

Ten-year German Bund

Inflation forecast at the five-year horizon (1), ECB quarterly Survey of Professional Forecasters

Five-year forward five years ahead inflation swap rate

B

Sources : Bloomberg, Thomson Reuters Datastream, NBB.(1) Annual percentage changes.

close to levels consistent with the quantitative definition of price stability. It was precisely the credibility of the Eurosystem that allowed monetary policy to take a par-ticularly accommodating stance.

Box 5 – Unconventional monetary policy of the Eurosystem and the US Federal Reserve

This box reviews the unconventional monetary policy measures adopted in the euro area and in the United States. It explains why the different methods of financing the non-financial private sector in the two economies caused the Eurosystem to concentrate its measures mainly on the banking sector, while the American Federal Reserve System, also called the Federal Reserve, provided substantial support for specific financial market segments, too. The differences between the policies adopted are illustrated on the basis of an analytical presentation of the balance sheets of the two monetary authorities, though the various items need to be interpreted with a degree of caution.

4

54

There are major differences in the external financing of households and non-financial corporations between the euro area and the United States. In the euro area, credit institutions provide the bulk of the external financing for both households and non-financial corporations, accounting for 75 and 72 p.c. respectively, in stark contrast to the United States where this channel provides only 30 and 21 p.c. of the finance.

Across the Atlantic, the non-bank external financing of households consists in particular of loans by private companies which issue ABS (asset-backed securities), and mortgage loans granted by the government-sponsored enterprises (GSEs), such as Fannie Mae and Freddy Mac. Both economies use issues of shares and debt securities for the non-bank financing of enterprises, although this practice is far more widespread in the United States. Yet these differences do not mean that little use is made of securitisation operations in the euro area. Credit institutions in fact use this technique to make it easier to finance their loans to the non-bank sector. Nevertheless, securitisation activity is less common in the euro area than in the United States.

The external financing structure is a vital parameter taken into account in the choice of the non-standard monetary policy measures which were applied. While the enhanced credit support provided by the Eurosystem was almost exclusively aimed at bank lending, the Federal Reserve also directed its credit easing measures at specific financial market segments seriously affected by the crisis, and tried to drive down the risk-free yield curve by purchasing US Treasury bonds.

external Financing oF the non-Financial Sector in the euro area and in the united StateS

(average annual flows between 2004 and 2008, percentages of the total)

0

20

40

60

80

100

0

20

40

60

80

100

0

20

40

60

80

100

0

20

40

60

80

100

Loans by credit institutions (1)

Other

Euro area

HOUSEHOLDS

United States

Euro area United States

NON-FINANCIAL ENTERPRISES

Loans by private ABS issuers

Loans by GSE ABS issuers

Sources : Federal Reserve, ECB, NBB.(1) For the United States, these are loans by commercial banks, credit unions and savings institutions.

4

55


Expressed as a percentage of GDP, the Eurosystem’s balance sheet – i.e. the consolidated balance sheet of the ECB and all the central banks of the countries forming the euro area – is bigger than that of the Federal Reserve. The surge in the outstanding volume of banknotes following the introduction of euro notes and coins caused the Eurosystem’s balance sheet to grow faster than that of the Federal Reserve. Having regard to the resulting substantial liquidity deficit on the money market – exacerbated by the amount of reserves which euro area credit institutions are required to hold – the bulk of the assets on the Eurosystem’s balance sheet, even before the financial crisis, consisted of loans to credit institutions. In contrast, in the United States, the Federal Reserve’s injections of liquidity into the economy prior to the crisis consisted mainly of purchases of US government debt

aSSetS on the balance SheetS oF the euroSySteM and the uS Federal reSerVe

(percentages of average GDP during the period 2007-2009)

0

5

10

15

20

25

2007 2008 2009 2007 2008 20090

5

10

15

20

25

Purchases of government securities (6)

Government securities traditionally held

Lending to financial institutions related to monetary policy (3)

Claims in foreign currencies related to foreign exchange swaps

Asset-backed securities, commercial paper and the money market (5)

Debt securities issued or covered by GSEsOther assets

Lending to credit institutions related to monetary policy, of which :

Claims on credit institutions unrelated to monetary policy (1)

Claims in foreign currencies (2)

Covered bonds

EUROSYSTEM FEDERAL RESERVE

Support for specific markets : Support for specific markets :

Main refinancing operations

Longer-term operations

Other assets

Support for financial institutions unrelated to monetary policy (4)

Sources : IMF, Thomson Reuters Datastream, Federal Reserve Bank of Cleveland, ECB, NBB.(1) Including emergency liquidity assistance in euro.(2) Including emergency liquidity assistance in foreign currencies, the Term Auction Facility in US dollar and swap agreements concluded with other central banks.(3) The Term Securities Lending Facility, repo’s with primary dealers, the Term Auction Facility, the discount window and the Primary Dealer Credit Facility.(4) Support provided for Bear Stearns and AIG.(5) The Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility and the Commercial Paper Funding

Facility.(6) For the purpose of credit easing.

4

56

4

securities, the volume being adjusted according to the demand for banknotes. The residual, very small liquidity deficit was settled via repos with a small number of primary dealers.

From August 2007, there were fundamental changes in the Eurosystem’s balance sheet and that of the Federal Reserve. During the first phase of the financial crisis, it was mainly the balance sheets’ composition that changed, as their total size followed the same pattern as in the past. The Eurosystem financed a larger proportion of the money market deficit via longer-term operations, while the Federal Reserve expanded the volume of lending to financial institutions, notably by accepting more counterparties, but at the same time reduced its portfolio of government securities. In the euro area, there was no need to increase the number of counterparties since the Eurosystem was already dealing with virtually all credit institutions.

In response to the worsening financial crisis, balance sheets expanded considerably. The Federal Reserve further augmented the volume of lending to financial institutions, though without neutralising the resulting increase in the reserves by selling government debt securities as it had done previously. Similarly, the Eurosystem substantially boosted lending to the banks by launching fixed rate tenders with full allotment – including for longer maturities – and by extending the list of eligible assets. Furthermore, in both currency areas, certain financial institutions received support outside of the monetary policy operations. Thus, a number of euro area central banks supplied emergency liquidity in euro and in foreign currencies. For its part, the Federal Reserve also provided more structural, longer-term financing, largely guaranteed by the State, to resolve the solvency problems of financial institutions such as the insurer A IG and the investment bank Bear Stearns. In the euro area, support measures for institutions suffering solvency problems were also set up, but solely by the fiscal authorities, without recourse to central bank financing. The separation between the responsibilities of the central bank and those of the fiscal authorities is in fact clearer here.

In addition, central banks worldwide were able to use mutual swap agreements and credit lines to supply their domestic banking sector with liquidity in foreign currencies, primarily US dollars. In return for these dollars, the Federal Reserve holds assets on an account opened with the central bank concerned, and therefore has a claim in a foreign currency. The strong expansion of the Eurosystem’s foreign currency claims is due mainly to the US dollars which the Eurosystem provided to the European banking sector via the Term Auction Facility. Just as in the case of the Federal Reserve, the Eurosystem’s swap agreements with other central banks gave rise to claims in foreign currencies.

As certain markets which perform a key role in the financing of the American economy were in danger of paralysis following the collapse of Lehman Brothers, the Federal Reserve also had to adopt support measures in their favour. Thus, programmes targeting ABS and commercial paper markets were set up, while a new lending facility was established at the Federal Reserve for money market investment funds. The languishing American housing market had also increased the financing costs of the government-sponsored enterprises active in this market, so that the Federal Reserve decided to play a bigger role here, too. It therefore bought debt instruments issued by those agencies and, subsequently, mortgage-backed securities backed by them.

A last element in the credit easing policy conducted by the Federal Reserve was its government securities purchasing programme, aimed at improving the operation of the private credit markets by reducing the long-term risk-free interest rate. This provided a way of pursuing a more expansionary monetary policy, whereas a further reduction in the key interest rates, which had already been cut close to zero, had become virtually impossible.

In May, the Eurosystem decided to buy a portfolio of covered bonds totalling 60 billion euro. These instruments are an important channel whereby banks finance their lending, mainly but not exclusively in the form of mortgage loans, and that particular market segment was seriously affected by the financial crisis. This covered bond purchase programme may look modest compared to the Eurosystem balance sheet or the programmes which the Federal Reserve set up to assist specific financial market segments, but the Eurosystem also provided indirect support for

4

57


markets essential to bank financing by allowing the banks to use a particularly broad range of assets as collateral in its refinancing operations. In addition, the list of collateral, which already included marketable assets – asset backed securities, commercial paper, etc. – was further extended when the crisis deepened in October 2008. This made it easier for the banks to obtain refinancing from the Eurosystem.

Once the economic outlook improves and financial stability is sufficiently ensured, it will be time to phase out the non-standard measures adopted by the Eurosystem and the Federal Reserve. Some of them have already diminished in importance during 2009. Thus, in both the euro area and the United States, the volume of liquidity supplied to credit institutions within the framework of monetary policy has already declined from the very high levels of the final quarter of 2008. Lending by the Eurosystem in foreign currencies, more especially in US dollars, has also been greatly reduced. The gradual decline in the use of these instruments has been partly automatic, either because they were intended from the start to operate for a limited period, or because they were available on conditions which were only attractive when the crisis was at its height. This automatic effect will also facilitate the further withdrawal of the non-standard measures. Conversely, there is no equally automatic downsizing of the portfolios of securities purchased, which are much larger for the Federal Reserve than for the Eurosystem. However, those securities can be sold once sufficient normality has returned on the market segments in question, though it is possible that they may be held to maturity.

Depending on macroeconomic developments and the resulting risks to price stability, it could also prove useful to adopt a more restrictive monetary policy stance while maintaining the instruments necessary to support certain segments of the financial markets if they have not recovered sufficiently. In those circumstances, to avoid the risk of money market interest rates remaining close to zero, despite increases in the key rates, the Federal Reserve was granted authority by law, in October 2008, to remunerate the reserves of financial institutions. That measure created a lower limit for the money market rate so that this rate can be steered even in a situation of abundant liquidity. Such a system had already been in force in the euro area from the start of monetary union : the required reserves are remunerated and the banks can also deposit their surplus liquidity via the Eurosystem’s deposit facility, albeit at an unattractive rate. The interest rate on the deposit facility therefore determines the lower limit of the market interest rate, whatever the quantity of liquidity supplied. Moreover, both the Eurosystem and the Federal Reserve have instruments at their disposal, if necessary, for quickly mopping up the liquidity provided, in order to neutralise the effect on money market rates.

Closer examination therefore shows that the differences between the non-standard monetary policy measures adopted by the Eurosystem and the Federal Reserve are attributable mainly to differences in the monetary policy transmission mechanisms, which are themselves due to specific structural characteristics of the method of financing the economy and implementing monetary policy. They therefore do not necessarily reflect any difference in the monetary policy stance. Moreover, even if that stance is particularly accommodating, as was still the case when this Report went to press, both central banks still have the necessary instruments at their disposal for altering the monetary policy stance, if need be.

2.4 Transmission of monetary policy

Ordinarily, monetary policy decisions have a direct influ-ence on very short-term interest rates on the money market and the interbank market, whereas their influence on other interest rates, both short- and long-term, is far more indirect. However, during the year under review the Eurosystem no longer confined itself to steering the inter-est rate on the overnight market (Eonia), but also tried, by supplying liquidity at one, three, six and twelve months,

to exert a more direct influence than in normal times over the yield curve on the money market at those maturities. In the first half of the year, those money market rates declined in line with the successive cuts in the key rates and expectations regarding the latter. Moreover, interest rates on secured loans with the shortest maturities – par-ticularly three and six months – dropped to levels below the central key rate, since the policy on supplying liquidity had created surplus liquidity on the money market. At the end of June, the first one-year refinancing operation,

58

which was accompanied by strong growth of the liquid-ity surplus, drove the money market rates lower still. As normality gradually returned on the financial markets and

chart 29 Money Market intereSt rateS in the euro area

(daily data)

0

1

2

3

4

5

6

2008 20090

1

2

3

4

5

6

Three-month

Eonia swaps Euribor

Six-month

Twelve-month

Source : Thomson Reuters Datastream.

confidence between banks was restored, the risk premi-ums included in the interest rates on unsecured loans declined so that the drop in those interest rates was even more marked.

During the year under review, with the substantial reduc-tion in the key policy interest rates, monetary policy acquired an unprecedentedly expansionary stance whereby real short-term interest rates – i.e. interest rates deflated by the inflation expected one year ahead, on the basis of the ECB Survey of Professional Forecasters – declined steeply and actually became negative. Moreover, owing to the effect of the enhanced credit support measures, real short-term market interest rates such as three-month Euribor, which is an important benchmark for financial contracts, dropped below the key policy rate from July 2009. Such an expansionary stance was only possible thanks to the firm anchoring of inflation expectations. In view of the downward pressure on prices, those expecta-tions declined in 2009 but remained clearly positive so that the cuts in the nominal key rates continued to result in a reduction in real terms.

The appreciation of the real effective euro exchange rate during the year under review implied that actual monetary conditions were slightly more restrictive than the move-ment in real short-term interest rates would suggest. That constituted a reversal of the strong depreciation at the end of 2008, when investors had switched their investments

chart 30 Monetary conditionS in the euro area

199

9

2001

2003

2005

2007

200

9

199

9

2001

2003

2005

2007

200

9

75

85

95

105

115

125

135

145

155

80

85

90

95

100

105

110

115

120

Three-month Euribor

REAL SHORT-TERM INTEREST RATE, EX ANTE (1)

Effective exchange rate (2) (left-hand scale)

EURO REAL EXCHANGE RATE(indices 1st quarter 1999 = 100)

Exchange rate against the US dollar (3) (right-hand scale)

Key policy interest rate

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Sources : Thomson Reuters Datastream, ECB.(1) Interest rate deflated by inflation expectations one year ahead, on the basis of the ECB Survey of Professional Forecasters.(2) Effective euro exchange rate against the currencies of the twenty-one main trading partners, deflated by the ratio between the CPIs.(3) Euro exchange rate against the US dollar, deflated by the ratio between the CPIs.

59


into assets traditionally viewed as a safe haven in times of severe tension, namely American financial market securi-ties and, in the second instance, securities denominated in Swiss franc. As the tensions and risk aversion waned, these flows were reversed, causing the euro to appreciate. During the year, the short-term volatility between the euro and the US dollar varied according to fluctuations in inves-tors’ risk aversion, so that whenever tension increased on the financial markets, the euro depreciated temporar-ily, and vice versa. The euro’s tendency to appreciate in 2009 is also attributable to the relative variations in the economic outlook for the two economies, and to expec-tations regarding the respective monetary policy stance, including as regards crisis exit strategies. The euro gained not only against the US dollar but also against the emerg-ing economy currencies implicitly or explicitly linked to the American currency and, in the second half of the year, against the pound sterling once it became evident that the British economic recovery would be more problematic than that of the euro area, and might depend on the con-tinuation of a very accommodating monetary policy in the United Kingdom for a fairly long period. The euro became relatively stable against the Swiss franc from March 2009, once the Swiss National Bank had intervened on the

chart 31 Financing conditionS For Monetary Financial inStitutionS in the euro area

(percentages, unless otherwise stated)

2003 2004 2005 2006 2007 2008 20090

1

2

3

4

5

6

7

8

2008 2009

0

1

2

3

4

5

6

7

8

Five-year senior bank bond

BANKS’ FINANCING COSTS

Three-month Euribor

Term deposits at one year

Deposits redeemable at notice of over 3 months

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

COVERED BOND MARKET(difference between yields on bonds with maturity of betweenfive and seven years and the corresponding swap interest rate (1),percentage points)

France

Germany

Spain

Announcement date

Implementation date

Eurosystem purchasing programme

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

Sources : Thomson Reuters Datastream, ECB.(1) Fixed rate paid in return for the short-term money market rate over a period of between five and seven years.

foreign exchange market to curb the deflation risk caused by a further appreciation of its currency.

The expansionary monetary policy stance in the euro area was transmitted mainly via the MFIs, given their key role in the financing of the other sectors of the economy. Thus, decisions on interest rates and the enhanced credit support measures undoubtedly exerted a downward influ-ence on financing costs for banks in the Eurosystem, and they largely passed that on to their customers. Apart from the impact of monetary policy, the guarantees provided by governments and the general improvement in risk perception benefited the MFIs by reducing their financing costs, thanks to the lower interest rates on deposits and bank bonds. Furthermore, the abundant liquidity provided by the Eurosystem was a contributory factor in supplying sufficient liquidity even for banks without ready access to the interbank markets. Moreover, the Eurosystem’s programme for the purchase of covered bonds triggered a revival on this key market segment for European banks as soon as the programme was announced in May, and even more so once it was actually implemented from July 2009. There was a surge in activity on both the primary and secondary markets in covered bonds, and the spread

60

between interest rates on these instruments and the fixed rate for a swap of similar maturity narrowed considerably. In the closing months of the year, that spread stabilised at a level comparable to that seen at the beginning of September 2008.

The reduction in banks’ financing costs was largely passed on to the other sectors, namely non-financial corporations and households. During the year under review, short-term debit interest rates fell sharply in nominal terms, by over 2 percentage points. That fall curbed the contraction of private sector investments and household consumption while easing the burden on existing contracts at variable rates. As often happens when the key rates are cut, debit interest rates fell by slightly less than interest rates on the money market and the interbank market. That was particularly the case in 2009 owing to the exceptionally low level of the key interest rates and rates on the inter-bank market, and also because the banks faced a decline in other income sources. Furthermore, the scale of the contraction in activity obliged the banks to charge their customers a higher credit risk premium. Longer-term debit interest rates also followed a downward trend, promoted by the general decline in interest rates on long-term

chart 32 Financing conditionS oF Monetary Financial inStitutionS in the euro area: debit intereSt rateS

(monthly data)

2003 2004 2005 2006 2007 2008 20091

2

3

4

5

6

7

1

2

3

4

5

6

7

Non-financial corporations, over 1 million euro, at up to one year

Non-financial corporations, up to 1 million euro, at up to one year

Households, house purchase, at up to one year

Households, house purchase, between five and ten years

Non-financial corporations, over 1 million euro, at more than five years

Source : ECB.

government bonds in the second half of the year. The banks’ intermediation margin was boosted by the decid-edly upward slope of the yield curve. The improvement in the banks’ profitability resulting from these factors should help to resolve their balance sheet problems and thus become a factor supporting lending.

Following the severe upheaval on the bond market in late 2008 and early 2009, the remainder of the year under review brought a tendency towards normalisation, and hence a decline in risk premiums. In addition, the suc-cessive interest rate cuts made by the Eurosystem and the credibility of its monetary policy contributed to the decline in the average yield on long-term government bonds in the euro area. During the initial months of the year under review, the spread between the average yield on government bonds issued by euro area countries and the yield on the German Bund remained substantial. Capital flows into safe haven securities were subse-quently reversed so that these spreads became narrower. Investors also appeared to become steadily less concerned about the situation in the European banking sector and the need for further support measures by the national governments. During the remainder of the year, spreads between the German Bund and the securities of other sovereign issuers in the euro area increasingly reflected

chart 33 bond Market yieldS in the euro area

(daily data, bond maturities between seven and ten years)

2

3

4

5

6

7

8

9

10

11

200

9

2007

2005

2003

2001

199

9

2

3

4

5

6

7

8

9

10

11

Bonds issued by financial corporations

Bonds issued by non-financial corporations

Government bonds (1)

German Bund

Source : Thomson Reuters Datastream.(1) Synthetic index of bonds issued by euro area countries.

61


the economic and financial developments specific to each country. Thus, at the end of the year under review, yield differentials for a number of countries, including Greece and Ireland, for example, widened significantly as a result of investors’ concerns about the sustainability of their public finances.

The year under review also saw a large number of corpo-rate bond issues in the euro area. The tightening of bank lending criteria and the resurgence of interest in this type of assets among investors were certainly contributory fac-tors. At first, it was mainly large firms with a very high credit rating that were able to resort to the bond market for their external financing, but as risk aversion waned, firms with a lower rating were also able to obtain finance in that way. At the end of 2009, the yield on bonds issued by non-financial corporations was, on average, about 250 basis points below the yield at the start of the year,

and that fall was even more marked in the case of firms with the lowest rating. However, for small and medium-sized enterprises, the bond market is hardly an alternative to bank loans.

Overall, there was a remarkable improvement in financ-ing conditions in 2009, thanks to the combined effect of the fall in risk-free interest rates and the decline in risk premiums. In normal times, the transmission of monetary policy takes effect principally via its impact on risk-free interest rates. During the year under review, however, which was dominated by an exceptionally severe financial and economic crisis, monetary policy made a significant contribution to the decline in risk premiums, in particular by reducing the risk of continuing macroeconomic desta-bilisation, which the financial markets had seriously feared at one time. Seen from that angle, monetary policy was more effective than in normal times.

63

3.

output, ExpEnditurE and currEnt transactions in bElgium

Output, expenditure and current transactions in Belgium

chart 34 gdp growth in belgiuM FroM a hiStorical perSpectiVe (1)

(percentage changes in volume compared to the previous year)

1930

194

0

1950

196

0

1970

198

0

199

0

200

0

200

9

–5

0

5

10

15

20

–5

0

5

10

15

20

No

data

ava

ilabl

e fo

r 19

40

-19

46

e

Sources : Buyst E. (2), NAI, NBB.(1) Calendar adjusted data from 1996 onwards.(2) Buyst E. (1997), “New estimates for the Belgian economy”, Review of Income and Wealth, 43, 357-375.

3.1 Summary

Belgium felt the full impact of the global economic reces-sion in 2009. Over the year as a whole, GDP was down by an average of 3 p.c. in real terms, the most severe con-traction since the Second World War. From the 1960s to the present day, there had been only three other episodes of a year-on-year fall in GDP, namely 1.5 p.c. in 1975, 0.3 p.c. in 1981 and 1 p.c. in 1993.

As in most of the advanced economies, when the finan-cial crisis suddenly intensified at the end of 2008, activity was already in a cyclical downturn phase, due partly to

the very strong rise in commodity prices. In the wake of the extreme tensions triggered in September 2008 by the collapse of the American bank, Lehman Brothers, the recession very quickly spread in the fourth quarter of that year and at the beginning of 2009, mainly as a result of the paralysis of a substantial proportion of world trade and industrial production. The stock market crash, the tightening of lending conditions and, more generally, the highly uncertain economic context prevailing at that time also caused Belgian individuals and enterprises to become very reticent. Thus, apart from exports, it was also house-hold expenditure – on both consumption and investment in housing – and business expenditure – via both gross

64

chart 35 gdp in belgiuM and in the euro area

(data adjusted for seasonal and calendar effects, percentage changes in volume compared to the corresponding quarter of the previous year)

2002 2003 2004 2005 2006 2007 2008 2009–6

–5

–4

–3

–2

–1

0

1

2

3

4

5

–6

–5

–4

–3

–2

–1

0

1

2

3

4

5

Belgium

Euro area

Sources : EC, NAI.

fixed capital formation and stock reduction – that seri-ously depressed activity.

At its most severe, in the second quarter of 2009, the total reduction in GDP came to 4.2 p.c. However, the scale of this decline was smaller than the 5.1 p.c. recorded for the euro area as a whole. This relative resilience of activity in Belgium is probably due to the relatively sound income and debt position of Belgian firms and households at the outbreak of the crisis, that contributed in particular to a more moderate decline in private investment. Thus, unlike in some euro area economies, such as Ireland and Spain, construction was unaffected by the bursting of a housing market bubble.

As in the euro area, activity in Belgium returned to positive growth in the third quarter of 2009. Just as the general environment had been the main catalyst of the recession, so the improvement in that environment combined with the easing of the financial tensions also contributed to this incipient economic recovery via strengthening foreign demand and the restoration of business and consumer confidence. By its action – which was in line with the initiatives taken at European and international level – the Belgian government did much to help create the condi-tions for that development by avoiding the collapse of the financial system and by taking measures to cushion the most immediately harmful impact of the crisis for enter-prises and households.

Although the recession phase had thus ended by mid 2009, the sharp contraction in economic activity will continue to take its toll for some time, as it has significant repercussions on the organisation of production, the com-position of final demand and the formation of primary incomes within the economy. First, that contraction has so far only been partly reflected in the quantity of production factors used by enterprises. While the delayed effects of an economic downturn on employment and the capital stock are apparent in all business cycles, as explained in box 6 via a comparison with other recession episodes, that inertia was particularly marked in 2009 owing to the suddenness and severity of the fall in output. Thus, there was evidently less intensive use of capital since the ratio between the capital stock and actual output increased sharply. Similarly, where labour is concerned, the appar-ent productivity per employee declined by 2.4 p.c. on average, while hourly productivity was down by 1.4 p.c., despite the use of flexible working arrangements which the government had in fact extended. Consequently, the share of wages in value added increased by 2.6 percent-age points between 2007 and 2009 to 59.1 p.c., almost equalling the last peak attained between 2001 and 2003. That rise implies a corresponding fall in corporate profit-ability. Finally, in proportion to final demand, which is ultimately the engine of activity, government consump-tion and investment expenditure increased from 23.9 p.c. in 2007 – a level close to the average since 1995 – to 24.9 p.c. in 2008 and 26.4 p.c. in 2009. That was actually the only expenditure to support activity throughout 2009.

The process of restoring normality could sap the strength of the recovery for some time yet, as businesses will first have to absorb the surplus capacity at their disposal and thus re-establish their profitability before resuming a normal rate of investment and proceeding with new recruitment. That will depress households’ consumption. As a result, the stimulus applied by public spending will not soon be followed by one based on private demand. Moreover, as explained in section 3.4, the economic and financial crisis is also likely to reduce, at least temporarily, the potential growth rate of the Belgian economy.

65


chart 36 indicatorS oF the eFFectS oF the criSiS on MacroeconoMic balanceS

–3

–2

–1

0

1

2

3

4

54

55

56

57

58

59

60

21

22

23

24

25

26

27

–3

–2

–1

0

1

2

3

4

21

22

23

24

25

26

27

54

55

56

57

58

59

60

1997

199

9

2001

2003

2005

2007

1997

199

9

2001

2003

2005

2007

1997

199

9

2001

2003

2005

2007

1997

199

9

2001

2003

2005

2007

APPARENT LABOUR PRODUCTIVITY(annual percentage changes)

FINAL GOVERNMENT EXPENDITURE(percentages of GDP)

SHARE OF WAGES IN VALUE ADDED(percentages)

Per employee Per hour worked

200

9 e

200

9 e

200

9 e

200

9 e

RATIO BETWEEN THE CAPITAL STOCK AND OUTPUT

4.4

4.5

4.6

4.7

4.8

4.9

5.0

5.1

4.4

4.5

4.6

4.7

4.8

4.9

5.0

5.1

Sources : NAI, NBB.

Box 6 – Comparison of recent recessions in Belgium

The recession which hit the Belgian economy from the third quarter of 2008 is unusual in several respects. In order to measure the significance of that recession and identify its special characteristics, this box compares its scale and duration with those of the three other recessions affecting Belgium between 1980 – the start of the period for which the quarterly national accounts aggregates are available – and the present day. The peak of activity preceding each of these recessions occurred respectively in the first quarter of 1980, the first quarter of 1992 and the fourth quarter of 2000.

Apart from the change in activity measured by GDP, the movement in the main expenditure categories is also analysed. Such a comparison permits an assessment in historical terms of the seriousness of the current recession and the economic variables which contributed to it, and allows some conclusions to be drawn regarding the expected pattern of economic activity.

4

66

Scale oF the receSSion

In all, GDP contracted by 4.2 p.c. in Belgium between the second quarter of 2008 and the second quarter of 2009. The current recession was therefore much deeper than those which have occurred since 1980. In fact, between the peak and trough of activity, the recessions of 1980-1981, 1992-1993 and 2000-2001 had resulted in a maximum net loss of output totalling 1.8, 2.9 and 0.4 p.c. respectively. By extension, the current recession can be considered the worst since the Second World War since, on the basis of the annual data, the contraction of GDP had never exceeded 1.7 p.c. after 1946.

The 2008-2009 recession brought an exceptional decline in exports. Having fallen by 3.5 p.c. at the very most during previous recession episodes, exports were down by 16.5 p.c. between the peak and trough of the present recession. As explained in chapter 1 on the international environment, the steep fall in exports is due mainly to the global character of the recession. It was also exacerbated to some extent by an increase in the elasticity of foreign trade in relation to GDP growth, due partly to the increasing fragmentation of production chains beyond national borders, a characteristic of economic globalisation. In addition, various sources based on surveys indicate that, in a context of widespread mistrust regarding the financial soundness of trading partners, the more difficult

gdp and Main expenditure categorieS during receSSionS (1)

(indices, peak preceding the decline in the economic variable = 100) (2)

10 32 54 6 87 9 10 11 12 13 14 15 10 32 54 6 87 9 10 11 12 13 14 15

10 32 54 6 87 9 10 11 12 13 14 15 10 32 54 6 87 9 10 11 12 13 14 15

94

96

98

100

102

104

106

108

94

96

98

100

102

104

106

108

85

90

95

100

105

110

85

90

95

100

105

110

80

85

90

95

100

105

110

115

97

98

99

100

101

102

103

104

105

80

85

90

95

100

105

110

115

97

98

99

100

101

102

103

104

105

GDP EXPORTS

INVESTMENT BY ENTERPRISES PRIVATE CONSUMPTION

e

ee

e

2nd quarter of 2008 4th quarter of 2000 1st quarter of 1992 1st quarter of 1980Q0 :

Sources : NAI, NBB.(1) Quarterly volume data adjusted for seasonal and calendar effects. (2) The charts start in the quarter (Q0) in which GDP peaked prior to the recession : namely the first quarter of 1980, the first quarter of 1992, the fourth quarter of 2000

and the second quarter of 2008 respectively.

4

67


4

or more limited access to export credit insurance depressed foreign trade, at least temporarily. Finally, it is possible that protectionist measures may have hampered trade in certain products.

Given the high import-related content of exports, imports also declined significantly. On a net basis, foreign trade nevertheless depressed annual GDP growth by 1.1 percentage points during the first four quarters of the 2008-2009 recession, in stark contrast to previous recession episodes in which – except for the 1992-1993 recession – net exports had made a positive contribution. That outcome may be due to the global character of the crisis and the relative resilience of domestic demand during the present recession.

While the fall in both GDP and exports during this recession phase is exceptional in historical terms, the same does not apply to domestic demand, taking account, in particular, of the movement in business investment, investment in housing, and employment.

The cumulative decline in business investment totalled 8.4 p.c. in the third quarter of 2009. Despite the steeper fall in activity and export demand, that percentage is comparable to the figure recorded in previous episodes after a year of recession. However, the decline in gross fixed capital formation by enterprises had then persisted for more than five quarters, to reach an average maximum contraction of 10.5 p.c. A similar phenomenon is evident for private investment in housing, which recorded a more moderate fall than in the past, but it should be pointed out that the average response of these investments during previous recession periods is greatly influenced by the housing crisis of the early 1980s.

The resilience of investments is unusual, not only in the light of the contraction in activity, which was more severe than in the past, but also in comparison with the euro area where the decline in investments was steeper. The relatively subdued response of investments could be due to the fact that the debt levels of enterprises and households in Belgium were lower than in the euro area, making them both less worried about credit conditions and less concerned to reduce their debts.

In contrast, private consumption fell a little more sharply than during the previous recession phases, even though the fall was proportionately less than the reduction in GDP. That sharper fall is not attributable to the actual change in employment in terms of persons, which – as discussed in chapter 4 in a similar comparison with the other recession episodes – initially produced a relatively more moderate response. As explained in box 8, households stepped up their savings ratio considerably, partly as a precaution, as they expected a steep rise in unemployment in a highly uncertain climate, and partly as a compensatory move, in a desire to rebuild their financial assets following the particularly severe impact of the substantial losses on their equity portfolio.

duration oF the receSSion

As the recovery which began in the third quarter of 2009 was maintained in the next quarter, economic activity bottomed out after about four quarters, as in the previous recessions. In the past, it then took an average of five quarters from that low point before economic activity returned to the level prevailing before the contraction, although that time lapse varied significantly from one recovery to another. Thus, in the case of the 1980-1981 recession, the recovery had been particularly difficult and it was only after ten quarters that activity had regained its previous peak level. Obviously, the scale of the recession is also a factor. In 2000-2001, when the recession had been less severe, GDP had needed only one quarter to regain its previous peak. In view of the depth of the current recession, it will probably take longer than in previous recessions before GDP returns to its previous high.

However, the timing of the trough and the recovery period needed to regain the previous peak level vary greatly from one expenditure category to another. Experience has shown that exports and private consumption are generally the first to show signs of recovery. In fact, while these two variables are already picking up, investment and employment still require significant adjustment. On average, the decline in investment and employment is

68

spread over a period of nine to ten quarters, so that these two variables reach their lowest point later than GDP. Moreover, they take longer to revive than GDP.

riSk FactorS For the end oF the receSSion in belgiuM

Although the decline in investment and employment was moderate during the year under review, it could prove persistent. The response of these two variables is crucial for paving the way to a sustained recovery. That recovery could therefore prove more laborious than in the past, especially as the financial crisis, compounding the effect of demand, could contribute to downward pressure on investment owing to the more difficult access to financing.

The above analysis also shows that it is exports which, historically speaking, account for the exceptional scale of the 2008-2009 recession. As is generally the case for very open economies, it is also exports that could start the cyclical upturn in Belgium. Leaving aside the uncertainty over the strength of the recovery in other countries, Belgium’s structural handicap in terms of competitiveness – reflected in a virtually systematic tendency to record weaker export growth than neighbouring countries – could impair the Belgian economy’s ability to take full advantage of the opportunities offered by the revival in world trade.

Duration anD scale of perioDs of recession in Belgium (1)

Average of the three previous recessions (1980-1981, 1992-1993, 2000-2001)

Recession 2008-2009

Duration of the recession (2)

Scale of the recession (3)

Duration of the recovery (4)

Scale (3)

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 –1.7 5 –4.2

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 –3.2 4 –16.5

Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 –5.8 6 –16.1

Private consumption . . . . . . . . . . . . . . . . . . . . . . . . 3 –1.0 3 –2.2

Investment by enterprises . . . . . . . . . . . . . . . . . . . . 10 –10.5 6 –8.4 *

Investment in housing . . . . . . . . . . . . . . . . . . . . . . . 9 –23.0 6 –6.1 *

p.m.Domesticemployment . . . . . . . . . . . . . . . . . . 9 –2.1 10 –1.1*

Sources : NAI, NBB.(1) The activity peak preceding the recession occurred respectively in the first quarter of 1980, the first quarter of 1992, the fourth quarter of 2000

and the second quarter of 2008. (2) Number of quarters between the peak and the trough, including the trough.(3) Loss in volume up to the trough, as a percentage of the starting level. For the present recession, an asterisk indicates the economic variables for which the latest

available figure (third quarter of 2009) was still falling.(4) Number of quarters needed following the trough to regain the peak level recorded before the recession.

3.2 Activity

In Belgium, the rate of contraction in activity was at its height at the end of 2008 and in early 2009. While the level of GDP had fallen only slightly, by 0.2 p.c., in the third quarter of 2008, it declined dramatically in the ensu-ing two quarters, first by 2.1 p.c., then by 1.7 p.c. In terms

of both speed and scale, that was by far the sharpest fall since 1980, when the national accounts aggregates first became available on a quarterly basis. That fall was borne out by the Bank’s business survey indicators, which slumped to their lowest level ever recorded. However, the fall was halted by the second quarter of 2009, since the reduction in GDP was then only 0.1 p.c.

69


chart 37 gdp and Value added in the Main brancheS oF actiVity

(volume data adjusted for seasonal and calendar effects, unless otherwise stated)

20092006 2007 2008–15

–10

–5

0

5

10

20092006 2007 2008–40

–35

–30

–25

–20

–15

–10

–5

0

5

10

–15

–10

–5

0

5

10

–5

–4

–3

–2

–1

0

1

2

3

4

Percentage changes compared to the corresponding quarter of the previous year

Percentage changes compared to the previous quarter

GDP (left-hand scale)

Overall synthetic business survey curve (1)

(right-hand scale)

Smoothed series

Gross series

GDP AND BUSINESS SURVEY INDICATOR

Industry

Construction

Market services

Non-market services

VALUE ADDED(percentage changes compared to the corresponding quarter of the previous year)

Gross value added per branch

GDP

e

e

Sources : NAI, NBB.(1) Seasonally adjusted data

The year-on-year decline in GDP reached 4.2 p.c. in mid 2009. The main branches of activity contributed to that fall, with the exception of non-market services. As usual, that branch maintained positive growth of value added, amounting to around 1.2 p.c., since the activity of its main components – which include general government, education and health care – were hardly affected by the fluctuations in the economy.

In contrast, owing to its closely intertwined production processes, which are increasingly organised internation-ally, and the importance of foreign markets, it was indus-try that suffered most from the collapse of world trade. In all, the year-on-year change in value added was converted from slightly positive growth of 0.2 p.c. in the third quar-ter of 2008 to a low point of –11.2 p.c. in the second quarter of 2009. As explained in box 7, the dispersion of the results of the various branches of industry is due largely to their degree of international openness, as the most exposed branches generally suffered a more severe

contraction in activity than those which focus more on the domestic market.

Market services did not escape the sharp deterioration in the general business climate. True, the decline in activity was initially moderate, and less rapid than in industry, as value added dropped by only 0.4 p.c. in the fourth quarter of 2008 compared to the corresponding quarter of the previous year, but the decline intensified signifi-cantly thereafter to reach 4.1 p.c. in the second quarter of 2009. That fall was apparent in most market services, albeit for differing reasons. On the one hand, logistical and transport activities, in common with the wholesale trade – in Belgium and more generally in Europe – felt the direct impact of the contraction in the activity of indus-trial firms, where their input is substantial. Also, business services – e.g. consultancies and IT companies – had to contend with cost-cutting measures introduced by their customers in a context of great uncertainty over the eco-nomic outlook. Finally, apart from businesses, households

70

chart 38 buSineSS SurVey indicatorS in the Main brancheS oF actiVity

(seasonally adjusted data, unless otherwise stated)

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009–60

–40

–20

0

20

40

60

60

65

70

75

80

85

90

–50

–40

–30

–20

–10

0

10

20

30

–40

–50

–30

–20

–10

0

10

20

30

–50

–40

–30

–20

–10

0

10

20

30

–50

–40

–30

–20

–10

0

10

20

30

–60

–40

–20

0

20

40

60

70

80

90

100

110

120


Business-related services

Smoothedseries

Grossseries

Trade

Construction

Smoothedseries

Grossseries

Assessment of actual activity

Activity expectations

Smoothedseries

Grossseries

BUSINESS CONFIDENCE IN THE MAIN BRANCHES : SYNTHETIC CURVES

BUSINESS SURVEYS IN BUSINESS-RELATED SERVICES INDUSTRIAL OUTPUT AND CAPACITY UTILISATION

Industrial output, excluding construction (index 2005 = 100) (left-hand scale)

Capacity utilisation in manufacturing industry (percentages) (right-hand scale)

Sources : DGSEI, NBB.

also made sharp cuts in their spending, and that had a particular impact on the retail trade and the hotels and restaurants sector.

The deterioration in the economy also led to a marked weakening of demand for construction. After a sharp slowdown in the rate of expansion from mid 2007, fol-lowing a two-year boom, particularly in housing con-struction, activity remained stable overall during 2008

before contracting by 5.5 p.c. in real annual terms in the first quarter of 2009. A modest rebound was seen in the second quarter compared to the previous quarter, largely thanks to the improvement in the weather after an unu-sually severe winter. Building companies also benefited from the measures adopted under the economic recovery plan launched by the Belgian government. Apart from the planned growth of public spending on infrastructure, the provisions adopted in this connection include the

71


extension until the end of 2010 of the cut in the rate of VAT from 21 to 6 p.c., applied to a 50,000 euro tranche for new building projects in cases where the application for a building permit is submitted before 1 April 2010, the nationwide extension for 2009 and 2010 of the cut in the VAT rate to 6 p.c. for renovation following demoli-tion, whereas this scheme is normally limited to 32 urban areas in Belgium, and the extension of the measures to promote energy efficiency. While these measures will not have produced their full effects immediately, given the time lags inherent in the execution of building projects, they nevertheless helped to strengthen the activity of that branch, which thus continued to pick up during the third quarter of 2009, by around 0.6 p.c. on a quarterly basis. Although that growth brought the year-on-year contrac-tion down to 3.8 p.c. in the third quarter of 2009, the decline was still significant at that point in relation to the previous year’s level.

More generally, the business climate gradually improved by mid 2009 for activity as a whole, including manufac-turing industry and business services. The economy there-fore emerged from the recession in the second half of the year under review.

This trend became apparent by April in the business sur-veys. In manufacturing industry, after falling to a record low in March, the synthetic curve recovered, at first gradually and then more strongly during the summer. That recovery was largely driven by the improvement in

the indicators concerning the assessment of order books and demand expectations. Among the other survey ques-tions, which are not included in the calculation of the synthetic indicator, attention should also be drawn to the jump in the indicator relating to the rate of activity from the spring of 2009. The analysis by branch of the busi-ness survey results reveals that this improvement in the business climate was more noticeable in the branches of activity which are more upstream of the production proc-ess or more geared to foreign demand, such as the steel industry and the chemical industry.

The economic upturn which emerged first in industry rapidly spread to companies providing business services, which had been particularly affected by the decline in industrial activity. The survey data in fact point to a marked recovery in the synthetic indicator from the summer of 2009, which is due largely to more favour-able expectations on the part of business leaders regard-ing the movement in activity. However, the improvement was less marked in regard to the assessment of actual activity.

In trade, the retailers and wholesalers polled in the monthly survey also appeared considerably less pessimistic, as is evident from the steady rise in the synthetic indicator from April 2009. However, the improvement in their expecta-tions was less significant than in industry, since the level of the synthetic trade indicator was still down against its average level during the third quarter of 2009. This slower

Table 9 ValueaddedinthebranchesofactiVity

(volume data adjusted for calendar effects; percentage changes compared to the previous year, unless otherwise stated)

p.m. Weight (1)

2005

2006

2007

2008

2009 First three quarters (2)

Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.9 –12.1 10.0 –1.1 0.1 –2.7

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.2 0.6 1.4 3.2 –0.6 –10.5

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 4.0 8.6 2.2 –0.4 –4.6

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.8 2.5 2.3 3.0 1.7 –2.1

of which :

Market services (3) . . . . . . . . . . . . . . . . . . . . . . . 52.4 2.9 3.0 3.7 1.8 –3.6

Non-Market services (4) . . . . . . . . . . . . . . . . . . . 23.3 1.5 0.8 1.4 1.7 1.3

total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 2.0 2.6 2.8 1.2 –3.8

p.m. GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 2.8 2.8 0.8 –3.7

Source : NAI.(1) Percentages of total value added in 2008.(2) Percentage changes compared to the corresponding period in 2008.(3) Trade, hotels and restaurants, transport and communication, financial and insurance services, and real estate and business services.(4) General government and education, and other services.

72

Box 7 – Transmission of the decline in global demand to branches of activity in Belgium

By the end of 2008, world trade collapsed in the aftermath of the ever-widening spread of the financial crisis to the real economy. Trade contracted by a record 20 p.c. That implied a severe shock for Belgium, owing to the very open character of its economy, with a strong focus on exports of industrial products. That shock spread to activity in general, principally via two channels, namely directly in the branches most geared to export, and indirectly via intermediate consumption flows between the various branches.

Owing to the very large weight of industrial products in exports, the secondary sector was particularly hard hit by the slump in foreign demand. However, the impact varied according to the degree of openness of the branches of industry, as is clear from the chart on the next page.

In general, the impact was most severe in the case of the most export-centred industries, i.e. those which, according to the input-output tables for the year 2000, had a ratio of over 50 p.c. between exports and total available resources, either domestically produced or imported. In most of these branches, the downturn in activity ranged between 10 and 36 p.c. year-on-year in the first half of 2009, as is evident from the movement in industrial output. The transport equipment manufacturing industry, which has one of the highest export ratios, proved particularly vulnerable to the collapse in world demand, recording a fall in output of around 36 p.c. Metallurgy recorded a 34 p.c. decline in activity during the period under review. The negative effect of the slump in external demand was also felt in the other branches which similarly form the keystones of Belgian exports, with output down 14 p.c. in the chemical industry and 17 p.c. in other manufacturing industries.

For their part, the other branches of industry, which – having an export ratio of less than 50 p.c. – are geared mainly to the domestic market, suffered less, on average, from the dramatic decline in global demand. That applies in particular to food, where output was down by only 2 p.c.

4

improvement in the business climate in trade is due largely to the still uncertain outlook for domestic demand, taking account of the expected deterioration in the labour market.

In the wake of this strengthening of the business climate as perceived by business leaders, a gradual restoration of activity, albeit modest overall, emerged from the third quarter in the statistics which directly measure output. Thus, GDP growth came to 0.7 p.c. in the third quarter of 2009 on a quarterly basis, ending four consecutive quarters of decline.

The rebound was strongest in industry, since value added there was up by 1 p.c. against the previous quarter. That growth, driven by the more favourable movement in world trade, brought the year-on-year decline in value added down from 11.2 p.c. in the second quarter of 2009 to 9.8 p.c. in the third quarter. At the same time, the sharp fall in capacity utilisation which had begun at the end of 2008 also came to an end. This consolidation was more marked in the case of producers of intermediate goods, i.e. firms whose output is intended mainly for foreign markets.

In market services, the quarterly growth rate of value added came to 0.4 p.c. in the third quarter of 2009. Although still subdued compared to past performance, this revival is due mainly to the pick-up in activity in business services and in the “trade, transport and communication” branch. In fact, the downward trend seen in these branches was reversed in the summer of 2009, owing to the revival in industrial activity and the steady improvement in domestic demand.

According to estimates for the fourth quarter, GDP grew by a further 0.3 p.c. In the light of these recent developments, it appears that the Belgian economy benefited both from the international economic upturn which occurred in the second half of 2009, and from the measures taken under the economic recovery plan. However, the scale of the recovery needs to be viewed in perspective. Thus, although they displayed an upward trend, most of the indicators obtained from the business surveys were below their long-term average, and have yet to regain the levels prevailing before the crisis. Moreover, for most branches of activity, the value added generated in the third quarter of 2009 was still well below the figure achieved a year earlier.

73


This dichotomy between the industrial branches focusing on foreign markets and those with a domestic focus is also clear from the analysis of their capacity utilisation rates. In fact, comparison of the development in those rates over the past two years reveals a clear divergence during the recent period. Thus, while those levels are generally

degree oF openneSS to export and deVelopMent in induStrial output (1)

–40 –35 –30 –25 –20 –15 –10 –5 0 5 100

10

20

30

40

50

70

80

60

Industrial output (3)

Expo

rt r

atio

(2)

Food

Textiles

Refining

ChemicalsMetallurgy

Electrical appliances

Transport equipment

Other manufacturing industries

Gas and electricity

Sources : DGSEI, NAI. (1) The area of the circles is proportionate to the share of the output of the sub-branch in that industry’s total output, calculated on the basis of the 2000 input-output

tables.(2) The export ratio is measured as a percentage between exports and total available resources. It is calculated on the basis of the 2000 input-output tables.(3) Percentage changes year-on-year in industrial output in the first half of 2009.

4

capacity utiliSation rate in ManuFacturing induStry

(seasonally adjusted quarterly data, percentages)

60

65

70

75

80

85

90

20092005 2007 2008200660

65

70

75

80

85

90

Branches geared to export markets (1)

Branches geared to the domestic market (1)

Sources : NAI, NBB.(1) The branches of activity are classified as being geared to export markets or the domestic market according to whether or not their degree of openness exceeds 50 p.c.

74

very similar and move in parallel, capacity utilisation recorded a sharper fall in the more export-oriented branches from the end of 2008.

In view of the growing links between industry and market services, the negative impact of the export slump on industry also spread more indirectly to the latter, even though they are not directly focused on foreign markets. This domino effect between sectors is due to intermediate consumption purchases (1), as firms tend to concentrate on their core activities and subcontract the support services required for their operation.

Structure oF doMeStic interMediate conSuMption by induStry

(percentages of the total domestic intermediate consumption of the branch (1))

0 20 40 60 80 100

Origin of the intermediate consumption :

Same branch

Other industrial branches

Business-related services

Transport and communication

Trade

Other

Share of domestic intermediate consumption

Manufacture of audio, video and communication equipment

Furniture manufacture ; miscellaneous industries

Paper and board industry

Manufacture of electrical machinery and appliances

Publishing, printing and reproduction

Manufacture of other non-metallic mineral products

Metalworking

Car industry

Metallurgy

Manufacture of machinery and equipment

Chemicals

Food

Textiles

Rubber and plastics industry

Source : NAI.(1) Branches ranked in descending order of the size of their value added.

(1) In this connection, see : Cornille D. and B. Robert (2005), “Sectoral interdependences and cost structure in the Belgian economy : an application for input-output tables”, NBB, Economic Review, second quarter, 33-48.Wölfl A. (2004), The interaction between manufacturing and service : some preliminary findings, OECD, STI working paper, 2004 / 7.Wölfl A. (2005), The service economy in OECD countries, OECD, STI working paper, 2005/3.

4

75


The input-output tables permit a breakdown of the indirect effects generated by industrial output, and thus provide an indication of the way in which the decline in output spread from the end of 2008. That breakdown first shows that some of the indirect effects occur within the same branch of production. In manufacturing industry, that is particularly true in the case of the food industry, metallurgy and chemicals, where almost 20 p.c., 22 p.c. and 31 p.c. respectively of domestic intermediate consumption originates from the same branch. At the level of relations between different types of branches, the secondary effects of industrial activity are heavily concentrated in market services, particularly in business-related services, trade – notably via the wholesale trade – and transport and communication services. These service branches were therefore affected indirectly by the decline in industrial activity from the end of 2008. For example, almost 31 p.c. of the domestic intermediate consumption of the car industry concerns services supplied by trade enterprises. Business-related services also account for a significant share of the total domestic intermediate consumption of certain branches of industry. That is true, in particular for the manufacture of audio, video and communication equipment (36 p.c.), the manufacture of electrical machinery and appliances (21 p.c.), and publishing, printing and reproduction (21 p.c.).

In all, given these intermediate consumption links between branches, the foreign demand shock which Belgium suffered from the end of 2008 generated, in addition to its direct impact on industry, additional indirect effects amounting to 20 p.c. in industry and 30 p.c. in market services. In view of these multiplier effects, a large part of the decline in activity in transport and communication, trade and business-related services can therefore ultimately be attributed to the fall in foreign demand. However, it should be noted that the analysis based on the input-output matrix – in this case the one for the year 2000 – is by nature static, as recent developments in service activity may also be influenced by specific responses on the part of enterprises and households during the crisis.

3.3 Real developments in the main sectors

The combination of a virulent financial crisis and a widespread fall in activity at global level dealt a heavy blow to households and enterprises in 2009. Except for general government consumption and investment, all components of final demand created a significant drag on GDP growth, while the accompanying decline in imports resulted in a neutral contribution by net exports.

Enterprises

At the end of 2008 and in early 2009, enterprises faced an unprecedented slump in demand, mainly as a result of the collapse of foreign trade. The outlook remained uncertain, not only in that regard but also in terms of the more general changes in turnover and financing conditions, taking account of the financial tensions and the difficulties facing credit institutions, even though the situation did ease somewhat during the year under review. In that context, companies had no choice but to make substantial adjustments. Thus, many industrial firms suspended their production in part, or even entirely, and drastically reduced their stocks, which also helped them to safeguard their financial position. Although that

chart 39 gdp and Main expenditure categorieS in belgiuM

(calendar adjusted data; contribution to the change in GDP, in percentage points, unless otherwise stated)

2002 2003 2004 2005 2006 2007 2008–5

–4

–3

–2

–1

0

1

2

3

4

–5

–4

–3

–2

–1

0

1

2

3

4


GDP (1)

Private consumption

Public expenditure

Gross fixed capital formation by the private sector

Change in stocks

2009 e

Sources : NAI, NBB.(1) Annual percentage changes.

76

Table 10 GDPanDmainexPenDiturecateGories

(calendar adjusted volume data ; percentage changes compared to the previous year, unless otherwise stated)

2005

2006

2007

2008

2009 e

Final consumption expenditure of individuals . . . . . . . . . . . . . . . . 1.2 1.8 1.6 1.0 –1.5

Final consumption expenditure of general government . . . . . . . . 1.2 1.0 2.6 3.3 1.7

Gross fixed capital formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 2.7 5.7 3.8 –4.6

Housing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 3.4 –0.8 –1.6 –2.8

Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 4.5 8.7 6.1 –6.5

General government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.8 –12.4 3.6 3.4 7.4

p.m.Totalfinaldomesticexpenditure. . . . . . . . . . . . . . . . . . . . . . . 2.5 1.8 2.7 2.2 –1.4

Change in stocks (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.6 0.1 –0.2 –1.6

Exports of goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 5.0 4.4 1.4 –11.0

Imports of goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 4.7 4.4 2.7 –11.1

p.m.Netexportsofgoodsandservices(1) . . . . . . . . . . . . . . . . . . . –0.9 0.4 0.2 –1.0 0.0

GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0 2.8 2.8 0.8 –3.0

Sources : NAI, NBB.(1) Contribution to the change in GDP, percentage points.

process slowed significantly in the second half of the year, the change in stocks dampened annual GDP growth by 1.6 percentage points in real terms. About half of the decline in GDP recorded in 2009 was therefore due to massive stock reduction by firms.

Moreover, businesses had to make major adjustments to the level of the production factors used, be it labour or capital. Their gross fixed capital formation thus contracted in real terms by 6.5 p.c. in 2009, a situation which con-trasts strongly with that of the five preceding years, when firms had stepped up their investment by an annual aver-age of 6.6 p.c. Since this decline outstripped the fall in activity, their investment ratio was also down, falling from 15.1 p.c. in 2008 to 14.6 p.c. in 2009. However, given the scale of the reduction in GDP, it remained at a high level, exceeding the pre-2008 figures.

The sharp decline in business investment is due mainly to the unprecedented slump in final demand from mid 2008 and under-utilisation of the firms’ production capacity. According to the results of the quarterly survey of manu-facturing industry, the capacity utilisation rate declined from 82.4 p.c. in the third quarter of 2008 to a record low of 70.1 p.c. in the first quarter of 2009, before a modest recovery restored it to 74.3 p.c. in the final quarter. The low rate of capacity utilisation induced many companies and self-employed persons to abandon, or at least post-pone, their investment plans.

Three-quarters of business leaders consider that the main reason for this under-utilisation of their production capac-ity lies in insufficient demand. Although the global econ-omy took a turn for the better in the second half of the year under review, the recovery was nonetheless modest and fragile. Sales predictions therefore remained pessi-mistic, and there was continuing serious uncertainty over whether the economic recovery would last, so that firms had little incentive to proceed with major investments.

At the same time, the decline in profits impaired firms’ ability to finance their investments themselves. Thus, the gross operating surplus of companies dipped sharply in 2009, essentially owing to the 7.1 p.c. contraction in the volume of sales, while the gross operating margin per unit of sales was down by only about 1 p.c. However, there were very marked changes in the various factors which determine that margin. So, in a context of very weak demand, selling prices declined by almost 4 p.c., on average, against the previous year : on the domestic market, prices were down by 3 p.c., while export prices fell by 4.8 p.c. Overall, total costs per unit of sales also declined by around 4 p.c., mainly because of the 7.2 p.c. reduction in the price of imported inputs, particularly commodities. Nevertheless, the strong rise in unit labour costs – amounting to around 4 p.c. – severely depressed the operating margin. That rise was due mainly to the fact that the number of hours worked declined by less than output, significantly reducing labour productivity.

77


chart 40 inVeStMent by enterpriSeS

–8

–6

–4

–2

0

2

4

6

8

1997

199

9

2001

2003

2005

2007

200

9

–15

–10

–5

0

5

10

15

–10

–8

–6

–4

–2

0

2

4

6

8

10

–30

–20

–10

0

10

20

30

1997

199

9

2001

2003

2005

2007

(left-hand scale)

ENTERPRISES AS A WHOLE : MOVEMENT AND DETERMINANTS(calendar adjusted volume data, unless otherwise stated ; percentage changes compared to the previous year)

Capacity utilisation rate (left-hand scale)

Level of demand (3) (right-hand scale)

200

9 e

Final demand (2) (right-hand scale)

Investment

Gross operating surplus of companies (1)

MANUFACTURING INDUSTRY : CAPACITY UTILISATION RATE AND LEVEL OF DEMAND(seasonally adjusted quarterly data, unless otherwise stated ; difference compared to the average 1980-2008, percentage points)

Sources : NAI, NBB.(1) Value data, not calendar adjusted.(2) Excluding the change in stocks.(3) Proportion of firms which did not mention insufficient demand as a factor

explaining the under-utilisation of production capacity in the Bank’s quarterly survey of manufacturing industry; data not seasonally adjusted.

Although firms invested considerably less in fixed capital than they had in 2008, the decline was still weaker than that seen in the euro area. It also appears modest in rela-tion to the 4.8 p.c. fall recorded in 2002 following the last cyclical downturn in Belgium, at a time when the context was far more favourable in terms of demand or profit-ability. That is partly because, at the start of the crisis, Belgian enterprises were in a stronger position than at the beginning of the millennium, and in relation to their European counterparts. Belgian firms in fact managed to cut their debt level significantly between 2002 and 2006. That was due not only to the unusually vigorous growth of their gross operating surplus, but also to the excellent stock market performance which had made share issues relatively more attractive than debt financing. In addition, the introduction of the venture capital tax allowance via the ‘notional interest’ mechanism encouraged Belgian enterprises to build up their equity from 2005 onwards.

Furthermore, having increased significantly in 2008 and at the start of the year under review, when the finan-cial crisis seriously intensified, external financing costs declined considerably during 2009, as explained in detail in chapter 7. On the one hand, following the reduction in risk premiums and the stock market revival, it became less expensive for firms to raise funds by issuing bonds or shares. Also, the marked easing of monetary policy led to a steep decline in the interest rates charged by banks. At the same time, however, firms reported a tighten-ing of the other lending standards applied by financial institutions. In a deteriorating business climate – which is therefore riskier for lenders – accompanied by the reor-ganisation of activity in the financial sector, banks often demanded more collateral, restricted the size of their loans and charged higher fees.

The 8.1 p.c. contraction in the gross operating surplus of companies – following exceptionally strong growth between 2004 and 2007 – was partly offset by changes in the other components of disposable income. Thus, during the year under review, firms paid less interest, and paid out lower dividends than in 2008, so that their net prop-erty income became less negative. In addition, the taxes which they paid on income and assets declined sharply, by 28 p.c. That situation is due to the crisis, which caused the tax base to diminish, particularly in the financial sector. In all, the disposable income of companies declined in nominal terms by 5.4 p.c. in 2009. However, following the sharp reduction in fixed capital formation and stocks, the financing balance of enterprises improved significantly, being converted from a deficit of 2.5 p.c. of GDP in 2008 to a surplus of 0.8 p.c.

78

Table 11 MaincoMponentsanddeterMinantsofthegrossoperatingsurplusofcoMpanies,atcurrentprices

2005

2006

2007

2008

2009 e

determinantsofthegrossoperatingsurplusofcompanies(percentage changes compared to the previous year)

Gross operating surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 4.9 8.1 –0.4 –8.1

Gross operating margin per unit of sales (1) . . . . . . . . . . . . . . . . 3.0 1.0 3.9 –2.4 –1.1

Unit selling price (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 2.6 1.9 4.0 –3.9

On the domestic market (1) . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 2.6 1.6 3.7 –3.0

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 2.7 2.2 4.2 –4.8

Costs per unit of sales (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 2.9 1.6 5.1 –4.3

Imported goods and services . . . . . . . . . . . . . . . . . . . . . . . . 4.5 3.4 1.9 6.6 –7.2

Costs of domestic origin per unit of output (1) (2) . . . . . . . . 0.8 2.0 0.8 2.5 2.8

of which : unit labour costs . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.8 2.3 3.7 4.2

Final sales in volume terms (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 3.8 4.0 2.1 –7.1

On the domestic market (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.6 3.6 2.7 –2.7

Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 5.0 4.5 1.5 –11.1

Maincomponentsofthecompanies’account(percentages of GDP)

Gross disposable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 14.2 15.0 13.0 12.6

Gross operating surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.0 22.9 23.6 22.8 21.4

Other components of disposable income (3) . . . . . . . . . . . . . . . . –8.6 –8.8 –8.6 –9.8 –8.8

Uses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.9 13.9 14.4 15.5 11.8

Gross capital formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 14.5 14.9 15.9 12.5

Capital transfers (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –2.9 –0.6 –0.5 –0.4 –0.7

Financing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 0.2 0.5 –2.5 0.8

Sources : NAI, NBB.(1) Including the change in stocks.(2) Apart from compensation of employees, this item covers indirect taxes net of subsidies, and gross mixed income of households.(3) Net property incomes and net current transfers, including the change in the net claims of households on occupational pension institutions.(4) These are net amounts, i.e. the difference between transfers paid to other sectors and those received from other sectors, including net acquisitions of non-financial

non-produced assets such as land or patents and goodwill.

Individuals

Like business investment, investment in housing also declined sharply in 2009 by 2.8 p.c., having already fallen in 2007 and 2008. Taking account of the usual time lag between the decision to build or renovate a house and the project start date, the explanation for the low level of expenditure in this area at the beginning of the year under review lies partly in the rise in mortgage interest rates in the two preceding years. The growth of investment in housing was also curbed by the sharp deterioration in the economic outlook, which prompted some individuals to postpone the execution of their projects. Moreover, fol-lowing an annual average rise of 11.3 p.c. from 2005 to 2007, prices on the secondary housing market dropped by around 0.5 p.c. in 2009. However, the decline in invest-ment was modest compared to the 5.5 p.c. fall recorded in 2002. On the one hand, banks gradually passed on to

their customers part of the key interest rate cuts applied by the ECB, driving down mortgage interest rates. In addi-tion, the support measures for the construction industry introduced by the government under the recovery plan also stimulated both investment in new housing and renovation projects.

In general, the consumption expenditure of individu-als is far less volatile than their investment. Individuals also often tend to smooth their consumption over time, cushioning the effects of the sometimes erratic changes in their disposable income. In that regard, the unusu-ally sharp fall in private consumption of 1.5 p.c. in real terms in 2009 is atypical. Consumption had continued to rise by 1 p.c. in 2008 and by 1.7 p.c. on average in the two preceding years. Moreover, during the year under review, the disposable income of individuals – which is traditionally a key determinant of their consumption

79


expenditure – increased at a faster than average rate, at least in real terms.

The sustained growth of the real disposable income of individuals is, however, due partly to temporary factors, suggesting that individuals opted not to use up this non-recurring income advantage immediately. First, in 2009, households benefited from the fact that, in contrast to 2008, the indexation of wages and social benefits con-siderably exceeded the erosion of their purchasing power resulting from inflation. In fact, in 2009, the health index of consumer prices – the benchmark for indexation – outpaced overall inflation, which was falling, mainly on account of the negative base effects following the surge in crude oil prices in 2008. In addition, the time lags inherent in the existing indexation mechanisms in the various joint committees imply that the purchasing power of individuals grows faster in periods when inflation is declining, as was the case during much of 2009. Owing to indexation, the total compensation of employees, which is by far the principal source of income for individuals, therefore increased by a further 1.2 p.c. during the year under review, despite the sharp fall in the total number of hours worked. Next, regarding transfers paid to other sectors, at the end of the year the federal government

brought forward the personal income tax assessments, significantly augmenting the amount of payments to households, as a large proportion of them received a tax refund on two occasions in 2009. Moreover, the payroll tax reduction, granted by the Flemish Region, also made a positive contribution to the disposable income of individu-als ; however, the Flemish government substantially scaled down this measure when drawing up its budget for 2010. The reduction in the net amount of taxes paid in 2009 is therefore clearly non-recurring.

Taken together, the gross operating surplus and the gross mixed income of self-employed persons showed a marked fall following the strong contraction in activity. Property income was also significantly affected. Individuals, who are traditionally net lenders of funds to other sectors, thus felt the effects of the sharp decline in interest rates. Similarly, dividends received were down after having been very high for two years.

In contrast to the support factors mentioned above, these elements will probably depress the disposable income of individuals for several years, thus helping to explain the low level of private consumption. But it is obvious that other factors have also played a role at the height of the economic and financial crisis, particularly households’ pessimism regarding unemployment and the decline in the value of their financial assets. As explained in box 8, these effects were conducive to a strong rise in the pro-pensity to save, the volume of private consumption falling sharply in the fourth quarter of 2008 and the first half of 2009. That trend was further reinforced by the growing interest burden borne by households in recent years and the deterioration in the situation of public finances, the resolution of which ultimately implies the risk of higher taxes or limits on social benefits.

Overall, the gross savings ratio of individuals increased by 3.4 percentage points in 2009 to 20.1 p.c. of disposable income. A similar trend was evident in the other euro area countries. Thus, the average gross savings ratio over four quarters came to 15.5 p.c. in the euro area in the third quarter of 2009, compared to 14 p.c. in 2007. As individuals in Belgium substantially reduced their invest-ment in housing in 2009, their financing balance also improved significantly, rising from 3.5 p.c. of GDP in 2008 to 6.6 p.c. in 2009. They thus formed a substantial buffer to compensate for the value wiped off their financial assets in 2008 and the loss of income expected in the years ahead.

chart 41 conSuMption, diSpoSable incoMe and SaVingS ratio oF indiVidualS

(percentage changes in volume compared to the previous year (1), unless otherwise stated)

–2

–1

0

1

2

3

4

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6

13

14

15

16

17

18

19

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21

Consumption

Disposable income (2)

Savings ratio (percentages of disposable income) (right-hand scale)

(left-hand scale)

1997

199

9

2003

2005

2007

200

9 e

2001

Sources : NAI, NBB.(1) Non calendar adjusted data.(2) Data deflated by the private final consumption expenditure deflator.

80

Table 12 DeterminantsofthegrossDisposableincomeofinDiviDuals,atcurrentprices


2005

2006

2007

2008

2009 e

p.m. 2009 e,

billions of euro

Gross primary income . . . . . . . . . . . . . . . . . . . . . . . 3.3 4.9 5.4 5.3 0.1 259.8

p.m. In real terms (1) . . . . . . . . . . . . . . . . . . . . . . . . . 0.6 1.9 2.5 1.5 0.1

Compensation of employees . . . . . . . . . . . . . . . 3.4 4.8 5.3 5.0 1.2 183.4

Volume of labour of employees . . . . . . . . . . 1.0 1.4 1.9 1.2 –1.7

Compensation per hour worked . . . . . . . . . . 2.3 3.4 3.4 3.7 2.9

Gross operating surplus and gross mixed income . . . . . . . . . . . . . . . . . . . 4.5 6.1 4.3 3.4 –2.3 45.4

of which : income from self-employed activity 1.9 5.6 1.5 4.0 –4.0 22.7

Property income (2) . . . . . . . . . . . . . . . . . . . . . . . . 0.9 3.7 8.0 10.3 –2.7 31.0

Current transfers (2) . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 0.6 7.9 6.0 –11.8 –42.2

Current transfers received . . . . . . . . . . . . . . . . . . 3.8 2.4 4.0 4.8 4.8 76.6

Current transfers paid . . . . . . . . . . . . . . . . . . . . . 3.6 1.7 5.5 5.3 –1.8 118.8

Gross disposable income . . . . . . . . . . . . . . . . . . . . . 3.3 5.9 4.9 5.2 2.8 217.7

p.m. In real terms (1) . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 2.8 2.0 1.3 2.8

Final consumption expenditure . . . . . . . . . . . . . . . 3.8 4.9 4.6 4.9 –1.6 176.3

Savings ratio (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.0 15.8 16.2 16.6 20.1

Sources : NAI, NBB.(1) Data deflated by the private final consumption expenditure deflator.(2) These are net amounts, i.e. the difference between incomes or transfers received from other sectors and those paid to other sectors, excluding transfers in kind.(3) Gross savings as a percentage of gross disposable income, these two aggregates being taken inclusive of the change in the net claims of households on occupational

pension institutions.

Box 8 – The saving behaviour of individuals

When deciding how much of their resources to devote to consumption in one period or another, individuals take account not only of their current income but also of the income which they can expect in the future. In this way they prevent temporary or irregular fluctuations in their disposable income from having too much impact on their consumption pattern, which is determined more by what theory refers to as “permanent income”. Such behaviour has implications for the savings profile, as savings act as a buffer : if, at any given time, disposable income exceeds their estimated permanent income, individuals will not increase their consumption in the same proportion but will prefer to set aside the excess income as savings. Conversely, individuals will reduce their savings in order to maintain their consumption in the event of a temporary negative change in income. That mechanism applies both at microeconomic level, according to the variable level of income at different stages in life, and at macroeconomic level, according to periods of strong expansion or moderation in disposable income.

It is therefore unsurprising that the savings ratio of individuals – i.e. the ratio between savings and disposable income plus the change in net claims on pension funds or occupational pension institutions – displays substantial fluctuations. While households were still saving over one-fifth of their disposable income in 1995, the first year for which the national accounts data revised according to the ESA 95 are available, the savings ratio dropped to

4

81


4

a low point of around 15 p.c. in 2005. Since then, an ever-increasing percentage of disposable income has been saved ; in 2009, the savings ratio climbed back to around 20 p.c.

However, the factors behind this increase in individuals’ propensity to save during the last four years vary from one year to another. In 2006 and 2007, it was the strong, above-average growth of disposable income which prompted individuals to save part of that additional income. While disposable income had also risen significantly in 2008, the increase in purchasing power had been considerably weaker owing to the surge in inflation. In real terms, the disposable income of individuals was actually up by only 1.3 p.c., corresponding broadly to the average growth recorded during the period 1996-2007. Nonetheless, the savings ratio had risen further in 2008. Finally, in 2009, disposable income grew by 2.8 p.c. in real terms, but private consumption dipped sharply, leading to a strong rise in the savings ratio. The increase in the savings ratio in 2009 and, to a lesser extent, in 2008 can be linked to a downward revision by households of their future income expectations, in the wake of the financial crisis and the economic recession.

At times of great economic uncertainty – particularly regarding the labour market situation, and hence the future outlook for their remuneration – individuals are tempted to consolidate their precautionary savings. That link can be illustrated by the consumer confidence indicator, and more specifically by the component which polls individuals’ expectations regarding unemployment over the coming twelve months. The rise in this component of the consumer confidence indicator is a sign that consumers take a less favourable view of their situation in terms of future income and that – all other things being equal – they will try to save more in order to compensate as far as possible for any decline in their income. This component of the consumer confidence indicator recorded a very marked deterioration from March 2008, reaching a record level of pessimism in February 2009. Although consumers have since become less pessimistic about the outlook for unemployment, the indicator has remained at an exceptionally adverse level. While activity ceased contracting in the third quarter of the year under review, the deterioration of the labour market is likely to be more persistent.

Another reason for the rise in individuals’ propensity to save in 2008 and 2009 lies in the decline in their assets, and hence the fall in both their expected future income from these assets and their capacity to finance expenditure by realising their assets if necessary. Owing to the stock market crash and the tensions affecting the financial markets in 2008, many investors lost a substantial part of their financial assets. During 2009, households were able to make part of that up, notably as a result of the stock market revival and increased savings. At the same time, however, the value of their real estate assets continued to fall on account of the decline in house prices on the secondary market.

Apart from financial and real estate assets, the financial debts of individuals and the associated interest charges may influence individuals’ consumption and saving behaviour. Although the debt ratio of Belgian households is lower than the euro area average, it has risen strongly in recent years. In relation to disposable income, the financial debts of households increased from 61 p.c. in 2002 to around 80 p.c. in 2009, owing to the substantial rise in secondary market housing prices, averaging around 10 p.c. per annum from 2003 to 2007. During the period 2003-2005, the increase in the debt ratio was nevertheless accompanied by a fall in interest rates, thus limiting the impact on interest charges. However, that was no longer the case in the ensuing three years, so that interest payments increased faster, on average, than the other components of disposable income.

It is also commonly acknowledged that the saving behaviour of individuals is influenced by the movement in the public debt, at least when the figure is very high in relation to GDP, as it is in Belgium. In fact, when large budget deficits are accumulating, households consider it highly likely that, ultimately, taxes will have to rise or social benefits will have to be limited. Individuals therefore expect their future disposable income to grow more slowly, and that encourages them to rein in their consumption in order to save more. The marked deterioration in public finances following the crisis may therefore also have contributed to the rise in the savings ratio.

82

Moreover, the assessment of individuals’ future incomes could well have been affected by the less favourable medium- and long-term prospects for the level, or even for the growth, of potential output, owing to the economic and financial crisis.

However, there is a possibility that the scale of the increase in the savings ratio in 2009 exceeded what was warranted by all those effects since, at the height of the crisis, the reaction by households may have been accentuated for a time by an excessively negative mood.

deterMinantS oF the SaVingS ratio oF indiVidualS other than their diSpoSable incoMe

1995

1997

199

9

2001

2003

2005

2007

200

9

1997

199

9

2001

2003

2005

2007

200

9

–3

–2

–1

0

1

2

3

–3

–2

–1

0

1

2

3

–20

–15

–10

–5

0

5

10

15

20

25

–20

–15

–10

–5

0

5

10

15

20

25

0

1

2

3

4

5

6

7

8

9

0

10

20

30

40

50

60

70

80

90

60

80

100

120

140

160

6

8

10

12

14

16

EXPECTED MOVEMENT IN UNEMPLOYMENT(normalised data (1))

Financial assets19

95

1997

199

9

2001

2003

2005

2007

ASSETS OF INDIVIDUALS(percentage changes compared to the corresponding quarter of the previous year)

Real estate assets

Consolidated gross debt of general government (left-hand scale)

Savings of individuals (right-hand scale)

PUBLIC DEBT AND SAVINGS OF INDIVIDUALS(percentages of GDP)

1995

1997

199

9

2001

2003

2005

2007

DEBTS AND INTEREST CHARGES OF INDIVIDUALS(percentages of disposable income)

Interest charges (left-hand scale)

Debts (right-hand scale)

200

9 e

200

9 e

Sources : NAI, NBB.(1) Original series reduced by its average over the period from 1985 to 2009 and divided by its standard deviation.

83


General government

Unlike the private sector, which showed itself to have been restrictive during the year under review, the gov-ernment increased its expenditure on both consumption and investment. Public consumption grew by 1.7 p.c. in real terms in 2009, which was nevertheless below the previous year’s figure of 3.3 p.c. The reason for that slowdown lies in the strong expansion of outlays in 2008, due partly to the restrictions on carrying forward payments at the end of the year for purchases of goods and services, and partly to the entry into force of the inclusion of the “minor risks” for self-employed per-sons in social security. However, expenditure on health care, which forms a major part of public consumption, continued to rise rapidly in 2009, as in the previous two years. Government investment was up by 7.4 p.c. in real terms in 2009. That increase was due essentially to local authorities’ investment, but also to investment by the Communities and Regions, where the growth rate exceeded the average for the past five years.

Rest of the world

The dramatic decline in world trade triggered a record slump in Belgium’s foreign trade in 2009. Exports and imports of goods and services were down by 16.5 and 16.1 p.c. respectively in real terms between the peak recorded during 2008 and the low point reached during the year under review. It was trade in industrial goods that recorded the steepest fall in the order of 20 p.c., while trade in services, which represent approximately one-fifth of Belgium’s total exports and imports, declined by around 10 p.c.

That development was not specific to Belgium, since neighbouring countries and the euro area as a whole also experienced a sudden contraction in their foreign trade. That similarity is due to the global character of the shock resulting from the economic and financial crisis, and to the close interdependence of production processes in the euro area. However, there were some variations between countries in the scale of the decline, particularly in regard to exports, owing mainly to the nature of those countries’ specialisation. Thus, in Germany, the movement in exports

chart 42 exportS, in VoluMe

(data adjusted for seasonal and calendar effects, unless otherwise stated)

2007 2008 200980

85

90

95

100

105

2004 2005 2006 2007 2008 2009–70

–60

–50

–40

–30

–20

–10

0

10

80

85

90

95

100

105

85

90

95

100

105

110

115

120

125

J

JJJJ

J

JJJ

J

J

J

EXPORTS OF GOODS AND SERVICES(indices, peak in 2008 = 100)

EXPORTS OF GOODS AND ASSESSMENT BY BUSINESS LEADERS

Euro area

Belgium

Germany

France

Netherlands Exports of goods (index 2000=100)(left-hand scale)

Smoothed series

Gross series(right-hand scale)

Assessment of foreign orders in manufacturing industry (1)

Sources : EC, NAI, NBB.(1) Seasonally adjusted data.

84

was particularly influenced by the widespread weakness of demand for equipment goods or road vehicles.

Following a substantial fall at the end of 2008 and in the first quarter of 2009, exports of goods gradually picked up from April onwards, as indicated by the monthly for-eign trade statistics. That improvement was confirmed by business leaders in manufacturing industry, who from then on became more optimistic about their export order position in the Bank’s monthly business survey. According to the national accounts data, the revival was also stronger than in neighbouring countries in the third quarter. Nonetheless, at the end of 2009, both the assess-ment of business leaders and the actual level of exports remained well below the values which prevailed just before the collapse of world trade. Despite the recovery which emerged during the year, total exports of goods and services declined by no less than 11 p.c. in volume over the year as a whole, compared to 2008.

Imports were down in more or less comparable propor-tions, namely 11.1 p.c. Their pattern is in fact closely linked to that of exports, a further sign of the growing

international fragmentation of the production chain. As in other countries, stock reduction also dampened demand for imported goods. On balance, net exports made a neutral contribution to annual GDP growth : the negative contribution observed at the height of the recession in the first half of 2009, was offset by the fact that exports recovered more strongly than imports in the second half of the year.

Apart from volumes, foreign trade prices also recorded an exceptional fall. Prices of exports and imports of goods and services were down by 4.8 and 7.2 p.c. respectively, so that the terms of trade improved by 2.7 p.c., follow-ing a 2.2 p.c. deterioration the year before. While these movements are largely due to the sharp fall in crude oil prices, the reduction in foreign trade prices spread to all goods, though to a lesser extent, owing to stagnating world demand.

The foreign trade statistics reveal that the prices of exported and imported goods declined by 6.9 and 10 p.c. respectively in 2009, mainly as a result of the movement in commodity prices, just as they had been the main

chart 43 priceS oF exportS and iMportS oF goodS (1)

(annual percentage changes, unless otherwise stated)

–15

–10

–5

0

5

10

15

–15

–10

–5

0

5

10

15

–5

–4

–3

–2

–1

0

1

2

3

4

5

100

75

50

25

0

–25

–50

1997

199

9

2001

2003

2005

2007

200

9 e

Energy

Excluding energy

Terms of trade for goods (left-hand scale)

Energy

Excluding energy

EXPORT AND IMPORT PRICES

1997

199

9

2001

2003

2005

2007

200

9 e

Crude oil price in euro (scale reversed, right-hand axis)

TERMS OF TRADE AND CRUDE OIL PRICES

Exports (2) Imports (2)

Sources : NAI, NBB.(1) Average unit values, foreign trade data according to the national concept.(2) Contribution to the annual change in prices of exports and imports, percentage points.

85


reason for the increases in the previous year. In particu-lar, in the case of crude oil the average annual increase of 24 p.c. in 2008 in prices expressed in euro, and the 32 p.c. decline in those prices in 2009, were reflected in the prices of all energy products, which in 2008 repre-sented around 19 p.c. of the value of imports and 11 p.c. of that of exports.

Excluding the energy component, import prices were down by 4.6 p.c. in 2009 and export prices fell by 3.5 p.c. These falls occurred after four years of strong increases amounting to 3.8 p.c. per annum, and exceeded those in the previous period of decline in 2003. However, while the decline during that period took place in the context of strong appreciation of the euro, the same was not true in 2009 since, as an annual average, the nominal effective exchange rate remained virtually unchanged in comparison with the previous year. Therefore, the contraction in the price of imports of manufactured goods was due more to the reduction in final prices in a context of decidedly weak demand, that movement having also been encouraged by the fall in commodity prices.

Table 13 NetleNdiNgtotherestoftheworld

(balances ; billions of euro, unless otherwise stated)

First nine months

2006

2007

2008

2009 e

2008

2009

1. Current account . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 5.3 –9.2 1.9 –5.2 1.9

Goods and services . . . . . . . . . . . . . . . . . . . . . . 7.2 4.7 –7.9 3.7 –4.8 2.4

Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 0.6 –11.2 0.6 –7.6 –0.4

of which : energy (1) . . . . . . . . . . . . . . . . . . . –14.4 –13.3 –18.9 n. –14.8 –8.2

Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.0 4.1 3.3 3.2 2.9 2.8

Incomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 5.3 4.6 4.5 3.9 4.3

Earned incomes . . . . . . . . . . . . . . . . . . . . . . . 4.1 4.6 4.5 4.7 3.3 3.4

Incomes from direct and portfolio investments . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.1 0.7 0.1 –0.2 0.6 0.9

Current transfers . . . . . . . . . . . . . . . . . . . . . . . . . –5.2 –4.7 –5.9 –6.4 –4.3 –4.8

Transfers of general government . . . . . . . . . –4.3 –4.6 –5.1 –5.1 –3.7 –3.9

Transfers of other sectors . . . . . . . . . . . . . . . –1.0 –0.1 –0.8 –1.3 –0.6 –0.9

2. Capital account . . . . . . . . . . . . . . . . . . . . . . . . . . –0.3 –1.4 –1.9 –0.1 –1.4 –0.3

3. Net lending to the rest of the world (1 + 2) . . 5.6 4.0 –11.1 1.8 –6.6 1.6

p.m. Idem,percentagesofGDP . . . . . . . . . . . . 1.8 1.2 –3.2 0.5

Financingrequirement(–)orcapacityofthedomesticsectors,accordingtothenationalaccounts,percentagesofGDP 3.3 3.5 –0.2 1.4

Sources : NAI, NBB.(1) Balance based on the foreign trade statistics (SITC – class 3).

Balance of payments current account

For goods and services as a whole, the fall in prices was additional to the reduction in the volume of trade, for both exports and imports, so that the revenue and expenditure figures relating to these transactions were down by 15.2 and 17.5 p.c. respectively in 2009. Owing mainly to the improvement in the terms of trade, the deficit of 7.9 billion euro recorded in 2008 for trade in goods and services gave way to a surplus of 3.7 billion in 2009. That improvement is reflected in the recovery of the balance of current transactions, where the net figure has now been converted from a deficit of 9.2 billion to a surplus of 1.9 billion.

While this improvement is certainly noteworthy, the Belgian current account surplus is nevertheless still small if viewed in a historical perspective. That performance is in line with a tendency which had begun in 2003 : while the 2002 surplus on current account was in the region of 4.5 p.c. of GDP, or close to the level achieved since 1995, it was subsequently eroded by an average of around 0.6 percentage point of GDP per annum.

86

Transactions in goods are the main factor behind this steady deterioration. The breakdown of this movement between volume effects and price effects shows that the latter played only a minor role over the period as a whole, since they contributed only around 0.5 point to the cumulative decline in the trade balance totalling 3.5 percentage points of GDP between 2002 and 2009. The deterioration is therefore due mainly to volume changes, the growth of exports having lagged behind that of imports. That difference was due partly to the buoyancy of domestic demand in Belgium, compared to the partner countries, particularly since 2007. Like the price movements over which Belgian producers have little control, that volume effect is not necessarily a sign of a worsening competitive position, so long as the relative dynamism of domestic demand has a sustain-able basis. Conversely, as explained in detail in the 2008 Report, the deterioration was also due to weaker growth in the export volume, compared to that of the trading partners, attributable not only to less dynamic specialisa-tion in terms of both products and countries, but also to structural losses of market shares.

In contrast to the figures for transactions in goods, net revenues from the international exchange of services remained stable in 2009, at 3.2 billion euro. In the wake of the slump in world trade, however, the surplus on transport services and merchanting declined. Moreover, the deficit in travel expenditure increased owing to the reduction in business travel in Belgium, whereas Belgians maintained the level of their foreign travel budget overall. Conversely, the 2008 deficit in business services and in research and development was converted to a surplus in 2009. IT services supplied abroad by Belgian firms also recorded growth.

The surplus of factor incomes also varied little in 2009. On the one hand, there was a slight increase in the structural surplus on earned incomes, consisting mainly of wages paid by European institutions to their staff resident in Belgium. On the other hand, income from direct and portfolio investments became slightly negative in 2009. Interest flows between Belgium and the rest of the world declined, on both the revenue and the expenditure side, owing to the combined effect of the reduction in interest rates and the contraction of the outstanding volume of assets and liabilities, particularly those with a short term. The surplus of incomes from interest-bearing investments contracted in net terms, but that fall was largely offset by the reduction in the deficit on net dividend payments, mainly as a result of the lower dividends paid by Belgian financial institutions.

Finally, the balance of current transfers deteriorated slightly, mainly owing to net transfers by the private sector to the rest of the world. Public transfers with the rest of the world traditionally also record a net deficit, since Belgium is a net contributor to the EU budget. In accord-ance with the EU’s financial projections for 2007-2013, the contributions recorded came to 4.3 billion during the first ten months of 2009, a figure comparable to that for the corresponding period of the previous year. The decline in customs duties, in parallel with the weakness of foreign trade, and the fall in the VAT contribution were offset by the increase in the GNI resource, which performs a residual function in resources transferred to the EU.

Apart from the improvement in the current account, the reduction in the capital account deficit also contributed to the rise in the financing balance of the economy as a whole. During the first nine months of the year, capital transactions recorded a small deficit of 0.3 billion euro, compared to a deficit of around 1.4 billion during the same period of 2008. The improvement in the capital account deficit was due to the substantial fall in net pur-chases of greenhouse gas emission rights by Belgian enter-prises under the quota trading system set up by the EU.

chart 44 balance oF tranSactionS in goodS

(percentage points of GDP, unless otherwise stated)

F

F

F

F

FF

F

FF

F

F

199

9

2001

2003

2005

2007

–4

–3

–2

–1

0

1

2

3

4

5

6

–4

–3

–2

–1

0

1

2

3

4

5

6

F

Price effect

Volume effect

Change in the trade balance

p.m. Trade balance (1)

p.m. Current account balance (1)

200

9 e

Sources : NAI, NBB.(1) Percentages of GDP.

87


The reduction in these purchases is a direct consequence of the economic recession, which generated a surplus of emission rights and a decline in their prices on trading markets, such as BlueNext.

According to the national accounts statistics, Belgium has therefore regained its traditional position as a net lender vis-à-vis the rest of the world, with a contribution of 4.6 billion euro, after having faced a borrowing require-ment of 0.8 billion in 2008. Expressed as a percentage of GDP, that change corresponds to an improvement in the financing balance of around 1.6 points.

This improvement in the financing balance of the econ-omy is due to enterprises and individuals, whose trans-actions compensated for the large deterioration in the general government financing balance. While the latter deteriorated by 4.8 percentage points of GDP, the financ-ing balance of individuals and enterprises improved by 6.4 points overall, to total 7.4 p.c. of GDP. By increasing their savings and curbing their expenditure, enterprises and individuals made a broadly equivalent contribution to

chart 45 Financing reQuireMent (-–) or capacity oF all doMeStic SectorS and balance oF payMentS current account


–8

–6

–4

–2

0

2

4

6

8

–8

–6

–4

–2

0

2

4

6

8

2001

2003

2005

2007

200

9 e

Financing requirement (–) or capacity of all domestic sectors

Individuals

Companies

General government

Balance of payments current account

of which :

Sources : NAI, NBB.

the improvement in the financing balance. The financing capacity of individuals reached its highest level for more than ten years, while in the case of enterprises the bal-ance regained a level close to its long-term average.

3.4 Structural developments

Effects of the crisis on production potential

The financial crisis and the economic recession triggered a very abrupt contraction in global demand. Belgium did not escape this deterioration in the economic environ-ment. Not only did GDP fall by 3.0 p.c. in 2009, as men-tioned earlier, but according to the Bank’s autumn 2009 economic projections, GDP growth was expected to reach only around 1 p.c. in 2010. Apart from these short-term effects resulting from demand, the current crisis – owing to its scale and duration – may have caused a negative supply shock. A reduction in the potential production capacity would imply that the crisis will have a longer-lasting impact on economic activity.

Potential supply, also referred to as potential output, cor-responds to an economy’s maximum productive capacity likely to be mobilised without generating tensions on the markets for factors of production and goods and services. It is often called an economy’s capacity to gen-erate sustainable, non-inflationary growth. Since direct measurement is not possible, potential supply or potential output must be assessed indirectly. In common with most international institutions (EC, IMF, OECD), the Bank and the Federal Planning Bureau supply estimates of Belgium’s potential output at varying horizons, using their own methodologies, all based on a production function. While those estimates generally tally in the long term, they may nevertheless lead to relatively divergent results in the short term. There is therefore great uncertainty over the meas-urements concerning the economy’s potential, and they must be used with caution, especially in real time.

Although the indicators of potential output are hard to measure, they need to be assessed as accurately as possible, because they are vital tools for the direction of economic policies. In the short term, fiscal and monetary policies may aim to stabilise the economy by reducing the output gap, or in other words the difference between the actual and the potential level of activity. In the longer term, it is essential to understand the mechanisms which influence potential growth so that structural policies intended to stimulate growth can be correctly designed. These considerations are particularly important in the current context, since the crisis could have a long-term

88

impact on economic potential. It is necessary to ensure that counter-cyclical measures taken to deal with the short-term effects of the crisis do not thwart the longer-term objectives. In the long run, lower potential growth would mean a slower rise in the level of prosperity, and could thus compromise the already endangered sustain-ability of public finances.

In theory, the recession may affect the long-term growth potential of an economy via its three main determinants : the capital stock actually available, the labour force – i.e. the population of working age, adjusted for the activity rate and the structural unemployment rate – and total factor productivity (TFP), which corresponds to the effi-ciency with which the production factors are used (and includes inter alia technical progress).

First, the fall in investment in a context of excess capac-ity and possible tightening of financing conditions slows the capital stock accumulation rate. Part of that stock may even face rapid obsolescence, e.g. in cases where activities disappear, particularly as a result of companies failing or being relocated elsewhere in the world. A per-manent rise in the cost of capital, caused for instance by increased risk aversion, may lead to a persistent reduc-tion in the contribution of the factor capital to potential growth.

Second, the crisis may reduce the equilibrium quantity of the factor labour. In the short term, the reallocation of workers between the various sectors may take some time, increasing frictional unemployment. In the longer term, the major risk is that part of the cyclical rise in unemployment becomes a structural increase. Known as the hysteresis effect, this phenomenon is due to the fact that people leaving the labour market for a relatively long period see their human capital decline, they become less attractive to potential employers, and are less active in their search for a new job. It is more difficult to reinte-grate them into the labour market. The hysteresis effects increase the weaker the pressure exerted by long-term unemployment on wages.

The adverse economic conditions may also discourage newcomers, particularly the young generations, from entering the labour market, thus lowering the participa-tion rate. In theory, they may conversely increase the activity rate if they encourage an initially inactive second member of a household suffering a loss of income owing to the crisis to enter the labour market. Finally, they may also contribute towards slowing down the (net) immigra-tion of workers, and hence lead to a less favourable trend in the population of working age.

Third, the crisis may affect TFP. However, it is uncertain what direction that influence may take. Thus, a distorted allocation process on both the labour and capital markets has a negative impact on productivity, in an economy facing structural shifts between certain branches of activ-ity or between the private sector and the public sector. The recession may curb investment by enterprises in R&D and public investment in education and infrastruc-ture, and that effect may in turn be amplified by stricter financing conditions. Conversely, a rise in productivity may result, for example, from a creative destruction process – in which the least productive firms disappear from the market –, sectoral shifts towards high value added sec-tors, or the implementation of structural reforms.

Results for Belgium

The sharp fall in effective GDP in 2009 represents a clear deviation from the potential output path prevailing before the crisis. That path was also itself affected by the crisis, though in a way which is difficult to quantify. While even in normal times the estimate of potential growth is already surrounded by a considerable number of unknowns, the crisis has had the effect of further augmenting the uncer-tainty over the potential output development, be it in the recent past, during the actual recession or in the years ahead.

First, it now seems that the assumed path of potential growth during the recent economic boom, particularly from 2005 to 2007, was probably overestimated. Today it is evident that the movement in certain factors on which that path was founded, in particular those resulting from the international environment or the financial markets, was not sustainable in the long term. However, the weak-ening of potential growth was more marked in 2009, at the time when the various channels described above had the greatest influence, and that is likely to continue in 2010.

In all, according to the Bank’s estimates, the pace of potential growth dropped from 1.8 p.c. in 2008 to 1.4 p.c. in 2009, and will subside to 1.1 p.c. in 2010. These percentages are very similar to those published by the Federal Planning Bureau and by the EC, which – at the end of the year under review – were predicting a slowdown to 1.4 and 1.1 p.c. in 2009 respectively, and 1.2 and 1 p.c. in 2010. Subsequently, the effects of the crisis on potential growth should gradually fade, although it could be several years before a return to the growth rate which prevailed before the crisis. Yet ultimately, as the example of past financial crises would suggest, the level of potential output lost as a result of the economic

89


and financial crisis will not be made up. The risk that the same may apply to the rate of potential growth cannot be entirely ruled out either, especially if the economic policy response is inappropriate. Moreover, potential growth will continue to be affected by demographic changes, particu-larly population ageing and the likely resulting reduction in the population of working age.

The slower pace of potential growth in 2009 and 2010 is due mainly to the significant reduction in the contribution of the factor capital. Thus, while capital had contributed 1 and 1.2 percentage points to potential growth in 2007 and 2008 respectively, the figure is expected to fall to 0.6 point in 2010. That is attributable to the decline in gross fixed capital formation by enterprises ; it comes after several years of particularly vigorous growth of those investments, and could therefore amount to a correction of possible excess investment in the past.

The depreciation rate could also influence the movement in the capital stock. It has displayed an upward trend for several years – notably owing to a higher proportion of capital goods with a shorter life, such as computer equipment. This means that part of the capital stock becomes obsolete more quickly, and that tends to reduce

chart 46 potential gdp in belgiuM

100

105

110

115

120

125

100

105

110

115

120

125

BB

BB

B

B

B

BB

BBB

Actual GDP (1)

Post-crisis potential GDP (3)

Pre-crisis potential GDP (2)

199

6

199

8

200

0

2002

200

4

200

6

200

8

0.0

0.5

1.0

1.5

2.0

2.5

Labour

Capital

Total factor productivity (TFP)

Potential growth (annual percentage changes)

LEVEL OF GDP, IN VOLUME(indices pre-crisis potential GDP = 100 in 2000)

BREAKDOWN OF POTENTIAL GROWTH(contribution to growth, percentage points, unless otherwise stated)

200

0

2002

200

4

200

6

200

8

2010

e

2010

e

0.0

0.5

1.0

1.5

2.0

2.5

Source : NBB.(1) For 2010, see “Economic projections for Belgium – Autumn 2009”, NBB, Economic Review, December 2009, 7-20.(2) Estimate by the Bank, June 2008.(3) Estimate by the Bank, December 2009.

the contribution of capital to potential growth, at least in the absence of new investments to counterbalance that effect. However, it is too soon to determine whether the crisis has accelerated that trend.

Having contracted slightly in 2008, the contribution made by employment to potential growth declined further in 2009, and the same is likely to happen in 2010. There are several factors behind this trend. Thus, the growth of the population of working age, which had been very strong in 2006 and 2007 owing to a substantial contribution from migration, lost momentum from 2008. The contribution to potential growth from labour immigration could dimin-ish still further in 2010, owing to the deterioration in the outlook for activity and employment in the host country.

The structural unemployment rate recorded only a slight rise in 2009, so that the observed increase in unemploy-ment was kept under control, notably because firms made large-scale use of temporary lay-offs. In the medium term, however, substantial job losses could drive unemployment higher, and part of that increase could become structural. It is evident from a number of studies that Belgium is particularly sensitive to hysteresis effects on unemploy-ment. According to the OECD, a shock of 1 percentage

90

point on the observed unemployment rate implies an increase of 0.84 point in the estimated equilibrium unem-ployment rate (NAIRU – non-accelerating inflation rate of unemployment), which in simple terms can be taken as structural unemployment. That is well above the aver-age for Europe or the United States, where the change would amount to only 0.62 and 0.17 point respectively. However, these results are based on historical observation, and today’s reality could be more favourable. The inten-sity of the hysteresis effects could in fact have declined, in view of the prospective shortage of available labour resulting from the projected ageing of the population, and the recent labour market reforms, particularly the activation policies. Nevertheless, according to several indi-cators the shift towards long-term unemployment is still a weakness of the Belgian economy. Thus, the percentage of unemployed job seekers still out of work after one year is structurally higher in Belgium than in the euro area. The percentage of long-term unemployed in the labour force as a whole is the highest in the EU15.

Compared to 2008, the contribution of TFP to potential growth remained unchanged in 2009, and no change is expected in 2010. There is a need for some caution here since, as mentioned previously, the impact of a recession on TFP is uncertain and depends, in particular, on the economy’s ability to restructure, and to reallocate the resources sooner or later to the most productive sectors. That depends partly on the degree of market regulation. According to the OECD, if the degree of market regula-tion is high – as it is in Belgium – TFP growth tends to slow more sharply at the end of a severe recession. However, it should be borne in mind that in most of the potential growth estimation methods, TFP is obtained as a residual figure, and that it therefore depends on the way in which the contributions of capital and labour are calculated. It must therefore be interpreted with caution. Thus, a steep fall in output compared to its equilibrium level, coupled with a slower adjustment of the production factors (and particularly labour), automatically causes TFP to lose momentum.

Belgium’s strengths and weaknesses in the face of the crisis and structural challenges

While there were major challenges ahead in the coming decades, such as population ageing, globalisation and technological changes, or issues relating to energy and the environment, the economic and financial crisis had the effect of weakening the structural position of the economy. However, experience of past recessions, be it in Belgium or in other countries, shows that certain char-acteristics of the way the economy is organised permit

the preservation of development potential. In the present case, a decisive factor lies in a way of working conducive to the redeployment and constant regeneration of the economic structure.

A set of factors may favour or, conversely, inhibit the economy’s ability to adapt. This generally concerns pro-moting the spread of innovative products or processes. Of course, that involves R&D efforts, but also concerns other key aspects. Entrepreneurship or entrepreneurial spirit is generally also associated with innovation, where it may act as a catalyst. The availability of skilled labour is

chart 47 r&d expenditure, innoVation and total Factor productiVity

HH

HH

H

H

H

H

HH

H

H H

H

H

H

H

HH

HH H

H H HH

HH H

H H H H

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

–2 –1.5 –1 –0.5 0 0.5 1 1.5 2

SE FI JP US

AT

DK DE FR UK NL

LU IE ES PT IT EL

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

R&D expenditure – public funding

R&D expenditure – private funding

Innovation performance (2) (right-hand scale)

(left-handscale)

R&D EXPENDITURE AND TFP GROWTH(average 2000-2006)

R&D EXPENDITURE AND INNOVATION(percentages of GDP in 2007, unless otherwise stated)

TFP growth (1)

(annual percentage changes)

R&D

exp

endi

ture

(per

cent

ages

of

GD

P)

BE

EU15

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

ATDEDK

ES

FI

FR

IEIT

JP

LUNL

PT

SE

UK

US

BE

EU15

Sources : EC, OECD, EU KLEMS.(1) The TFP data were obtained from the EU KLEMS database to permit international

comparison on a harmonised basis. They are available for all countries only until 2006 – with the exception of Luxembourg and Portugal (2005) – and are not comparable with those presented in chart 46, since the method of breaking down potential growth differs from that of the Bank.

(2) Score obtained from the European innovation scoreboard, 2008. A higher score indicates a more innovative economy.

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also essential to innovation, and facilitates the spread of new technologies in the economy. On the other hand, the degree of market regulation and the level of competition influence the entry of new firms and hence the devel-opment of new ideas. These various factors are briefly discussed below, together with a description of Belgium’s position in relation to other European countries.

First, in terms of R&D expenditure, the level in Belgium – at 1.9 p.c. of GDP in 2007 – has been stagnating for a number of years and falls short of the commitments given under the Lisbon strategy. For comparison, R&D expendi-ture averages 2.3 p.c. in the three main neighbouring countries (Germany, France and the Netherlands), and is close to 3.5 p.c. in economies such as Sweden or Finland. Belgium also features a particularly low level of public funding for R&D and a concentration of expenditure on a small number of sectors, or even firms, accompanied by heavy dependence on abroad. While an increase in R&D spending is not sufficient in itself to trigger a virtuous innovation process, a positive link is generally apparent among the advanced economies between the level of expenditure on R&D, expressed as a percentage of GDP, and the growth of TFP.

The European innovation scoreboard developed as part of the Lisbon strategy considers innovation from a broader angle than just R&D expenditure. In particular, it takes

chart 48 entrepreneurShip

(2007 figures ; scale from 0 to 1 ; a higher score indicates more developed entrepreneurial activity or a more favourable entrepreneurial climate)

HHH

H

HH HH H

H HH HHHHH HHH HHH H

H

0.0

0.2

0.4

0.6

0.8

1.0

0.0 0.2 0.4 0.6 0.8 1.0

ES

SLHU LUMTPT

DKEL LT BE FRPL IEITSK ATCY DECZEE FI

NLLV UKSE

Entr

epre

neur

ial a

ctiv

ity (1

)

Entrepreneurial climate (2)

Average EU15

AverageEU15

0.0

0.2

0.4

0.6

0.8

1.0

Source : European Entrepreneurship Survey Scoreboard (2007).(1) The index of entrepreneurial activity depends on the business creation rate, the

proportion of firms under three years old in the total population of enterprises, and the profile of the entrepreneur (featuring higher or lower risk aversion).

(2) The index of entrepreneurial climate depends on the obstacles to setting up a business, the perception of entrepreneur status, the possibility of a second chance, and the motivation to become an entrepreneur (deliberate choice or one dictated by economic conditions).

account of whether the production factors are geared to innovation (scientific staff, access to venture capital), relations between the various players involved in the innovation process (governments, universities, research centres), and actual achievements (number of firms which have introduced innovative products or processes, number of patents). According to the 2008 edition of this scoreboard, Belgium is in 9th place among the EU15. Alongside Austria, Ireland, Luxembourg, France and the Netherlands, Belgium is one of the “follower” countries, with a poorer performance than the “leader” countries in terms of innovation (Sweden, Finland, Germany, Denmark and the United Kingdom) but nonetheless outperforming the European average. The chief obstacles to the innova-tion process in Belgium are clearly financial, and apply mainly to small firms : this concerns the excessive cost of innovation and the lack of internal and external financ-ing. Domination of the market by established businesses is another key factor inhibiting the innovation process.

Entrepreneurship or entrepreneurial spirit plays a key role in the innovation process via its influence on the creation of businesses. Entrepreneurial spirit depends on many cultural and societal factors and on the varying levels of administrative, legal or other barriers hamper-ing its development. In view of its role as an innovation promoter and catalyst, entrepreneurial spirit is an indica-tor which is monitored under the Lisbon strategy. In the latest scoreboard published by the EC, Belgium’s score is slightly below the average for the EU15, in terms of both entrepreneurial activity rate and entrepreneurial climate, these two variables generally exhibiting a posi-tive link in advanced economies. According to the results of the Global Entrepreneurship Monitor survey however, Belgium has a genuine entrepreneurship deficit, some-times attributed to cultural factors, and particularly a very marked preference for employee status, on grounds of stability and security.

In some of the new EU Member States, entrepreneurial activity is strong even though the environment is not par-ticularly favourable : that may reflect entrepreneurship dic-tated by “necessity”, owing to the lack of opportunities for salaried employment. Sweden, the United Kingdom, the Netherlands and Finland have high rates of entrepre-neurship thanks to a favourable institutional context.

Workers’ skills can produce benefits at various stages in the innovation process : scientific staff for R&D, devel-opment of the entrepreneurial spirit, facilitation of the spread of ICT in the economy, etc. The basic level of skills of the labour force can be measured via the proportion holding certificates of tertiary education – which corre-sponds to higher education in Belgium – in the population

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aged from 25 to 29 years, i.e. at the start of their career for this category of graduates. In 2008, that propor-tion was 42 p.c. in Belgium, compared to an average of 31 p.c. in the EU15. Belgium is in second place among the European countries, preceded only by Ireland.

In contrast, regarding expenditure on lifelong learning, Belgium lags behind among the EU15 countries : thus, in 2008, only 7.2 p.c. of persons aged from 25 to 64 years had taken part in training programmes, whereas that pro-portion stood at 10.9 p.c. in the EU15. The best perform-ers in this respect were the three Nordic countries of the

chart 49 education and training oF the labour Force and total Factor productiVity

00 5 10 15 20 2525 30 3575 100

H

H

H

H

H

H

HH

H

H

H

H

HH

FI

50

H

AT

DE

IT

PT

EL

FI

UK

ES

LU

DK

NL

SE

FR

BE

IE

EL

PT

IT

LU

BE

FR

IE

DE

ES

AT

NL

UK

FI

DK

SE

CONTINUOUS TRAINING OF THE LABOUR FORCE(percentages of the population aged 25-64 years participating in a training programme, 2008)

–1.5

–1

–0.5

0

0.5

1

1.5

–2 –1.5 –1 –0.5 0 0.5 1 1.5 2

EDUCATION AND TRAINING OF THE LABOUR FORCE AND TFP GROWTH(average 2000-2006)

Leve

l of

educ

atio

n an

d tr

aini

ngof

the

labo

ur f

orce

(1)

TFP growth (2) (annual percentage changes)

EU15

EU15

–1.5

–1

–0.5

0

0.5

1

1.5

INITIAL EDUCATION OF THE LABOUR FORCE(percentages of the population aged 25-29 years with tertiary education qualifications, 2008)

AT

BE

DE

DK

ES FRIE

IT

LU

NL

PT

SEUK

EU15

Sources : EC, OECD, EU KLEMS.(1) Index calculated by according a weight of 50 p.c. to the normalised results of the countries in terms of initial education and continuous training of the labour force.(2) The TFP data were obtained from the EU KLEMS database to permit international comparison on a harmonised basis. They are available for all countries only until 2006 – with

the exception of Luxembourg and Portugal (2005) – and are not comparable with those presented in chart 46, since the method of breaking down potential growth differs from that of the Bank.

EU and the United Kingdom, with training programme participation rates of over 20 p.c. Lifelong learning must be encouraged since it consolidates the skills acquired in basic training, making it easier for workers to adapt to technological changes or methods of organisation, and therefore contributes to an improvement in the general productivity of the economy. Chart 49 illustrates the positive link, among European countries, between the availability of skilled labour – measured here by an index comprising, in equal halves, the results for initial educa-tion and the results for lifelong learning – and productivity growth.

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Market regulation may also influence a country’s innova-tive performance. Where the current regulations protect existing firms or impose excessively strict operational conditions, they impede access for new entrants, thus restricting innovation. International institutions regularly pinpoint general market regulation, which they regard

chart 50 product Market regulation

(2008 figures; scale from 0 to 6 ; a higher score indicates more restrictive legislation)

3

3

3

2

2

2

1

1

1

State supervision of industrial and commercial enterprises (1)

Legal and administrative barriers to entrepreneurship (3)

Barriers to international trade and investment (2)

BE

DE

NL

FR UK

US

US

UK NL

DK ES JP FI

HU SE DE

AT IT BE PT FR LU CZ PL

INTERMEDIATE INDICATORS

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5SYNTHETIC INDICATOR

Source : OECD.(1) Takes account of the proportion of enterprises under public supervision,

particularly in the network industries, and the method of governance in those enterprises, the existence of price controls, etc.

(2) Takes account of discriminatory treatment between residents and non-residents, the existence of strategic or nationally important sectors, the accessibility of legislation in foreign languages, tariffs, etc.

(3) Takes account of the administrative burdens necessary for starting a business or obtaining licences and permits, administrative simplification, antitrust exemptions, definitions of universal service etc.

as particularly restrictive in Belgium. Thus, the OECD – in its product market regulation indicator – puts Belgium in 4th worst position among the EU15 countries, after Luxembourg, France and Portugal. According to that indicator, the United States and the United Kingdom have the most flexible regulation, alongside the Netherlands.

Belgium’s low score is due particularly to state supervision of industrial and commercial enterprises and the legal and administrative obstacles to entrepreneurship. The blame is attributed to the abundance – rather than the content – of legislation relating to the pursuit of an activity in certain sectors, such as the retail trade. The multiplicity of the levels of power causes a lack of transparency in decision-taking, which tends to hamper entrepreneurship. Conversely, the barriers to international trade and invest-ment are few, in line with Belgium’s status as a small, very open economy, and confirming its desire to stay that way. But the small market size, cultural differences and strong dominant position of the historical operator in certain net-work industries impede the entry of foreign competitors.

In regard to the various factors which may influence the economy’s ability to adapt, Belgium holds an intermedi-ate position, or even a position slightly below the aver-age for the EU15 countries. The Nordic EU countries, the Netherlands and the United Kingdom perform much better. Various other dimensions are also involved, such as the availability of funding appropriate to the various stages in the development of activity. Boosting the devel-opment potential of the Belgian economy will also depend on promoting the responsibility and involvement of all the players concerned – enterprises, social partners, government, academic world, etc.

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4.

labour markEt and labour costs

Labour market and labour costs

chart 51 actiVity and eMployMent

(data adjusted for seasonal and calendar effects, percentage changes compared to the corresponding quarter of the previous year, unless otherwise stated)

2001

2003

2005

2007

200

9–3

–2

–1

0

1

2

3

–6

–4

–2

0

2

4

6

A

–30

–20

–10

0

10

20

30

B

HH

HH

H

H

H

H

H

H

H

H

HHH

H

HHHH

H

H

HH

HHHHHH

H

HH

HH

H

HHH

H

Domestic employment (left-hand scale)

GDP in volume (right-hand scale A)

Domestic employment (change in thousands compared to the preceding quarter) (right-hand scale B)

H

e

Sources : NAI, NBB.

4.1 Labour market

Employment

The economic recession was reflected in the change in employment by the fourth quarter of 2008. The slacken-ing pace of job creation apparent since the beginning of 2008, resulting from the gradual slowing of economic growth, then became much more accentuated, giving way to job losses from the beginning of 2009. Thus, com-pared to the end of 2008, employment initially declined by 17,000 units in the first quarter and continued to fall at much the same rate thereafter. In the final quarter, an extra 20,000 people had lost their job. Net job losses during the year therefore totalled 67,000 units. Though economic activity picked up in the second half of the year, the usual time lapse that occurs before changes in eco-nomic growth affect employment meant that the labour market situation continued to deteriorate. On average, in relation to 2008, domestic employment dropped by 0.5 p.c. to 4,437,000 persons.

However, the response by employment to the weakening of activity was relatively moderate until the end of the year under review, in comparison with the reaction to the decline in activity during previous periods of economic recession. During the 1980-1981 recession, following the second oil shock, employment had contracted rapidly and over a long period, as it was 1984 before net job creation resumed. The next recession, which had set in at the beginning of 1992, had already generated net job losses after one quarter. The decline had been relatively slow, but persisted for eight quarters. During the follow-ing recession, in 2000-2001, the fall in activity had been minimal, and job losses only occurred after a lag of three quarters ; moreover, they never exceeded 0.2 p.c. on quar-terly basis. During the 2008-2009 recession, employment

mirrored the decline in activity after a lag of two quarters, so that job creation became negative at the beginning of the year under review. The scale of the net job losses when compared to the peak of activity preceding the recession was smaller than at the time of the 1980-1981 episode, and did not exceed that seen in the 1992-1993 recession until the fourth quarter. At the end of 2009, those extra job losses were relatively minor in view of the exceptional severity of the crisis.

96

chart 52 reaction oF doMeStic eMployMent during periodS oF receSSion (1) (2)

(indices, employment level corresponding to the pre-recession GDP peak = 100)

0 2 4 6 81 3 5 7 9 1096

97

98

99

100

101

96

97

98

99

100

101

2nd quarter of 2008

4th quarter of 2000

1st quarter of 1992

1st quarter of 1980

T0 :

e

Sources : NAI, NBB.(1) Quarterly data adjusted for seasonal and calendar effects.(2) The chart begins in the quarter (T0 ) in which the pre-recession peak in GDP

occurred, namely the first quarter of 1980, the first quarter of 1992, the fourth quarter of 2000 and the second quarter of 2008.

chart 53 adJuStMent oF eMployMent and oF the VoluMe oF hourS worked to econoMic actiVity

(indices second quarter of 2008 = 100 (1))

95

96

97

98

99

100

101

2008 2009

95

96

97

98

99

100

101

Q4 e

GDP in volume

Domestic employment

Volume of hours worked

Productivity per person in work

Hourly productivity

Q2 Q3 Q4 Q1 Q2 Q3

Average number of hours

Sources : NAI, NBB.(1) Corresponding to the activity peak preceding the recession of 2008-2009.

As reported in a survey conducted by the Bank in the summer of 2009, Belgian firms used a range of strate-gies to cope with the shock of the economic recession. The results of that poll, presented in detail in section 4.2 below, reveal that most firms not only scaled down their workforce, they also reduced the volume of work done by their employees, while a minority mentioned measures concerning wages.

In terms of the year-on-year change, the cyclical trough was reached in the second quarter of 2009, when economic activity was down by 4.2 p.c. Over the same period, the total volume of hours worked declined by 2 p.c., while employment expressed as the number of persons in work dropped by only 0.2 p.c. The delayed adjustment of employment to fluctuations in activity is attributable to a sharp reduction in hours worked per person, amounting to 1.7 p.c. Since employment did not fall in proportion to the decline in GDP, productiv-ity per person – which had already dropped sharply at the end of 2008 and in early 2009 – recorded a further steep fall of 3.9 p.c. in the second quarter. From the third quarter, activity recovered in relation to the preceding quarter. Since employment continued to fall even faster, productivity picked up again especially as there was a

simultaneous slight increase in the average hours worked per person.

The fact that the number of hours worked adjusted faster than employment reflects the practice whereby, in the initial phase of a cyclical downturn, firms adapt by first reducing overtime, but particularly by resorting to the system of temporary lay-offs (on that subject, see also box 9). While that system permits temporary suspension of the execution of employees’ contracts, the employees remain on their employer’s staff register and are there-fore still included in the national accounts employment statistics.

At the beginning of the year under review, recourse to temporary lay-offs for blue-collar workers in fact recorded an exceptionally large increase. Use of this instrument had already expanded significantly at the end of 2008, but there was a further strong rise after that. On average, around 229,000 workers thus drew temporary unem-ployment benefit from the NEO in the second quarter of 2009, up by almost 90 p.c. against the corresponding quarter of 2008. Under the recovery plan decided by the government at the end of 2008, various measures were taken to amplify the buffer role of the temporary lay-offs system, to alleviate the impact of the crisis on employ-ment : on 1 January 2009, temporary unemployment benefits were increased, while workers employed under

97


agency contracts or temporary contracts also qualified for this system, subject to certain conditions.

Later, the government decided to extend the scope of the temporary lay-offs system to white-collar workers, via the “temporary collective scheme for total or partial suspen-sion of employment contracts”. This new measure was adopted under the law of 19 June 2009 laying down vari-ous provisions relating to employment during the crisis. The measure concerns the total or partial suspension (at least two working days per week) of the execution of the employment contract for a specifically limited period (from sixteen to twenty-six weeks), whereas in the case of “conventional” temporary lay-offs of blue-collar workers for economic reasons, the system can be extended after a certain time by the introduction of a compulsory working week. This new provision applies from the end of June 2009 to firms in difficulty, i.e. those which, according to the law, face either a 20 p.c. fall in their turnover or output over one year, or 20 p.c. temporary lay-offs of blue-collar workers for economic reasons, compared to the total number of days declared to the NSSO. These firms must also be bound by a sectoral collective labour agreement, or failing that, a corporate collective labour agreement or corporate plan. During the period of reduced working, the employees concerned receive, in addition to the NEO benefit, a financial supplement paid by the employer in order to limit their loss of income.

Despite this new measure, the year-on-year rise in the number of persons temporarily laid off declined to around 45 p.c. in the third quarter of 2009, then to 19 p.c. at the end of the year. That slowdown is attributable notably to a slight revival in activity and a base effect. Moreover, adjustment via a reduction in hours worked eventually reaches its limits : in the end, firms may be forced to make more lasting cuts in their production capacity, e.g. by redundancies or early retirement of workers who may ini-tially have been temporarily laid off for economic reasons. In December, 165,453 workers were receiving temporary unemployment benefit. That included 6,291 white-collar workers ; in November the figure was 8,910.

The statistics on temporary lay-offs, broken down by branch of activity, which are available only some time after the overall series, reveal that the use of temporary lay-offs was concentrated mainly in two branches – con-struction and manufacturing industry – which have a higher proportion of blue-collar workers than the other branches of activity. However, the strongest rise in tem-porary lay-offs occurred in manufacturing industry, where the increase came to 160 p.c. over the first seven months of the year under review, so that, in July 2009, workers

from that branch represented about half of the persons temporarily laid off.

Another crisis measure adopted in the spring is the indi-vidual temporary reduction in working time – also known as the “crisis time credit”. It applies in the private sector on the same conditions as the preceding measure, e.g. in terms of the fall in turnover and the rate of temporary lay-offs. However, the individual employee (full-time blue-collar or white-collar worker) has to consent to the use of this instrument. Working time is reduced by one-fifth or by half for a maximum period of six months. In December, this measure concerned 2,574 workers.

Finally, the scheme for “temporary adjustment to work-ing time in a crisis” comprises a collective reduction in working time applicable to all employees of a firm or to a specific category of workers in the firm. Full-time blue-collar and white-collar workers cut their working time by one-fifth or a quarter and receive financial compensation from their employer. The latter is granted a reduction in employer’s contributions. The individual worker’s consent is not required, but the firm must have a collective labour agreement in order to qualify for the scheme.

These measures supplementing the recovery plan were already applicable from 25 June to 31 December 2009. Following consultation of the social partners in the National Labour Council, the government decided to take the option of extending them until 30 June 2010, with a few modifications to the access criteria for firms and to the amount of additional compensation for white-collar workers. At the same time, it decided to introduce, for the same period, a supplementary fixed payment of 1,666 euro for blue-collar workers made redundant either individually or owing to bankruptcy.

The government also indicated that it wanted periods of temporary unemployment to be used for training to enhance the employability of the workers concerned. Training can be organised on the employer’s initiative, either outside the firm or in house. In that case, par-ticipants can continue to draw temporary unemployment benefits provided the training is organised by a public employment service – or by a body recognised by the latter –, by a sectoral fund or by the employer, and in this last case, so long as the public employment service has approved the programme’s content. A temporarily unemployed person who decides on his own initiative to pursue training or study – or who was already doing so before his contract was suspended – retains entitlement to temporary unemployment benefits. These provisions apply until 31 December 2010.

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Box 9 – Working time adjustment measures supported by the NEO

In the wake of the recession which battered the Belgian economy from the third quarter of 2008, the decline in activity was reflected in labour hoarding via various mechanisms for adjusting the volume of labour, such as temporary lay-offs, part-time working or crisis time credit. In addition, there are various instruments introduced some years ago, aimed at fairly broad categories of workers and intended to permit the adjustment of working time with financial support from the NEO.

Half-time early retirement offers private sector workers who have worked for twenty-five years or more the opportunity to reduce their working hours. In addition to the unemployment benefits which they receive as persons taking early retirement, they get a supplementary payment from their employer. The system has had rather limited success, and the number of half-time early retirements has fallen since the beginning of the decade. In 2009, this scheme covered fewer than 600 people.

Career breaks in the public sector and time credit in the private sector offer workers the option of suspending their career in whole or in part, while receiving at the same time benefit from the NEO. The full career break or full time credit permits total suspension of work for a limited period of time. It is also possible to reduce working time by between one-fifth and a half for a set period. Workers aged 50 years or over who fulfil certain conditions relating to their seniority as employees and within the firm are eligible to reduce or suspend their working time until they draw their retirement pension. The number of persons taking a full career break or a full time credit has been constantly declining, including in 2009. Conversely, since the start of the decade there has been a steady increase in the partial working time reduction arrangements, and the pace accelerated slightly in 2009 compared to 2008, notably because some employers encouraged such arrangements during the economic crisis.

4

chart 54 teMporary lay-oFFS (1) and agency work (2)

(quarterly averages, percentage changes compared to the corresponding quarter of the previous year)

2001

2003

2005

2007

200

9

–40

–30

–20

–10

0

10

20

30

40

–100

–75

–50

–25

0

25

50

75

100

Temporary lay-offs (left-hand scale)

Blue-collar agency work

White-collar agency work(right-hand scale)

Sources : Federgon, NEO.(1) Physical units (number of payments made by the NEO).(2) Hours worked.

Reduced use of agency staff and non-renewal of tempo-rary contracts are other ways of adjusting the volume of labour in line with activity requirements without resort-ing to redundancy for workers on permanent contracts. These forms of work act as a buffer to cushion cyclical shocks, showing a two-tier labour market according to whether jobs are secure or precarious. The profile of the decline in the number of agency hours worked varies between blue-collar and white-collar workers. In the case of blue-collar workers, who account for almost 60 p.c. of the volume of agency work, there has been a steady and ever-accelerating decline since the last quarter of 2007. In the second quarter of 2009, the number of agency hours worked by blue-collar workers was down by a record 35 p.c. against the previous year. According to the figures for the last two quarters, that downward trend has tended to moderate in parallel with the recovery of output. For white-collar workers, the annual growth rate in the number of agency hours worked only became negative at the end of 2008. The decline gathered pace in 2009 : in the third quarter, it reached 18 p.c., but slowed somewhat thereafter.

99


Special leave, which covers parental leave (accounting for the major part), medical assistance leave and palliative care leave are other specific forms of break from employment, based essentially on personal considerations. Such forms of leave have encountered growing success since they were introduced. In 2009, persons taking special leave increased by 8,000 units, and a growing number of men used the scheme (42 p.c. more between December 2008 and December 2009). The April 2009 increase in the child’s age up to which parents can apply for parental leave (12 years instead of 6) is probably a factor behind the trend apparent in recent months.

Reductions in woRking time

(total number of beneficiaries, annual averages, unless otherwise stated)

Half-time pre-pensions

Full career breaks and full time credit

Career breaks and time credit:

reduction in hours worked (1)

Special leave

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,092 21,786 65,967 9,540

2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,214 23,363 77,571 11,059

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,198 22,895 93,745 14,055

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,073 21,361 113,000 22,224

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926 21,562 127,390 27,459

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873 21,899 141,428 31,522

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782 21,126 153,362 36,471

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 702 19,899 163,549 39,869

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 617 18,360 172,884 44,436

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 582 16,035 183,026 52,435

Source : NEO.(1) Not including crisis time credit.

Apart from the working time reduction measures sup-ported by the public authorities, another way of limiting redundancies by adjusting the quantity of labour is for the employer to introduce or extend a system of part-time working. In that regard, the labour force surveys indicate a continuing rise in part-time employment during the first three quarters of 2009, while full-time employment declined on average over the same period of 2009 com-pared to the previous year.

In all, employment was down by an average of 24,000 units in Belgium in 2009. That fall was attributable to the branches sensitive to the business cycle, namely agricul-ture, industry, construction and market services. These branches lost a total of 52,000 jobs, whereas in 2008, as in 2007, around 50,000 new jobs had been created. Conversely, net job creations continued at a sustained rate in “other non-market services”, which is dominated by

the “health and social work” branch. Largely subsidised by the government, the activities of these services created 17,000 extra jobs in 2009. In the first phase of the recov-ery plan, the Federal Government had decided to increase the allocations to the sectoral Social Maribel funds in 2009 and in 2010, which should permit additional job creation in the private non-market sector. Similarly, per-sonnel employed in general government and education continued to increase in 2009, growing by 7,000 units, or close to the average for recent years.

In contrast, with an additional 4,000 units in 2009, the number of self-employed persons recorded much weaker expansion than in previous years. On a quarterly basis, there was actually a small decline by the second quarter of 2009. The reasons may lie in the worsening busi-ness climate and continuing rise in bankruptcies. Also, since 1 May 2009, Czech, Estonian, Hungarian, Latvian,

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Table 14 LaboursuppLyanddemand

(annual averages ; year-on-year changes in thousands of persons, unless otherwise stated)

2005

2006

2007

2008

2009 e

p.m. 2009 e, level (1)

Population of working age (2) . . . . . . . . . . . . . . . . . 44 63 70 59 44 7,114

Labour force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 47 19 57 26 5,065

National employment . . . . . . . . . . . . . . . . . . . . . 61 53 72 82 –24 4,514

Frontier workers . . . . . . . . . . . . . . . . . . . . . . . . 2 2 2 0 0 77

Domestic employment . . . . . . . . . . . . . . . . . . . 59 50 70 82 –24 4,437

Self-employed . . . . . . . . . . . . . . . . . . . . . . . . 3 4 7 10 4 720

Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 46 63 72 –28 3,717

Branches sensitive to the business cycle (3) 28 32 49 49 –52 2,315

General government and education . . . 16 7 7 9 7 787

Other non-market services (4) . . . . . . . . . 13 7 7 15 17 614

Unemployment (5) . . . . . . . . . . . . . . . . . . . . . . . . . 11 –5 –53 –26 50 551

Sources : FPB, DGSEI, NAI, NEO, NBB.(1) Thousands of persons.(2) Population aged from 15 to 64 years.(3) The branches “agriculture, hunting, forestry and fishing”, “industry”, “construction”, “trade, transport and communication”

and “financial, real estate, renting and business activities”.(4) The branches “health and social work”, “community, social and personal services” and “private households with employed persons”.(5) Unemployed job seekers, comprising totally unemployed persons claiming benefits (except older unemployed persons not seeking work), and other job seekers registered

on a compulsory or voluntary basis. Job seekers working for the Local Employment Agencies were omitted since they are already included in employment.

Lithuanian, Polish, Slovakian and Slovenian nationals have been able to enter the service of employers based in Belgium as paid employees without first needing to apply for a work permit. That liberalisation may have influenced the profile of self-employed activity during the year under review, as in previous years a large number of nationals of the new EU Member States wishing to pursue an activity in Belgium had opted for self-employed status, which entailed fewer constraints in terms of access to the Belgian labour market. The domestic labour market has not yet been fully opened up to nationals of Bulgaria and Romania, two countries which joined the EU later ; they still show a strong interest in working as self-employed persons in Belgium.

Unemployment

The growth of the labour force was weaker than in 2008, at only 26,000 units, compared to 57,000 units a year ear-lier. That slower pace tempered somewhat the impact of the decline in jobs on unemployment. Following a signifi-cant drop in unemployment in 2008, the number of people unemployed increased by 50,000, as an annual average, and the harmonised unemployment rate came to 7.9 p.c., up by 0.9 percentage point against the previous year.

Owing to the escalating impact of the crisis on the labour market during the year, there were 60,000 more people unemployed at the end of 2009 than there had been a year previously. Having been falling steadily since 2006, the seasonally adjusted number of unemployed job seek-ers had reached a low of 495,000 in May 2008. At the end of 2008, the number had risen by 4.6 p.c. above that low point. Since then, the rise has continued : in December 2009, the increase came to 16.9 p.c. Almost all categories of the population are affected by the resurgence of unemployment, but sometimes in quite different ways.

Thus, there has been a substantial rise in the number of persons unemployed who had previously worked in branches of activity particularly sensitive to the business cycle, such as industry and construction. More surpris-ingly at first sight, the number of unemployed job seek-ers who had worked in services – i.e. activities which, except for financial services, are generally less exposed to the direct impact of the crisis – also showed a strong rise. That increase is due partly to the registration of agency workers whose contract was not renewed ; agency work is in fact recorded under the business serv-ices sector and not the branch of activity in which the work was done.

101


chart 55 uneMployMent Since the May 2008 low (1)

(seasonally adjusted data (2), percentage changes compared to May 2008)

–20

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End of 2008 End of 2009

Tota

l

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Source : NEO.(1) The more heterogeneous “Other” categories are not included in the breakdowns by branch of activity and by level of education.(2) The breakdowns by level of education and by period of unemployment, for which only very short time series are available, were seasonally adjusted on the basis of the seasonal

factors of the total series.

The increase in the number of unemployed job seekers was particularly strong in Flanders, where the proportion of employment in branches of activity sensitive to the business cycle is higher than in Brussels and Wallonia. Since male workers are generally over-represented in

those activities, they are the ones who were hardest hit by the crisis up to the end of the year under review. Consequently, for the first time since 1982, the first year for which data are available by gender, unemployed men outnumbered unemployed women in Belgium.

102

chart 56 harMoniSed uneMployMent rate in belgiuM and in the regionS (1)

(percentages of the corresponding labour force of working age)

1999 2001 2003 2005 2007 20090

2

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12

14

16

18

20

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Belgium

Brussels

Flanders

Wallonia

Source : DGSEI.(1) Annual averages until 2008 ; averages of the first three quarters for 2009.

A breakdown by age reveals a very marked rise in unemployment among young people in Flanders, and among older workers in all three regions. On completing their education, young people are in fact the first to be affected by the slowdown in recruitment, and – for those who had secured a job – by the non-renewal of tem-porary contracts, which are more common at this stage of integration into working life. The least skilled are the ones most seriously affected, since in these circumstances they cannot make up for their lack of a diploma by work experience of value to employers. Workers aged 55 and over are still among the first to suffer the consequences of restructuring by firms wishing to adjust their produc-tion capacity and cut costs. A system of pay scales based largely on seniority is one reason why the labour costs of older workers may seem too high in relation to their productivity.

On the labour market, the chances of quickly finding a job and remaining permanently in work normally show a direct, positive correlation with the level of qualifica-tions. However, unemployment among graduates has shown a much sharper increase than that of less skilled persons. Thus, in Flanders the number of highly skilled job seekers increased by almost 80 p.c. compared to May 2008, while the increase for the low-skilled unemployed came to 20 p.c. In the other two Regions, the order of ranking was similar. The inflow of young graduates who have been unable to find a job, and the large-scale use of the system of temporary lay-offs for economic reasons – which made it possible to avoid redundancy for large numbers of blue-collar workers – contributed to these developments. In addition, it should be borne in mind that the absolute number of highly skilled unemployed persons was relatively low at the start of the crisis, ampli-fying the rise expressed as a percentage change for this group.

The seriousness and length of the crisis contributed to bigger numbers of unemployed job seekers and longer periods of unemployment. The reduced staffing require-ment due to the weakness of activity implies not only a drop in recruitment, reducing the unemployment out-flow, but also the non-renewal of agency contracts and temporary contracts, and dismissal of surplus workers, increasing the unemployment inflow. In fact, at the end of 2008, the number of short-term unemployed was about 15 p.c. higher than in May, and in December 2009 the increase came to 32 p.c. Owing to the low numbers find-ing work, many of the unemployed persons registered in 2008 reached the threshold of one year’s unemployment, swelling the number of persons unemployed for between one and two years. At the end of 2009, their number had risen by 33 p.c. compared to the figure at the start of the

crisis. The lengthening of the period of unemployment is particularly marked in Flanders, that Region having felt the impact of the economic recession sooner.

Nevertheless, the proportion of job seekers in the labour force is still significantly higher in Wallonia, and especially in Brussels. On average, over the first three quarters of 2009, these two Regions had a harmonised unemploy-ment rate of 11 and 15.6 p.c. respectively, compared to 5 p.c. in Flanders.

Although shortages persist for certain critical functions and in certain regions, the tensions on the labour market eased considerably as a result of the crisis and the conse-quent reduction in personnel requirements. That is clear, for example, from the Bank’s business surveys in manufac-turing industry, which include a question on impediments to firms’ activity due to a shortage of skilled labour. The indicator, which measures the proportion of firms facing such problems, has been falling steadily since the third quarter of 2008 and did not stabilise until the end of the year under review, having reached its lowest level since the beginning of 1997.

The movement in that indicator is reflected fairly clearly in the change in the harmonised unemployment rate, which also reached a turning point in the spring of 2008, after which it began rising again. On average, in the fourth quarter of 2009, 8.1 p.c. of the labour force was looking

103


chart 57 uneMployMent rate and iMpediMentS to actiVity due to a Shortage oF Skilled labour

(seasonally adjusted quarterly data)

1983

1985

1987

1989

1991

1993

1995

1997

199

9

2001

2003

2005

2007

200

90

2

4

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14

0

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4

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12

14

Harmonised unemployment rate (1)

Impediments to activity due to a shortage of skilled labour (2)

Sources : EC, NBB.(1) Number of job seekers as a percentage of the labour force, calculated on the

basis of the results of the labour force survey harmonised at European level ; series adjusted by Eurostat.

(2) Proportion of firms stating that they face these difficulties, weighted according to their relative size ; moving average over three quarters, in order to reflect the fundamental trend in the series.

for a job, compared to 6.7 p.c. at the lowest point in the previous year.

The pattern of the harmonised unemployment rate since 1983, the year in which the labour force survey was launched, clearly shows that the impact of an economic recession on unemployment may be felt for a long time. After the crises of the early 1990s and the 2000s, the unemployment rate in fact continued to rise for several years, before stabilising for a time and then subsiding. After the 1992-1993 crisis, it had risen by around 3.5 percentage points. It was about seven years before it returned to a level comparable to the previous low point recorded during 1991, i.e. around 6 p.c. at the begin-ning of 2001. Following the crisis at the start of the new millennium, the unemployment rate had increased by around 2.5 percentage points. However, the decline that had set in from 2006 was weaker : at the turning point in the second quarter of 2008, it was therefore still half a percentage point higher than the figure recorded at the previous two low points. The 2008-2009 recession therefore began at a time when the impact on unem-ployment of the 2000-2001 recession had not yet been entirely neutralised. However, it should be noted that, in view of the simultaneous expansion of the labour force,

the number of unemployed job seekers never returned to a level equivalent to that recorded before each of these episodes of economic recession. The forecasts for 2010 suggest that unemployment is likely to rise. As in previous recessions, there is therefore an increased risk of job seek-ers becoming long-term unemployed, and of a structural increase in the unemployment rate.

Up to the end of 2009, even though the labour force was growing more slowly, the increase in the unemployment rate was relatively moderate in Belgium, compared to the figures for the other EU Member States, thanks partly to widespread use of labour reallocation schemes and tem-porary lay-offs. As the year-on-year increase was no more than 1.1 percentage points at the end of the year under review, Belgium recorded the most modest rise among the twenty-seven EU Member States, after Germany and Luxembourg. In contrast, the Baltic countries, Ireland and Spain recorded an extremely steep increase in unemploy-ment, ranging from 5 to 12 percentage points. In Latvia and Spain, almost one-fifth of the labour force was look-ing for a job at the end of 2009. On average, the harmo-nised unemployment rate was up by 2 percentage points in the EU in 2009, reaching 9.6 p.c.

chart 58 harMoniSed uneMployMent rate in belgiuM and in the other eu MeMber StateS (1)

(seasonally adjusted data)

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Unemployment rate at the end of 2009 (2) (percentages)

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(per

cent

age

poin

ts)

EUEU15

Source : EC.(1) Number of job seekers as a percentage of the labour force, calculated on the

basis of the results of the labour force survey harmonised at European level ; series adjusted by Eurostat.

(2) December 2009, except for Estonia, Greece, Lithuania, Romania (September) and the United Kingdom (October).

104

Box 10 – A new in-company training indicator

The social balance sheets relating to financial years ending on or after 1 December 2008 record all continuing vocational training activities and initial vocational training initiatives. They also permit a breakdown of personnel by level of education, separately for men and women. A full analysis of the new features introduced in the new form was published in the Bank’s December 2009 Economic Review.

Continuing vocational training initiatives comprise training schemes planned in advance with the aim of augmenting the workers’ knowledge or improving their skills. The social balance sheet identifies two types of continuing vocational training activities. Courses and programmes designed by training officers for a group of

4

chart 59 harMoniSed eMployMent rate in belgiuM and in the eu (1)

(percentages of the corresponding population of working age)

2001 2003 2005 2007 200954

58

62

66

70

54

58

62

66

70

Belgium

EU15

EU

Sources : EC, DGSEI.(1) Second quarter data up to 2004, annual averages from 2005, averages of the first

three quarters for 2009.

Structural developments and vulnerable groups

On the basis of the results of the labour force surveys for the first three quarters of 2009, the employment rate in Belgium was down by 0.9 percentage point against the corresponding period of 2008, at 61.5 p.c. That fall is the largest since the one recorded at the time of the 2001 trough in the economic cycle. However, it is smaller than for the EU as a whole, where the employment rate dropped by 1.2 percentage points in 2009.

The employment rate fell by less in Belgium because the recession began later and was smaller in scale, and because employment is more sensitive to the business

cycle in some countries, such as Spain. In Belgium, firms made relatively more extensive use of measures to cut working time, particularly via the system of temporary lay-offs, which initially kept net job losses down.

Nonetheless, the employment rate was still 4 percentage points lower in Belgium than in the EU15, and the gap has gradually widened in the past ten years. This struc-tural handicap in terms of labour participation applies particularly to certain population groups. The employment rate in Belgium for persons aged between 25 and 54 is actually 1 percentage point above the EU15 average, and for persons with higher education qualifications it is very similar ; in contrast, young people, persons aged over 54, and more especially, persons of foreign origin and those with no more than a certificate of secondary education are still under-represented in employment in Belgium. For these groups, other than nationals of non-EU15 countries, the situation worsened compared to the European average from 2000 to 2009. While some progress was made, it still fell short of the results achieved by our European partners.

The likelihood of integration into the labour market shows a positive correlation with the level of education, as is evi-dent from the low employment rate of low-skilled persons in Belgium which, at 38.5 p.c., is 23 percentage points below the national average, taking all levels of education together. That problem is not specific to Belgium, but it is particularly acute in our country, which lags almost 11 points behind the EU15. Basic education to prepare young people better for the requirements of the labour market, and continuing training to maintain or even improve employability during working life are the main ways of augmenting the chances of lasting participation in the labour market. New information available from the social balance sheets now provides a better insight into the vocational training efforts of Belgian firms. The main results are set out in box 10.

105


trainees, organised at a location separate from the place of work, are recorded in a table relating to formal vocational training. Learning activities other than those referred to above are listed in a table relating to less formal or informal training. They feature a high degree of organisation by the trainee himself, a content determined according to his own needs, and a direct link with the job or place of work. A third table deals with initial vocational training, for persons employed under arrangements which alternate training and work experience.

Of the approximately 50,000 firms which, on 16 September 2009, had filed a social balance sheet for the financial year ending 31 December 2008, almost 19 p.c. reported their training efforts in the ad hoc tables, a much higher percentage than in previous years. Over 7,600 firms completed the table relating to formal training, and 3,300 completed the one on informal training. Just under 1,700 firms filled in the table concerning initial training. Analysis of the individual data shows that the probability of a firm providing formal or informal training depends primarily on its size, the branch of activity coming second. Other significant factors concern whether or not there is a link with a non-resident enterprise, and the composition of the staff (particularly in terms of education level).

In 2008, 580,000 workers, or 37 p.c. of the population considered, took part in one or more formal training activities. Informal training concerned one worker in five, or 323,000 persons, while the rate of participation in initial training was only just over 1 p.c., representing fewer than 18,000 workers. Since it is not possible to identify persons who took part in more than one type of training, adding the participants in training activities together to calculate an overall participation rate implies a risk of multiple counting. The social balance sheet therefore cannot be used to assess the position of firms in the private sector in relation to the target of a 50 p.c. participation rate in 2010, for vocational training initiatives as a whole.

The net costs linked to training activities represented 1.71 p.c. of staff costs overall. If the items concerning informal training and initial training, representing respectively 24 and 3 p.c. of the total, are added, that significantly improves the firms’ performance compared to a situation which takes account of formal training only.

The assessment of the financial effort by private sector firms, compared to the target of 1.9 p.c. defined under the central agreements, was based only on formal training. If all training costs incurred by firms are included, that brings the figure closer to the target, though without reaching it. Nonetheless, it should be noted that the social balance sheet still offers imperfect coverage of some expenditure, particularly that resulting from compulsory payments in the form of social contributions (educational leave, employment and training for risk groups), or payments to the sectoral training funds. The number of firms reporting such expenditure remains low, whereas in theory they all have to contribute. Altogether, these payments corresponded to 0.06 p.c. of staff costs in 2008.

Training acTiviTies recorded in The social balance sheeTs in 2008

(provisional population (1))

Training initiatives

Initial

Formal

Informal

Initial

Participants in a training activity (percentages of average employment) . . . . . . . . . 36.9 20.5 1.1 –

Net costs (2) linked to training activities (percentages of staff costs) . . . . . . . . . . . . . . . . . . 1.24 0.41 0.06 1.71

Source : NBB (Central Balance Sheet Office).(1) Firms which, on 16 September 2009, had filed a social balance sheet for the financial year ending 31 December 2008.(2) Net training costs are obtained by adding to the gross costs the contributions paid and payments to collective funds,

and subtracting subsidies and other allowances received.

4

106

The new headings also record subsidies received (e.g. in the form of training vouchers or allowances paid to firms or workers by the sectoral training funds), which came to 0.07 p.c. of staff costs and financed a total of 6 p.c. of the gross formal training costs incurred.

In the 2005 Generation Pact, the government confirmed the financial target of the social partners, while adding a sanction mechanism at sectoral level, to apply if the overall target of 1.9 p.c. was not achieved. These sanctions will take the form of an additional contribution to the educational leave scheme, payable by sectors whose efforts proved to be inadequate. So far, it has not been possible to conduct the planned assessments : for one thing, the sanction mechanisms were set up at a late stage ; also, the methodological note accompanying the training tables was not published until during 2008, so that firms were unable to adjust their instruments for measuring their training efforts in time. The first assessment will therefore take place in November 2010, on the basis of the provisional results for 2009, for the purpose of the Technical Report of the Central Economic Council Secretariat on the maximum margin available for changes in labour costs.

Moreover, the employment rate for the 15-24 age group, at 25.2 p.c., is well below the average for the EU15, namely 38.5 p.c. That situation is due to two factors : the proportion of students in this age group is higher in Belgium, since courses of study are longer on average here ; also, in Belgium relatively fewer students combine education with employment, in contrast to common practice in other EU15 countries. For the group of young people excluding those still studying, the employment rate is similar to the figure for the rest of the EU.

In Belgium, there are also far fewer people working among the 55-64 age group. Barely one in three is active on the labour market, the lowest proportion for all EU15 countries. Moreover, it is countries with the highest employment rate for seniors that also perform best in terms of jobs for young people, and that apparent com-plementarity can be extended to all age groups.

The proportion of persons aged 55 or over in work has nevertheless risen considerably in Belgium over the past ten years, by around 12 percentage points. Yet that rise falls short of the increase recorded by some other European countries, such as Germany, Finland and the Netherlands, which already had a much higher employment rate for seniors in 2000. The increase in their employment rate in Belgium has resulted in particular from the gradually rising percentage of women in the labour market – which over time automatically leads to larger numbers of working women in the older age groups – and the implementation of a series of measures intended to prevent early departure from the labour market. Thus, the statutory retirement age for women has been raised gradually since 1997 : in January 2009, it increased from 64 to 65 years, the same age as for men. The age at which persons can claim the

status of older unemployed exempt from seeking work was also raised : since 2004 it has been set at 58 years, subject to a few exceptions relating to the length of the person’s career. In addition, the Generation Pact adopted in December 2005 limited the scope for taking early retirement. As a result, although the number of full-time pre-pensions has increased in recent years, the propor-tion of pre-pensioners in the population aged between 50 and 64 years has declined, falling from 6.6 p.c. in 2000 to 5.6 p.c. in 2009. In addition, access to outplacement schemes has been widened, and – since 2007 – persons who continue working after the age of 62 years or following a career of at least 44 years qualify for a bonus in the calculation of their pension. In December 2009, around 45,000 pensioners received a financial benefit of that type. These measures have improved the distribu-tion between the age groups of the impact on jobs of the slowdown in activity since the second half of 2008. The data for 2009 do not yet indicate any significant increase in the number of pre-pensions as a result of the economic crisis.

That may be attributable partly to the time needed to reorganise the business, and the minimum of six months’ notice required for taking a pre-pension if this scheme is used in firms recognised as being in difficulty or under-going restructuring. In addition, in the case of collective redundancies, the workers concerned must have been registered for at least six months in a job centre estab-lished by the employer, or one in which he participates. Workers aged 58 and over, or those who have worked for at least 38 years by the end of the period of notice, are exempt from that condition. The number of pre-pension-ers who have not yet been granted exemption from seek-ing work and who are therefore temporarily registered as

107


Table 15 EarlydEparturEfromthElabourmarkEt

(annual averages, number of beneficiaries aged 50 years and over, unless otherwise stated)

Older unemployed persons, exempt from seeking work

Full-time pre-pensions with exemption

from seeking work

Full-time career breaks and time credit (1)

p.m. Population aged

from 50 to 64 years (thousands)

2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,763 114,478 3,100 1,727

2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,919 109,950 3,620 1,752

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152,309 106,482 3,956 1,780

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146,417 107,915 4,706 1,808

2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,907 109,869 5,661 1,838

2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,683 109,018 6,728 1,876

2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,169 111,069 6,568 1,925

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,939 113,579 5,907 1,979

2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,844 114,151 5,108 2,027

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,801 115,552 3,722 2,069

Sources : DGSEI, FPB, NEO.(1) These figures cover beneficiaries of the general system and those using the specific system for persons aged 50 years and over who, subject to certain conditions,

may suspend their work for an unlimited period, i.e. until they retire.

job seekers has in fact risen significantly. There were 39 of them, on average, in 2007 (the year of entry into force of the new rules requiring them to look for a job), 1,196 in 2008 and 1,976 in 2009 ; in December there were 2,169.

Conversely, the decline – which began in 2003 – in the number of older unemployed persons exempt from looking for work has continued. Similarly, having risen constantly until 2005, the number of persons aged 50 and over taking time credit or a full-time career break has fallen. Though the success of the general time credit system has not dimin-ished, older workers have tended to prefer arrangements whereby they reduce their working time.

Like young people and seniors, foreign nationals are under-represented on the labour market. According to the available data from the labour force surveys – where, taking account of the fact that the breakdown is based on nationality, foreigners who have acquired Belgian nationality are counted as Belgians – only four out of ten nationals of non-EU countries resident in Belgium were in work in 2009, compared to 62.4 p.c. of Belgians. Not only is this the lowest employment rate for foreigners among the EU15 countries, but there are only two countries with a larger discrepancy in comparison with the rate for nationals, namely the Netherlands and Sweden.

The low proportion of foreigners in employment on the labour market in Belgium exerts an indirect downward effect on the categories in which they are more strongly

represented : this composition effect is part of the reason why the employment rates for young people, the low skilled, or for certain regions are below the Belgian average. The low employment rate of non-EU nationals cannot be attributed solely to their lower average educa-tional level since, whether the persons concerned have a low, average or high level of skills, the employment rate for non-EU nationals is at least 10 points percent-age points below the corresponding rates for Belgian nationals.

The apparent complementarity between the employment rates of the various age groups is evident at regional level, too, at least in Flanders and Wallonia. In Flanders, the gap between the employment rates of seniors and young people is below the average, owing to a much higher pro-portion of young people who pursue a gainful occupation in one form or another. In contrast, in Brussels it is very large, since 43.1 p.c. of persons aged from 55 to 64 years were in work in the first three quarters of 2009, by far the highest employment rate of the three regions for that age group, while only one in five young Brussels residents was working.

While the employment rate of non-Belgian EU nationals is below the rate for Belgians in Wallonia, and equal to that rate in Flanders, it exceeds that figure in Brussels. That dif-ference is due mainly to the jobs created for EU nationals in the European civil service and by the many international organisations established in Brussels. Moreover, the large

108

Table 16 Harmonisedemploymentratesin2009

(averages of the first three quarters of 2009, percentages of the corresponding population of working age)

Brussels

Flanders

Wallonia

Belgium

EU15

total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.2 65.5 56.5 61.5 66.0

According to sex

Women . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61.1 70.6 62.6 67.1 72.1

Men . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.4 60.2 50.4 55.9 59.9

According to age

15 to 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.3 28.1 22.0 25.2 38.5

25 to 54 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.4 85.0 74.5 79.8 78.6

55 to 64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.1 35.0 32.8 34.9 47.9

According to educational level

Lower secondary education or less . . . . . . . . . . 35.1 41.9 34.6 38.5 49.1

Upper secondary education . . . . . . . . . . . . . . . . 53.1 69.2 60.9 65.3 71.1

Higher education . . . . . . . . . . . . . . . . . . . . . . . . . 76.2 84.3 80.2 82.1 83.0

Nationality

Belgian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.5 66.0 57.5 62.4 66.6

Other EU nationals . . . . . . . . . . . . . . . . . . . . . . . 63.0 66.0 52.2 59.5 68.0

Non-EU nationals . . . . . . . . . . . . . . . . . . . . . . . . . 39.0 42.4 31.3 38.6 55.9

Sources : EC, DGSEI.

proportion of persons of foreign origin with a lower level of education among the Brussels population of Belgian nationals tends to depress the employment rate of nation-als there. Thus, the labour market situation is particularly heterogeneous in Brussels and in Flanders, with a 24 per-centage point difference between the employment rate of foreign EU nationals and non-EU nationals. In Wallonia, the difference is almost as great, but the employment rate of foreign nationals is much lower there. For comparison, the average difference in the EU15 is 12 percentage points.

4.2 Survey of firms’ reactions to the crisis

Like the central banks of other EU countries, the Bank conducted a survey in June of the year under review to gauge the labour market’s reaction to the economic and financial crisis. That survey was a follow-up to the Autumn 2007 detailed survey on wage-setting covering a broad representative sample of Belgian firms. These surveys were conducted in connection with the Wage Dynamics Network (WDN), a network of researchers from the European System of Central Banks (ESCB), which examined wage dynamics. The follow-up survey aimed to

examine the extent to which firms were affected by the economic and financial crisis and consequently modified their behaviour. In Belgium, it was addressed to the par-ticipants in the initial 2007 survey ; 997 replied, represent-ing a response rate of 70 p.c.

In Belgium, the crisis had a negative impact on the great majority of firms, and half of them were seriously or very seriously affected. The fall in turnover was steepest in firms in manufacturing industry, whereas the construction and energy branches were relatively little affected. There is a clear positive link between a firm’s size and its sensitiv-ity to the crisis.

The main effect of the economic and financial crisis was to dampen demand for the products and services offered. In order of importance, the second effect is the rise in the number of customers experiencing payment difficulties. Problems in obtaining the necessary finance or in getting supplies from the usual suppliers were considered less important by firms participating in the survey.

In regard to cost-cutting strategies, it is noteworthy that firms taking part in the follow-up survey were unable to indicate a single option from the list of possibilities, which included reductions in basic pay, variable pay, permanent

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Table 17 ImpactofthecrIsIsonturnover

(percentages of total responses, unless otherwise stated (1))

Negative impact

p.m. Strong or very strong (2)

Positive impact

Zero impact

total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 50 2 11

Manufacturing industry . . . . . . . . . . . . . . . . . . . . . . 91 61 1 9

Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 0 0 94

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 29 2 26

Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 37 2 8

Business services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 58 1 14

Financial institutions . . . . . . . . . . . . . . . . . . . . . . . . 87 34 9 4

5 to 19 workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 35 2 19

20 to 49 workers . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 45 3 14

50 to 199 workers . . . . . . . . . . . . . . . . . . . . . . . . . . 85 55 2 13

200 workers or more . . . . . . . . . . . . . . . . . . . . . . . 92 55 1 7

Source : NBB.(1) Results weighted on the basis of employment and re-scaled by exclusion of missing responses.(2) Percentage of firms stating that they suffered a strong or very strong decline in their turnover, among those experiencing a negative impact.

employment or temporary employment, hours worked or non-wage costs. They resorted to multiple strategies simultaneously, and all strategies except the reduction of non-wage costs were applied more intensively the greater the impact of the crisis on the firm.

The decision to cut the number of hours worked is par-ticularly noticeable here : that response accounted for one-fifth of all the strategies used. Ways of reducing the hours worked included restricting or stopping overtime, or making increasing use of the time credit scheme. However, the survey results – which thus bear out the administrative statistics – indicate that the principal form

chart 60 coSt-cutting StrategieS in reSponSe to a decline in turnoVer

(percentages of the total number of firms (1))

0 10 20 30 40 50 60 70 80 90 100

Seriously or very seriously affected by the crisis

Slightly or moderately affected by the crisis

All firms

Basic payNumber of permanent workers

Number of temporary workers

Hours workedNon-wage costsVariable pay

Responses via adjustments to :

Source : NBB.(1) Results weighted on the basis of employment and re-scaled by exclusion of missing responses.

110

Table 18 FreezingoFbasicwagesintimesoFcrisis

(percentages of the total number of firms (1))

Implemented

Planned

total . . . . . . . . . . . . . . . . . . . . . . . . . 27 4

Manufacturing industry . . . . . . . . . . 21 7

Energy . . . . . . . . . . . . . . . . . . . . . . . . 0 0

Construction . . . . . . . . . . . . . . . . . . . 3 4

Trade . . . . . . . . . . . . . . . . . . . . . . . . . 36 5

Business services . . . . . . . . . . . . . . . . 31 2

Financial institutions . . . . . . . . . . . . 42 2

5 to 19 workers . . . . . . . . . . . . . . . . 6 6

20 to 49 workers . . . . . . . . . . . . . . . 14 6

50 to 199 workers . . . . . . . . . . . . . . 23 5

200 workers or more . . . . . . . . . . . 42 3

Source : NBB.(1) Results weighted on the basis of employment and re-scaled by exclusion of

missing responses.

in which firms implemented their strategy was the system of temporary lay-offs. This in fact gives Belgian employers an efficient tool for coping, in principle, with short periods of reduced demand. Thanks to this system, the firm no longer bears the major part of the labour costs relating to supernumerary workers, while the workers concerned remain contractually bound to their employer, who can call on his staff at any time in response to a revival in activity. It is mainly firms in manufacturing industry that use this system, which was still confined to blue-collar workers at the time of the survey.

There were also substantial job losses among permanent workers, and even more so for temporary staff. The latter act as a buffer to absorb fluctuations in activity. Almost one-third of firms seriously or very seriously affected by the crisis cut their temporary workforce. No less than 46 p.c. of firms stated that they had resorted to cut-ting jobs. That is therefore a more important channel for Belgian firms than it is, on average, for the coun-tries conducting the follow-up survey (Austria, Belgium, Czech Republic, Estonia, France, Italy, Luxembourg, the Netherlands, Poland, Spain), this strategy concerning only 41 p.c. of the firms polled.

According to the analysis of the results of the initial survey, this greater use of the employment channel may be attrib-utable to several factors in which Belgium differs from other countries. Most of them concern wage rigidity, and more particularly the fact that real wages are hardly ever reduced even if that is economically justified, and the per-centage of variable pay is small. Certain institutional char-acteristics of the labour market, particularly the system of automatic indexation and the fact that wages are often negotiated at a higher level than the firm, also contribute to wage rigidity. Other mechanisms attenuate rigidity. For example, activation of all-in clauses limits the impact of automatic indexation. Similarly, the wage cushion, i.e. the supplementary wage which firms pay on top of the sectoral pay scales, offers some scope for adjusting effective wages in line with economic circumstances if necessary.

In the results of the follow-up survey, wage rigidity is evident in the weak response by wages to the demand shock. While variable pay components made some con-tribution to the adjustment process – they were cut by one in ten firms – basic pay was only very slightly reduced following the economic recession.

More than a quarter of firms stated that they had frozen wages – in that case, this applied to two-thirds of work-ers, on average – and 4 p.c. intended to do so. Large firms, i.e. the group most affected by the crisis, were the

main ones resorting to a pay freeze. In terms of branches of activity, it was mainly services, more especially financial institutions, trade and business services, that used this option, and to a lesser extent firms in manufacturing industry which, all the same, were hard hit. In fact, this last sector was able to make greater use of other meas-ures, such as temporary lay-offs and dismissal of tempo-rary workers, including agency staff.

In response to the crisis, firms also made substantial sav-ings at the level of non-wage costs. That is particularly true in the case of small companies : they have less scope for reducing an already small workforce, so that they seem to postpone any redundancies for as long as pos-sible. The expenditure items which firms most frequently reported cutting are their fleet of vehicles, maintenance, business travel and sales representation expenses, adver-tising and sponsorship.

4.3 Labour costs in the private sector

Recent developments and determinants

During the year under review, gross wages per hour worked in the private sector increased by 2.3 p.c., well below the 3.7 p.c. rise recorded in 2008. Both collectively agreed pay increases – including indexations – and the

111


wage drift contributed to this slowdown. The impact of the contributions which employers pay to social security was almost neutral, as in 2008. Conversely, the other employers’ contributions exerted an upward effect esti-mated at 0.5 percentage point, so that hourly labour costs increased by 2.8 p.c.

In 2009, the real collectively agreed increases implemented by the joint committees at sectoral level were based mainly on earlier agreements, and their impact on the rise in gross wages was virtually negligible, at 0.2 percentage point. Under the central agreement dated 22 December 2008, used as a guide for the sectoral negotiations in the first half of 2009, the social partners agreed to fix the labour cost increase at a maximum of 125 euro per worker for 2009. Taken over the full two-year period, this fixed sum may rise to 250 euro in 2010. In order to protect purchas-ing power without imposing an excessive burden on costs, it was agreed to retain indexation and to grant the fixed increases in the form of instruments such as eco-vouchers or meal vouchers, which are exempt from employers’ con-tributions, so as to limit the overall cost to the employer. The fixed amounts thus allocated are not included in the pay scales and do not influence the index of collectively agreed wages published by FPS Employment, Labour and

Social Dialogue. From a statistical point of view, these pay components come under the wage drift.

The sharp fall in inflation was only partly reflected in the average impact of indexations during the year under review, which continued to reflect the rise in the health index in 2008. In fact, there is a time lag before wages are adjusted according to that index, since it is implemented via mechanisms provided in the sectoral agreements, which may differ substantially from one joint committee to another. Within the broad range of indexation methods, two main categories can be identified. In the first, indexa-tion occurs once the moving average of the health index has passed a threshold. For about three-fifths of private sector workers, however, indexation takes place at fixed intervals : monthly, quarterly, half-yearly, annually, every two months or every four months. In this category, annual adjustment is the commonest mechanism. Thus, for over a quarter of private sector workers, wage indexation occurs annually, in the first quarter of the year, so that it was not until the beginning of 2009 that the wages of over half a million employees were adjusted in line with the high inflation of 2008, and the fall in the health index during the year under review was not taken into account until the first quarter of 2010.

Table 19 HourlylabourcostsintHeprivatesector

(calendar adjusted data, percentage changes compared to the previous year, unless otherwise stated)

2003

2004

2005

2006

2007

2008

2009 e

Grosswagesperhourworked . . . . . . . . . . . . . 1.7 2.1 2.3 3.5 2.9 3.7 2.3

Collectively agreed wages (1) . . . . . . . . . . . . . . . . . . 1.8 2.4 2.4 2.3 1.9 3.4 2.5

Real agreed adjustments . . . . . . . . . . . . . . . . . . . 0.4 1.0 0.4 0.5 0.3 0.5 0.2

Indexations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.4 2.0 1.8 1.6 2.9 2.3

Wage drift (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.2 –0.3 –0.1 1.1 1.0 0.2 –0.1

Employers’ social security contributions (3) . . . . . . . 0.0 –0.1 –0.2 –0.1 0.2 0.0 0.1

Other employers’ social contributions (4) . . . . . . . . 0.1 –0.2 –0.2 –0.1 0.3 –0.3 0.5

labourcostsperhourworked . . . . . . . . . . . . . 1.7 1.9 1.9 3.2 3.4 3.3 2.8

p.m. Includingtheeffectsofthepayrolltaxreductions5(5) . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.9 1.8 3.0 3.1 3.1 2.5

Idem,percentagesofthewagebill . . . . . . . 0.0 0.0 0.1 0.4 0.6 0.9 1.2

Reductionsinemployers’socialsecuritycontributions,percentagesofthewagebill 3.2 3.6 3.9 3.9 4.0 3.9 3.8

Sources : Chamber of Representatives (General Notes on the budget) ; FPS Employment, Labour and Social Dialogue ; NAI ; NSSO ; NBB.(1) Wage increases fixed by joint committees.(2) Increases and bonuses granted by enterprises over and above those under central and sectoral collective agreements, wage drift resulting from changes in the structure of

employment and errors and omissions ; contribution to the change in labour costs, percentage points.(3) Contribution to the change in labour costs resulting from changes in the implicit contribution rates, percentage points.(4) Actual social contributions which are not paid to the government, including group insurance premiums and pension funds or occupational pension institutions,

and imputed contributions including redundancy pay.(5) This concerns the part of the reductions in payroll tax granted to private sector firms. According to the national accounts methodology, the ESA 95, these should be recorded

as a subsidy and not as a direct reduction in charges. They therefore cannot be taken into account in calculating labour costs

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chart 61 index oF collectiVely agreed wageS (1)

(percentage changes compared to the previous quarter)

2007 2008 2009 2007 2008 2009–1

0

1

2

3

4

5

–1

0

1

2

3

4

5

BLUE-COLLAR WORKERS WHITE-COLLAR WORKERS

Industry

Production and supply of electricity, gas and water

Construction

Wholesale and retail trade, repairs to motor vehicles and household goods

Hotels and restaurants

Transport, storage and communication

Financial institutions

Real estate, renting and business services

Source : FPS Employment, Labour and Social Dialogue.(1) Wage increases fixed by joint committees, including indexations.

In 2009, the average impact of indexation came to 2.3 p.c., or almost 0.6 percentage point below the 2.9 p.c. seen in 2008, though the latter was admittedly exceptional. Collectively agreed wage increases thus totalled 2.5 p.c. in 2009, against 3.4 p.c. a year earlier. During the year under review, as a result of the move-ment in inflation and the variations in the indexation mechanisms applied by the joint committees, collectively agreed wage increases varied widely between branches of activity and categories of workers, whereas under normal circumstances the differences are not generally so marked. In particular, since the large auxiliary national joint committee for white-collar workers, representing numerous workers in all branches of activity, applies an indexation mechanism which adjusts wages in January, relatively more white-collar than blue-collar workers received a collectively agreed increase in the first quarter of 2009. This mainly concerns white-collar workers of firms in the hotel and restaurant sector and the construc-tion industry, and those in the “real estate, renting and

business services” branch. However, the movement in the index of collectively agreed wages reveals that some joint committees responsible for blue-collar workers, particu-larly in the hotel and restaurant branch and in “wholesale and retail trade, repairs to vehicles and household goods” also granted substantial pay increases, corresponding principally to indexations, at the beginning of the year under review.

Similarly, the period of negative inflation during the year under review did not have the same impact every-where on the indexation of the wages of private sector workers. On labour market segments where wages are indexed by a fixed 2 p.c., temporary, modest negative inflation does not trigger the downward adjustment of the nominal pay scales. Moreover, negative indexations are not applied by all joint committees which adjust their wages more frequently in line with inflation. Thus, the joint committees for blue-collar construction workers and for blue-collar and white-collar workers in the paper and

113


board production sector, where wages are indexed every three and six months respectively, rule out any reduction in wages. Other joint committees limit negative indexa-tions, e.g. the committee covering blue-collar workers in the paper and board processing sector, where wages are adjusted every six months but with neutralisation of the reduction to a maximum of 1 p.c. Other joint committees delay negative indexations. Thus, the wages of white-collar workers in the clothing and made-up textiles sector are adjusted downwards after a six-month time lag. The pay scales of blue-collar and white-collar workers in the financial sector and the “production and supply of elec-tricity, gas and water” branch, where wages are indexed monthly or every two months, were the main ones to be reduced during the second half of 2009. It should be noted that in 2008 wages in these branches of activity had been adjusted faster to the increase in inflation and that, logically, they were again adjusted more quickly when inflation returned to positive territory. Wages which are indexed when a threshold is exceeded will be adjusted after a longer delay since it will first be necessary to com-pensate for the decline in the health index recorded in recent months. However, it should be remembered that employees covered by such mechanisms did not see any nominal reduction during the period of negative inflation.

Fixed rate pay increases capped at 125 euro per worker made a positive contribution to the wage drift in 2009, but that effect was neutralised by the impact of the eco-nomic crisis on wages and bonuses in firms. Many firms were obliged to freeze base wages and reduce the vari-able pay components, as is evident from the results of the Bank’s survey, discussed in section 4.2. Moreover, when restructuring, firms generally shed the most expensive workers, often the oldest members of their staff. The resulting employment and pay structure makes a negative contribution to the wage drift. Increased use of temporary lay-offs also has an influence on that : firms save money on the wages of the workers concerned, but in most cases they pay them a supplement on their unemployment benefits. Moreover, recourse to that scheme modifies the structure of employment in that it is more commonly used for workers on relatively lower wages. Taking all these factors into account, the wage drift was estimated at -0.1 percentage point during the year under review.

Employers’ social security contributions exerted a slightly positive influence on the rise in labour costs during the year under review. That is because the reductions in con-tributions granted to employers are fixed, non-indexed amounts, whose moderating effect eventually fades away. They represented 3.8 p.c. of the private sector wage bill in 2009, against 3.9 p.c. in 2008. For the period 2010-2011, the government has introduced total exemption from

employers’ social security contributions in the case of recruitment of workers aged under 19 years. In December, as part of the crisis measures in favour of employment, it was decided to revise the amount of the activation of unemployment benefits for several categories of job seekers. An employer taking on an unemployed person under the age of 26 years will qualify for a 1,100 euro reduction in the monthly social contribution for a period of up to 24 months, if the person concerned is low skilled and has been unemployed for at least three months, and a 1,000 euro reduction in the case of a person with secondary education qualifications who has been out of work for more than six months. For older unemployed persons, registered for at least six months, the amount of the activation is also 1,000 euro per month. To combat long-term unemployment, the activation benefit granted to persons who have been seeking work for between one and two years, regardless of their age or level of educa-tion, was increased from 500 to 750 euro during the first twelve months. These arrangements came into force on 1 January 2010 and will terminate on 31 December 2012 ; they will be assessed once they have been in operation for two quarters. Finally, the quarterly maximum for low wages was raised to 6,150 euro on 1 January 2010 and will be increased to 6,450 euros on 1 January 2011 ; that will boost the number of potential beneficiaries of the reductions in employers’ contributions intended to sup-port jobs for the least skilled workers.

Employers also pay contributions which do not accrue to social security. These payments – mainly group insurance premiums, payments to pension funds or occupational retirement institutions and redundancy pay – may increase significantly in times of crisis. On the one hand, it may prove necessary to expand the provisions for defined con-tribution supplementary pensions if the capital invested is generating lower yields and suffering a loss of value owing to stock market movements. Also, the weight of redundancy payments increases if firms are obliged to restructure in order to cope with the decline in business. It is estimated that these other employers’ contributions increased hourly labour costs by 0.5 percentage point in the private sector in 2009.

Labour costs per hour worked therefore increased by 2.8 p.c. during the year under review, against 3.3 p.c. in 2008 ; that deceleration was less marked than in the case of gross wages.

Moreover, under the December 2008 economic recovery plan, new cuts in payroll tax – measures which, accord-ing to the ESA 95 rules used for drawing up the national accounts, are treated as subsidies and not as direct reduc-tions in labour costs – were granted in 2009, further

114

Table 20 LabourcostsandLabourproductivityintheprivatesector

(calendar adjusted data, percentage changes compared to the previous year)

2003

2004

2005

2006

2007

2008

2009 e

Labourcostsperhourworked . . . . . . . . . . . . . 1.7 1.9 1.9 3.2 3.4 3.3 2.8

Number of hours worked per worker . . . . . . . . . . –0.2 0.0 –0.5 0.2 0.2 –0.7 –1.4

Labourcostsperworker . . . . . . . . . . . . . . . . . . . 1.5 1.8 1.4 3.5 3.6 2.6 1.3

Labour productivity (1) . . . . . . . . . . . . . . . . . . . . . . . . 1.0 2.6 0.8 1.8 1.4 –1.3 –2.7

unitlabourcosts(2) . . . . . . . . . . . . . . . . . . . . . . . . 0.5 –0.7 0.6 1.7 2.2 4.0 4.2

Sources : NAI, NBB.(1) Volume of value added per person employed.(2) Labour costs per worker, divided by labour productivity

reducing the cost of labour for firms. In 2009, they repre-sented 1.2 p.c. of the private sector wage bill, compared to 0.9 p.c. a year earlier. The payroll tax cuts in favour of research and development, innovation and certain specific forms of working – shift work, night work and overtime – were retained or even extended during the year under

review, as was the general wage subsidy granted in the form of a payroll tax abatement. The number of overtime hours qualifying for exemption from social contributions was increased from 65 to 100 per worker per annum, and is raised to 135 in 2010. In addition, the rate of abatement of payroll tax for researchers was raised from

chart 62 unit labour coStS and uneMployMent gap

(percentage changes compared to the previous year, in percentage points)

–2

–1

0

1

2

3

4

5

–2

–1

0

1

2

3

4

5

1997

199

9

2001

2003

2005

2007

BELGIUMTHREE MAIN NEIGHBOURING COUNTRIES (1)

(weighted accorded to GDP)

1997

199

9

2001

2003

2005

2007

Unit labour costs (2)

Unemployment gap (3)

200

9 e

200

9 e

Sources : OECD, NBB.(1) Germany, France and the Netherlands.(2) Unit labour costs in the economy as a whole, divided by the volume of GDP per unit of labour.(3) Gap between actual unemployment rate and estimated equilibrium unemployment rate or NAIRU (non-accelerating inflation rate of unemployment), in percentage points.

115


65 to 75 p.c. and the general reduction in payroll tax was increased from 0.25 to 0.75 p.c. in June 2009. If these cost reductions had been taken into account in calculat-ing the increase in labour costs per hour worked, that increase would have been around 0.3 percentage point lower in 2009.

Taking account of an exceptionally sharp decline in the average number of hours worked per worker, labour costs per worker increased at only half the rate of hourly labour costs, namely 1.3 p.c. compared to 2.6 p.c. in 2008.

Since the contraction of output did not have direct, pro-portional repercussions on employment, the productivity of workers in the private sector, which had already fallen by 1.3 p.c. in 2008, declined by a further 2.7 p.c. during the year under review. That decline in labour productivity was reflected in a renewed acceleration in the rise in unit labour costs which, having increased by 4 p.c. in 2008, went up by 4.2 p.c. during the year under review. The cyclical pattern of unit labour costs is particularly marked, as is evident from the very small increases – or even falls – recorded in previous years during a more favourable phase of the cycle. Unit labour costs are in fact connected with the economic situation on the labour market, be it via fluctuations in productivity or via wage movements.

When the economic climate deteriorates, upward pres-sure on wages (and prices) declines, and vice versa. The labour market situation can be assessed via the unemploy-ment gap, i.e. the difference between actual unemploy-ment and the estimated equilibrium unemployment rate, also known as “NAIRU” or non-accelerating inflation rate of unemployment, i.e. the unemployment rate at which there is no upward pressure on wages and inflation. The OECD’s figures for the economy as a whole show that in Belgium, as in the three main neighbouring countries, unit labour costs and the unemployment gap move in opposite directions. That gap contracted steadily up to 2008, while unit labour costs increased. It then began to increase in 2009, reacting after a certain time lag to the weakening of economic activity which had begun in the previous year. That increase is likely to persist in 2010, alleviating the pressure on wages. In conjunction with the rise in labour productivity, that easing of tension should permit a significant reduction in unit labour costs.

Labour cost handicap

The 1996 law on the promotion of employment and the safeguarding of competitiveness gave the Central Economic Council various tasks, including that of

chart 63 labour coSt handicap oF belgian FirMS

(percentage differences in relation to the index for the three main neighbouring countries)

–15

–10

–5

0

5

10

15

20

25

–15

–10

–5

0

5

10

15

20

25

1997

199

9

2001

2003

2005

2007

1997

199

9

2001

2003

2005

2007

Three main neighbouring countries

Germany

France

The Netherlands

HOURLY LABOUR COSTS IN THE PRIVATE SECTOR, ACCORDING TO THE CEC

UNIT LABOUR COSTS IN THE TOTAL ECONOMY, ACCORDING TO THE OECD AND THE NBB

200

9 e

200

9 e

Sources : OECD, CEC, NBB.

116

assessing the competitiveness of firms in terms of labour costs. That assessment is based on the relative move-ment, since 1996, in hourly labour costs in the private sector in Belgium and in the main neighbouring countries and trading partners, namely Germany, France and the Netherlands. According to the estimate of the CEC sec-retariat, the labour cost handicap came to 3.5 p.c. in the year under review, representing a small improvement of 0.1 percentage point compared to 2008. That is due to the stronger rise in hourly labour costs in Germany, where there was an even steeper decline in hours worked than in Belgium, without a proportionate decline in the wage bill. In fact, German firms made extensive use of the system of temporary lay-offs, whereby the employer pays premiums which compensate for between 75 and 90 p.c. of the loss of net pay. Clearance of the time savings accounts, reduction in the number of overtime hours and temporary cuts in working time introduced to safeguard jobs also contributed to the fall in the volume of hours worked.

The other two neighbouring countries, like Belgium, recorded a weaker rise in hourly labour costs than in the previous year, so that the competitive advantage in rela-tion to France continued to decline, while that vis-à-vis the Netherlands remained stable. In the latter country, the working time reduction measure initially introduced in response to the decline in activity was replaced by a system of partial unemployment with effect from 1 April in the year under review. In France, the existing system of reducing working time was extended.

The labour cost handicap expressed in terms of hourly labour costs takes no account of the relative movement in productivity compared to the three main neighbour-ing countries. If the stronger rise in productivity in those countries is taken into account, the labour cost handicap measured on the basis of unit labour costs was even bigger, and is estimated at 8.9 p.c. at the end of the year under review.

119

5.

pricEs

Prices

Table 21 Harmonisedindexofconsumerpricesforbelgium

(percentage changes compared to the previous year)

Total

p.m. Idem,

euro area

p.m.Health index (3)

Energy

Unprocessed food (1)

Processed food

Underlying trend

in inflation (2)

Non- energy

industrial goods

Services

2003 . . . . . . . . . . . . . . . . . 1.5 2.1 0.2 1.7 2.8 1.5 1.0 1.9 1.5

2004 . . . . . . . . . . . . . . . . . 1.9 2.1 6.6 0.9 2.2 1.3 0.3 2.1 1.6

2005 . . . . . . . . . . . . . . . . . 2.5 2.2 12.7 1.7 2.0 1.3 0.3 2.1 2.2

2006 . . . . . . . . . . . . . . . . . 2.3 2.2 7.3 3.3 2.1 1.5 0.9 2.1 1.8

2007 . . . . . . . . . . . . . . . . . 1.8 2.1 0.2 3.0 4.7 1.4 0.9 1.9 1.8

2008 . . . . . . . . . . . . . . . . . 4.5 3.3 19.8 2.8 7.8 1.8 1.3 2.3 4.2

2009 . . . . . . . . . . . . . . . . . 0.0 0.3 –14.0 0.4 1.7 2.1 1.4 2.6 0.6

p.m. 2009, euro area . . . –8.1 0.2 1.1 1.4 0.6 2.0 –

Sources : EC, DGSEI.(1) Fruit, vegetables, meat and fish.(2) Measured by the HICP excluding food and energy.(3) National CPI, excluding products considered harmful to health, namely tobacco, alcohol, petrol and diesel.

5.1 Summary

Having reached 5.9 p.c. in July 2008, inflation measured by the harmonised index of consumer prices (HICP) fell sharply in Belgium, dropping to –1.7 p.c. in July 2009. It then began rising again, becoming slightly positive by the end of the year under review, at 0.3 p.c. On average, inflation disappeared in 2009, whereas it had come to 4.5 p.c. in the previous year.

Negative inflation figures, even over a relatively brief period, are exceptional in Belgium and had not been seen since 1960. However, as demonstrated by the analysis which follows, one cannot conclude that Belgium expe-rienced a period of deflation in 2009 (see also box 3 on this subject).

In fact, the emergence of negative inflation during the year under review is due solely to the movement in energy prices. In parallel with the collapse of energy commodity

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chart 64 negatiVe inFlation, without a generaliSed Fall in priceS19

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2008 2009 2010

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7

underlying inflation trend (3)

CONTRIBUTION OF THE MAIN COMPONENTS TO INFLATION(percentage points, unless otherwise stated)

HICP (1) (2) of which contribution from :

food

energy

BASE EFFECTS (5)

Inflation (percentages) (left-hand scale)

Base effects due to non-energy products (percentage points)

Base effects due to energy products (percentage points)

(right-hand scale)

Unweighted proportion

Weighted proportion (4)

PROPORTION OF PRODUCT CATEGORIES RECORDING PRICE FALLS (percentages)

Inflation measured by the HICP (2)

Inflation expected in the next twelve months (6)

INFLATION EXPECTATIONS(percentage changes compared to the corresponding month of the previous year)

Sources : EC, NBB.(1) Percentage changes compared to the corresponding month of the previous year.(2) Excluding the estimated effect, in January and July 2000, of the fact that prices discounted in sales have been taken into account in the HICP since 2000.(3) Measured by the HICP, excluding food and energy.(4) Weighted by the respective weights of the product categories in the HICP.(5) Cumulative base effects since January 2008. They represent the contribution to the change in inflation during a given month which is attributable to substantial movements in

the corresponding month of the previous year. To calculate them the monthly change in the HICP was compared, for each month, with the normal profile (i.e. the average rate of change taking account of seasonal factors). That method permits prediction of the impact of base effects during the next twelve months.

(6) Balance of replies to the Bank’s consumer survey, converted to an inflation indicator comparable to the HICP in accordance with the standardisation procedure described in Aucremanne L., M. Collin and T. Stragier (2007), Assessing the gap between observed and perceived inflation in the euro area : Is the credibility of the HICP at stake?, NBB, Working Paper 112.

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prices on the world market from August 2008, consumer prices of energy declined, whereas they had risen strongly during the first seven months of 2008. The negative base effects associated with the disappearance of the impact of the surge in these product prices in 2008 contributed significantly to the sharp fall in inflation during 2009. A similar phenomenon also occurred in the case of processed foods.

The influence of these base effects was at its height in July 2009, when inflation reached its lowest point, pre-cisely because energy and processed food had recorded the strongest price increase in that month of the previous year. The negative contribution of the base effects then declined in the second half of 2009, and in principle, on the basis of the price movements recorded in 2009, those effects can be expected to imply higher inflation in 2010. That is one reason why all the inflation forecasts for 2010 – both those of the Bank and those of the Federal Planning Bureau, international institutions and private forecasters such as the primary dealers – have remained invariably positive.

Prices of the other main analytical components of the HICP – essentially non-energy industrial goods and serv-ices, which together represent over 70 p.c. of the HICP in Belgium – continued to increase. Although the rise in the prices of these components slowed significantly during the year, the increases still came to 1.4 and 1.7 p.c. respectively at the end of the year under review. While a more detailed analysis reveals that the number of products covered by the HICP for which price falls were recorded in 2009 increased slightly, that number remained generally small in historical terms. Following in-depth examination of the very extensive sample of individual price readings on which the consumer price index is based, the Price Observatory within the National Accounts Institute came to the same conclusions in its report on the movement in prices in the second quarter of 2009, i.e. when inflation dipped sharply : in fact, the number of individual products reduced in price does not seem to have increased very much. Yet deflation proper refers to a situation of gener-alised price falls.

In that connection, it is also noteworthy that the only available yardstick for inflation expectations in Belgium – which, via conversion to an inflation indicator compara-ble to the HICP, is derived from the replies to the question in the monthly survey asking consumers for their opin-ion on the movement in prices over the coming twelve months – did not entirely mirror the downward trend in inflation, and became slightly positive again at the end of the year under review. Consumers therefore did not immediately expect further price reductions. If they had

done so, that could have contributed towards the start of a vicious deflationary spiral in which expectations of price reductions would have led to a rise in real interest rates ex ante and caused the economic agents to postpone their expenditures ; that in turn would have reinforced the contraction in demand and exerted additional downward pressure on prices. It is difficult for a fall in inflation caused by commodity prices to be linked to this type of mecha-nism. In commodity-importing countries like Belgium, such a development is, on the contrary, a factor support-ing purchasing power and demand in the economy.

Finally, from the point of view of monetary policy, the question whether or not a period of deflation occurred in 2009 is relevant for the euro area viewed as a whole, but less so for the individual Member States, because monetary policy aims to control inflation measured at the level of the entire monetary union. Divergences in infla-tion which may be recorded between member countries are essentially variations in relative prices which, in theory, generate a relative loss of competitiveness (if the deviation is upwards) or a relative gain (if the deviation is down-wards). As explained in more detail in chapter 2, the euro area did not record any deflation, and monetary policy did everything possible to prevent an excessively steep fall in inflation. One of the reasons why the Eurosystem aims at moderate but positive inflation – namely less than but close to 2 p.c. – is to ensure that, when a Member State has to adjust relative prices downwards in order to restore its competitiveness, it can do so without having to face a long period of negative inflation. In that case, its ability to adjust could be hampered by nominal down-ward rigidities which may affect wage- and price-setting. Recent research conducted by the Bank in connection with the Wage Dynamics Network – a research network of the European System of Central Banks – showed that, owing to the indexation system, nominal wages have less downward rigidity in Belgium than in most other euro area Member States. Other studies conducted earlier by the Eurosystem, via the Inflation Persistence Network, had established that in Belgium, as in the euro area, there were few signs of downward nominal price rigidity. Consequently, the 2 p.c. buffer included in the definition of price stability by the ECB Governing Council can, in principle, be considered more ample for Belgium than on average for the other euro area members. Sudden disin-flation or a possible period of negative inflation would thus be less damaging for Belgium than for many other Member States, precisely because indexation reduces the risks of an undesirable increase in real wages.

Since the steep decline in inflation was not the precursor to a deflationary spiral either in Belgium or in the euro area, and a possibly sharper fall in inflation in Belgium

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chart 65 inFlation gap between belgiuM and the euro area

199

9

2001

2003

2005

2007

200

9 2008 2009–2

–1

0

1

2

3

4

5

6

–2

–1

0

1

2

3

4

5

6

INFLATION (percentage changes compared to the corresponding month of the previous year)

Belgium (1)

Euro area

CONTRIBUTION OF THE MAIN COMPONENTS TO THE INFLATION GAP(percentage points)

Gap between Belgium and the euro area Contribution made by :

unprocessed food

processed food

gas and electricity

petroleum products

underlying inflation trend (2)

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

–2.0

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

Sources : EC, NBB.(1) Excluding the estimated effect, in January and July 2000, of the fact that prices discounted in sales have been taken into account in the HICP since 2000.(2) Measured by the HICP, excluding food and energy.

will not have any adverse effects on wage-setting but, on the contrary, would improve Belgium’s competitiveness, it is therefore entirely appropriate to ask whether infla-tion in Belgium declined sufficiently in 2009, in response to the sudden reversal of the trend in commodity prices and the marked contraction of activity. Though inflation in Belgium in 2009 was lower than in the euro area, by 0.3 percentage point, that difference seems relatively small in view of the fact that the positive inflation gap in 2008 had been 1.2 percentage points. Analysis of the inflation gap according to the main components of the HICP supports that point of view. It reveals that the pres-ence of a negative inflation gap in 2009 is due solely to energy products, whereas they were responsible for most of the positive gap in 2008. In the case of petroleum products, the positive and negative gaps recorded in 2008 and 2009 respectively were similar in size. The inference is that, as has often been explained in the Bank’s publica-tions, the greater sensitivity of these products to crude oil price fluctuations in Belgium is symmetrical. Conversely, the positive inflation gaps recorded for gas and electricity in 2008 do not seem to have been followed by equivalent negative gaps in 2009. Processed food prices in Belgium continued to increase faster than in the euro area, despite

the sharp deceleration in the rise in prices of commodi-ties used in their manufacture. It is not only the greater volatility of electricity, gas and processed food prices but also their apparent asymmetry that raises questions about price-setting for these product categories, as discussed in more detail below, and underlines the need for more fun-damental analytical research on the subject, for instance under the aegis of the Price Observatory established during the year under review.

Another reason for the relatively small size of the nega-tive inflation gap in 2009 lies in the movement in the underlying inflation trend, namely inflation in services and non-energy industrial goods, which was higher in Belgium than in the euro area from the last quarter of 2008, although the price increases included in that figure did slow down against the backdrop of the economic crisis. The conclusion is that the influence of the cyclical downturn on inflation in 2009 was less in Belgium than in the euro area. At the end of 2008 and the beginning of 2009, when the financial crisis spread to the real economy, the 2008 surge in inflation was in fact still having a major impact on labour costs, and on other cost components such as profit margins in certain sectors, via

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the indexation applied to the setting of both wages and prices. This shows that the indexation of wages and other incomes makes it more difficult to control the general movement in prices and costs in Belgium, as do the prob-lems mentioned above concerning the pricing of certain energy products and processed foods.

While, as stated earlier, the practice of indexation reduces nominal rigidity, it is nonetheless a significant source of real rigidity, so that the adjustment of the economy is more difficult in the case of supply shocks affecting the equilibrium level of real wages. Where those shocks are negative, such as a deterioration in the terms of trade or a less favourable movement in productivity, the lack of flex-ibility in real wages exposes the economy to the risk that the slowdown confronting it at that point will be exacer-bated by a loss of competitiveness, whereas safeguarding competitiveness is essential for a small open economy like Belgium. Conversely, if the economy experiences positive shocks of the same type – an improvement in the terms of trade or a rise in productivity – the resulting positive impact on activity is reinforced by an improvement in competitiveness taking account of the initially favourable effect on inflation, and hence on indexation.

If there is a random succession of negative and positive shocks of this type, the effect of wage and price indexa-tion can be assumed to be largely neutral in the medium term in regard to inflation, competitiveness, economic activity and employment. Thus, over the first eleven years of monetary union, inflation in Belgium has not systemati-cally exceeded that in the euro area, despite indexation. As explained in chapter 4 on the labour market and labour costs, it even became a source of wage moderation during the year under review.

In the case of permanent, or at least persistent, negative shocks, such as a structural upward trend in energy prices or a long-term adverse trend in productivity, the practice of indexation implies that the adjustment has to take place via negotiations concerning real wages. It was pre-cisely to facilitate that process that the 1996 law on the promotion of employment and the safeguarding of com-petitiveness incorporates that practice in a broader frame-work of wage-setting in general, intended to moderate labour costs overall and to align their movement with that in the main neighbouring countries. While developments over the past two years have not cast doubt on the rel-evance of this system, they have nevertheless highlighted the need for constant vigilance, especially as it was clear, during that period, that changes in energy prices have a much stronger impact in Belgium than elsewhere in the euro area.

5.2 Energy and food : transmission of global commodity price impulses

Having accounted for much of the acceleration in inflation in 2008, energy and food – particularly processed food products – made a notable contribution to the slackening pace of inflation during the year under review. Average energy prices were in fact down by 14 p.c., following a rise of almost 20 p.c. in the previous year, and in the case of processed foods the rate of price rises slowed from 7.8 to 1.7 p.c. The movement in unprocessed food prices also assisted the deceleration in inflation in 2009, though to a much smaller degree.

Energy

Consumer prices of energy products depend very much on the movement in crude oil prices on the interna-tional markets. While the dollar price of Brent crude had more than doubled between the beginning of 2007 and July 2008, to reach almost 146 dollars per barrel, it subsequently declined owing to the economic and financial crisis, dropping to only around 40 dollars in December 2008. From January 2009, it gradually climbed back to around 75 dollars during the last quarter of the year under review. As in recent years, there was a nega-tive correlation between the movement in the price of Brent and the exchange rate of the US dollar. As a result, the changes in the crude oil price – first downwards and then upwards – were less marked once expressed in euro. Despite the price increase during the year, prices of Brent in euro remained below those of the previous year until the start of the last quarter of 2009, so that their contri-bution to inflation was negative overall.

In the case of consumer prices of petroleum products, the transmission of changes in the price of Brent is very rapid : it affects international prices of refined products almost instantly, and – in accordance with the “programme con-tract” – the latter then determine the level of prices paid by households, taking account of excise duty, VAT, and distribution costs, and after deduction of any discounts granted by distributors. In 2009, excise duty went up fol-lowing the government’s decision to reactivate the ratchet system which had already been operational from 2003 to mid 2005, whereas in 2008 the reverse ratchet mecha-nism had resulted in reductions in excise duty on petrol (down 3.8 cents between February and October 2008). Under the original system reactivated from January 2009, half of each price reduction due to developments on inter-national oil markets was offset by a permanent increase in excise duty until the point where that increase over the year totalled a maximum of 2.8 cents per litre for petrol

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chart 66 conSuMer priceS oF petroleuM productS

(percentage changes compared to the corresponding month of the previous year)

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9

Consumer prices

PETROL DIESEL HEATING OIL

p.m. Prices in euro of the refined product on international markets

Sources : EC, DGSEI, NBB.

and 3.5 cents for diesel. That maximum was reached in March for diesel and in July for petrol. The overall effect of these increases on inflation can be estimated at 0.1 per-centage point in 2009. Moreover, in October, the govern-ment announced that the ratchet mechanism would be extended in 2010 and 2011, up to a maximum of 4 cents per annum, but only for diesel.

As a result, motor fuel prices declined in 2009 by an aver-age of 16 p.c. compared to 2008, while heating oil prices dropped by 35 p.c. However, owing to the movement in the Brent price during the year, motor fuel and heating oil prices in December 2009 were above their year-end 2008 level. Price fluctuations are generally more marked in the case of heating oil, since that product is more sensitive to the movement in world prices owing to the lower level of excise duty applied. On the basis of similar reasoning, various Bank publications – including the 2008 Report – have shown that the lower overall level of excise duty on petroleum products in Belgium compared to other countries explains why Belgian consumer prices display a relatively higher elasticity to the refined product prices on international markets. Combined with the greater weight of these products in the consumption basket, that is the reason why the contribution of petroleum products to inflation is more volatile in Belgium than in the rest of the euro area. Overall, the Bank’s analyses have not revealed any significant anomalies in the setting of petroleum

product prices in Belgium, although those prices made a sizeable contribution to the inflation gap vis-à-vis the euro area : that applies to both the positive gap in 2008 and the negative gap in 2009.

In 2009, the negative contribution of energy prices to inflation was accentuated by the fall in consumer prices of gas and electricity. Those prices always mirror the move-ment in oil prices after a certain time lag so that they did not start to decline until the second quarter of 2009. Average gas and electricity prices thus dropped by 9.5 and 3.8 p.c. respectively, whereas in 2008 they had soared by 36.5 and 16.5 p.c. These particularly large variations in gas and electricity prices in Belgium, first upwards in 2008 then downwards in 2009, seem fairly atypical in relation to the euro area as a whole, where gas prices increased by 11.5 p.c. in 2008, then fell by 3 p.c. in the following year, while electricity prices went up by 5.1 p.c., and then by 4.3 p.c. They also significantly augmented the inflation gap in relation to the euro area.

The increased volatility in Belgium in the recent period may be attributed partly to the change in the methodology used to record consumer prices of gas and electricity. Since the beginning of 2007, these prices have been recorded month by month on the basis of the actual figures, whereas they used to be recorded monthly on the basis of the annual invoices paid by consumers receiving their statements in

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that particular month. Owing to the switch from the tariffs applicable in the preceding twelve months (“payment” approach) to the tariffs for the month in question (“acquisi-tion” approach), factors affecting gas and electricity prices have had an immediate impact on inflation, increasing its volatility, while under the old recording method the impact of those factors was more gradual, and temporary shocks were smoothed out. While this helps to explain the dif-ference between the current situation in Belgium and the situation in the past, that does not necessarily apply in the case of the gaps in relation to other countries. An article published in the Bank’s December 2009 Economic Review shows that this change certainly cannot explain those gaps : quite the contrary, since it aligns the price recording method with standard practice in the other economies. In fact, the method of recording gas and electricity prices in most euro area Member States, and certainly in the three main neighbouring countries, is based on the “acquisition” approach, and has been for many years. Moreover, that approach is in line with Eurostat rules.

The change in the method of recording gas and electricity prices therefore cannot explain their greater volatility in relation to the euro area. Even if the “payment” approach is applied approximately to the post-2006 period, the

movement in gas and electricity prices in Belgium still deviates considerably from that in the euro area as a whole. If that greater volatility is not due to the methodol-ogy, it must therefore come from characteristics inherent in the setting of gas and electricity prices in Belgium.

As regards pricing, the residential segment of the gas and electricity market has been fully liberalised in Belgium since January 2007, which means that all consumers can choose their gas and electricity supplier. Largely on the basis of the pricing method which used to prevail on the regulated market, most suppliers set their tariffs by a method which automatically adapts prices each month via, on the one hand, an index deemed to reflect the movement in prices of the energy component of natu-ral gas and electricity and, on the other hand, an index assumed to cover the movement in non-energy costs associated with the production and supply of natural gas and electricity. However, suppliers are free to choose the reference indices and define the parameters used in their tariff-setting formulas, and to modify them when they wish. Transport costs and distribution charges are additional to the prices defined by gas and electricity sup-pliers. Since this market segment is still a monopoly, the corresponding items invoiced are controlled by the CREG.

chart 67 conSuMer priceS oF gaS and electricity


1997

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Belgium

Belgium, estimate based on “payment” approach (annual bills)

p.m. Brent in euro (right-hand scale)

Euro area

GAS ELECTRICITY

(left-hand scale)

Sources : EC, DGSEI, NBB.

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chart 68 international coMpariSon oF the leVel oF gaS and electricity priceS on the reSidential Market (1) (2)

(half-yearly data)

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ELECTRICITY PRICES EXCLUDING TAXES(euro/kWh)

GAS PRICES EXCLUDING TAXES(euro/Gj)

Euro area

Belgium

Three main neighbouring countries

0.00

0.05

0.10

0.15

0.20

0.00

0.05

0.10

0.15

0.20

e

e

Sources : EC, NBB.(1) Based on representative consumption profiles of an average household according to the structural indicators obtained from Eurostat.(2) Price levels in the second half of 2009 were estimated on the basis of those in the first half year and the change in prices between those two periods according to the HICP.

Nonetheless, it is possible to identify three significant changes in the setting of consumer prices of gas and electricity in Belgium since January 2007 : the increases in transport and distribution charges in 2008 and 2009, the change in one parameter – the constant – in the formu-las used by the biggest supplier to set charges for gas in October 2007, followed by similar changes on the part of the other suppliers, and the introduction of a spot price in these formulas in January 2007, whereas previously it was only the averages of petroleum product prices taken over several months that were used. The first two fac-tors had only a temporary impact on inflation, although their impact was the most significant. The impact of the increase in the constant in the gas pricing formula can be estimated at around 14 p.c. on average between the end of 2007 and the end of 2008. Regarding the price of electricity, the effect of the increase in the transport and distribution charges can be estimated at 8 p.c. between the beginning of 2008 and the beginning of 2009 ; the effect of the higher distribution charges introduced during 2009 was smaller. The same applies in the case of gas, in both 2008 and 2009. In terms of the price level, these effects are permanent and have therefore given rise to some asymmetry. The third factor, namely the reference to the spot market price of gas, means that consumer prices of gas have become structurally more volatile. However,

the impact of that factor was small between 2007 and 2009, compared with the very strong fluctuations in con-sumer prices of natural gas during the period 2007-2009.

In all, these three changes in pricing have undoubtedly contributed to the increase in price volatility in the recent period. Nevertheless, even if their influence is neutralised, prices were still much more volatile in Belgium than in the euro area. Moreover, that additional volatility was already present before 2007, indicating that it is deeply rooted in the pricing formulas. In the past, however, its impact on the HICP was weaker, not only because of the recording method but also because, with a structurally lower level of commodity prices, the relative importance of the latter in consumer prices of gas and electricity was smaller.

An international comparison of gas and electricity prices excluding taxes – the most relevant yardstick for examin-ing the implications of the pricing method and the opera-tion of the market – also shows that the prices charged on the residential market in Belgium during 2008 were significantly higher than those recorded in the euro area, whereas that had not previously been so. In the case of gas, this handicap seems to have disappeared again in the second half of 2009. Conversely, for electricity the available information indicates that this handicap has

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persisted, although it has diminished. Moreover, it should be noted that gas and electricity prices for the second half of 2009 still only reflect a small part of the increase in energy commodity prices since the spring of 2009. Owing to the transmission – stronger in Belgium – of this new upward impulse, the country’s relative position will prob-ably deteriorate in the near future. Assuming the pricing method remains unchanged, that deterioration is likely to be accentuated if the upward trend in energy commodity prices persists in the coming years.

Food

Food is a second component of the HICP which contrib-uted to the fall in inflation during the year under review. In the case of unprocessed food, namely vegetables, fruit, meat and fish, inflation dropped from around 3 p.c., in each of the three preceding years to 0.4 p.c. in 2009. This component traditionally represents a source of short-term fluctuations in inflation, as prices of these products are largely determined by sometimes very unstable supply conditions. Thus, owing to favourable weather condi-tions, fruit and vegetable prices were below their previous year’s level for almost the whole of the year under review. Despite the high volatility of unprocessed food prices, the inflation profile for these products is fairly similar through-out the euro area. That may be due to the trade in these products between Member States, plus the interdepend-ence of national markets.

Thus, although weather conditions are largely responsible for the erratic pattern of prices in this product category, and usually vary from one country to another, or at least from one group of countries to another, their impact on production and local prices eventually spreads to the other economies via the operation of the markets : a production shortfall in one country creates additional demand for imports from other countries, so that the pressure on supply, and hence on prices, tends to increase through-out the euro area and even beyond. That mechanism also operates in the opposite direction when harvests are good, as they were in 2009. Consequently, unprocessed food made hardly any contribution to Belgium’s inflation gap in relation to the euro area in either 2008 or 2009.

The rise in consumer prices of processed food slowed sharply during the year under review, following the trend of the food commodity prices on the international market. It thus slackened pace from 8.5 p.c. during the first half of 2008 to 0.7 p.c. at the end of 2009. While tensions between supply and demand, due in particular to adverse weather conditions in several regions of the world, the growth of demand for protein-rich foods in

chart 69 conSuMer priceS oF Food


1997

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Belgium

Germany

France

Netherlands

Euro area

UNPROCESSED FOOD

PROCESSED FOOD

Sources : EC, NBB

Asia, greater interest in the production of biofuels and a surge in energy costs, had led to a strong increase in food commodity prices from October 2006 until the first half of 2008, by December 2008 their prices in euro had reverted overall to the level recorded a year earlier. And although, during the year under review, international market prices have edged upwards again, partly as a result of the grad-ual recovery in demand from Asian countries, they have remained well below the peaks attained in the previous year. Thanks to favourable weather conditions, harvests were exceptionally good at a global level, while the tem-porary suspension of the land set-aside obligation and relaxation of quota rules agreed by the EC in a context of high prices augmented supplies in Europe. Moreover,

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Box 11 – Prices and costs in the dairy sector

The developments in milk prices were constantly in the news in 2009. In many euro area countries, farmers took to the streets and poured millions of litres of milk away in protest at prices which were considered too low. This box examines the movement in prices and costs in the Belgian dairy sector on the basis of statistical data in the public domain.

The milk price paid to farmers increased from an average of 27 cents per kilo during the period 1999-2006 to just over 40 cents at the end of 2007, then dropped to around 20 cents during the summer of the year under review. These fluctuations are due to movements in world market prices. In regard to the pricing of foodstuffs in the EU – and hence also the transmission to consumer prices in the euro area in general and in Belgium in particular – it should be noted that, in the past, the European market was largely protected against variations in prices on the global markets thanks to the intervention mechanism provided by the common agricultural policy (CAP). However, in 2007, milk prices on the international markets exceeded the CAP intervention thresholds so that their increase was also reflected in pricing in Europe. At the beginning of 2009, the milk prices prevailing on the international market dropped back below the intervention thresholds so that the CAP stabilised prices to some extent, this time by limiting the fall. Yet the stabilising effect of the CAP was far less pronounced than it used to be, since the intervention thresholds were lowered by successive reforms of the CAP. At the end of the year under review, however, there were signs of recovery on the international markets in milk.

Although there are no exhaustive data on dairy farmers’ costs, FPS Economy produced an estimate of those costs on the occasion of a study published in 2008 and updated in mid 2009 (1). According to that estimate, the variable costs of dairy farming clearly exceeded the selling price of milk in 2008, the main factors being successive increases in the costs of energy and fodder, and that situation did not really change during the year under review, despite some reduction in the variable costs. Even if account is taken of (non product-related) subsidies and other income – sale of cows, etc. –, farmers’ incomes seem to have been insufficient to cover their expenses.

4

oil prices fell sharply on an annual average basis, driving down energy costs and making biofuel production less attractive. Finally, the economic crisis led to a decline in food consumption and imports in some emerging countries.

Unlike in the past, the mechanisms set up under the common agricultural policy (CAP) have done little to cushion these sharp fluctuations in food commodity prices in recent years, so that they were also largely reflected in prices charged in Europe, first via an increase in 2007 and in part of 2008, and then via a reduction. That is particularly noticeable in the case of milk prices (see also box 11). When farm prices dropped to their lowest point, during the summer of 2009, measures were taken at both European and national level to sup-port the agricultural sector in general, and the dairy

farming sector in particular. In addition, in Belgium, the professional federation representing the distribution sector (Fedis) concluded an agreement with organisa-tions representing the dairy farming sector whereby distributors undertook to pay farmers, for six months (from July to December 2009), a supplement capped at 14 euro cents per litre of drinking milk destined for the Belgian market. The distribution sector largely passed on that supplement to the consumer so that the con-sumer price of milk began to increase substantially again between July and September. The mechanical effect of that measure on the rate of increase in the prices of processed food can be estimated at around 0.4 percent-age point during the second half of 2009, which explains why, despite a marked deceleration during the year under review, prices of these products continued to rise faster than in the euro area.

(1) FPS Economy, SMEs, Self-employed and Energy (2008), Évolutions récentes des prix et des coûts dans la filière du lait.

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That is the context in which farmers staged protests, which in Belgium were directed mainly against the distribution sector, notably because farmers accused that sector of succeeding in selling the milk at a much higher price. During the downward phase, the consumer price only partly reflected the prices that farmers had to accept, whereas the upward price shock in 2007 was passed on in full to the consumer. That was not necessarily due solely to the distributors’ pricing policy, since account must also be taken of what happens at the level of the dairy industry, which is an intermediate link between farmers and distributors. At the level of milk consumption in Belgium, it is not possible to identify the respective roles of the dairy industry and distributors. On the other hand, in regard to “best deals” on semi-skimmed milk (i.e. prices for this type of milk product intended to entice customers), FPS Economy conducted, as part of its work for the Price Observatory, a more detailed analysis which suggested that the difference between the consumer price and the price paid to farmers was more or less stable during the upward phase, at around 14 cents per litre, and that this gross margin was shared equally between the dairy industry and the distribution sector (1). The existence of a gross margin of this kind is not problematic in itself, because in principle it reflects the costs of labour, capital and energy entailed in the processing, packaging, transport and distribution of the milk. However, it increased considerably during the period when prices were falling, reaching an average of around 25 cents in the first half of 2009, again being shared equally between the two sectors. The growing difference between the consumer price and that paid to farmers therefore seems to be attributable to both the dairy industry and distributors, who each accounted for half of the increase in the gross margin. Such an analysis is not possible for higher priced milk but, according to the FPS Economy research mentioned earlier, the transmission of the downward movement was even more partial for that type of milk.

priceS and coStS in the dairy Sector

(euro per kilo, unless otherwise stated)19

99

2001

2003

2005

2007

200

9

199

9

2001

2003

2005

2007

200

9

PRICES AND COSTS FOR DAIRY FARMERS

Prices paid to farmers (standardised milk)

Belgian domestic market price (skimmed milk powder)

CAP intervention price (skimmed milk powder)

Approximation of farmers’ variable costs (1) (2)

CONSUMER PRICES

Semi-skimmed milk (1)

p.m. Price paid to farmers (standardised milk)

0.0

0.1

0.2

0.3

0.4

0.5

0.0

0.1

0.2

0.3

0.4

0.5

0.0

0.2

0.4

0.6

0.8

1.0

0.0

0.2

0.4

0.6

0.8

1.0

World market price (skimmed milk powder)

Sources : EC ; DSGEI ; FPS Economy, SMEs, Self-employed and Energy ; NBB.(1) Euro per litre.(2) Approximation based on the methodology developed by FPS Economy in Recent developments in prices and costs in the dairy sector (2008).

4(1) NAI (2009), Price analysis : third quarterly report in 2009 by the NAI.

130

At the end of June, the Belgian federation of distributors (Fedis) concluded an agreement with the Boerenbond and the Algemeen Boerensyndicaat whereby distributors undertook to pay a supplement, capped at 14 euro cents per litre of drinking milk, for a period of six months (from July to December 2009). Since the bulk of the milk produced is not turned into drinking milk for the Belgian market (much of it is processed into other dairy products or destined for export), and since the distribution sector does not pay a supplement for those dairy products, the Belgian dairy farming sector received the equivalent of around 2 cents per litre for its total production under that agreement. Although the organisations representing Wallonian farmers did not sign that agreement, those farmers also benefited. The distribution sector largely passed on that supplement to the consumer, so that the consumer price of milk went up sharply again between July and September. It should therefore show a renewed fall in 2010 since the agreement ended as originally planned in January 2010.

Asymmetries in price setting practices for energy and processed food

Even though prices of energy and food increased again during the year under review, they still remained well below the exceptional peaks seen in the summer of 2008. Those prices in fact fell considerably during the second half of 2008, and for certain commodities the downward trend even continued until the summer of 2009. The question is therefore whether consumer prices of energy and processed food sufficiently reflected that downward movement. There are two reasons why it is important to examine that.

On the one hand, it is the symmetry (or lack of symmetry) between the initial upward phase and the downward phase that is generally the indicator permitting assess-ment of the degree of competition in pricing. In fact, if only a partial picture is available, limited to the phase in which upward pressure on costs is transmitted, it is often impossible to draw definite conclusions on the subject. A high degree of transmission may equally point to either a lack of competition in pricing or the opposite, because in a highly competitive environment, the various links in the chain from production to distribution find it hard not to pass on cost increases, since their margins are already, in principle, small.

On the other hand, price falls should contribute, via indexation, towards safeguarding competitiveness and employment, whereas that same mechanism caused a deterioration in competitiveness during the phase of rising commodity prices. The existence of asymmetries in pricing practices could imply that the moderation which one might expect, a priori, from a reversal of the trend in commodity prices would occur only partially or after a considerable delay.

The reaction to commodity price fluctuations can be con-sidered symmetrical if a decline in the relative price of the commodity influences the relative price of the product in question in exactly the same way as an increase, in terms of both the scale of that reaction and the speed of adjustment. Conducting this analysis at the level of nominal prices, rather than relative prices, could result in the reaction by consumer prices being too often assessed as asymmetrical, and would therefore be too strict. In fact, nominal consumer prices reflect not only the movement in commodity prices but also that in many other inputs involved in the processing of the commodities, on the one hand, and in the packaging, transport and distribution of the final product, on the other. For example, if commod-ity prices return to their initial level, consumer prices do not necessarily do so, even in the case of a symmetrical reaction, since the other costs – often unconnected with the movement in commodity prices – may well have continued to increase in the meantime. In the absence of exact data on the movement in other costs for each of the products examined, the analysis is conducted at the level of relative prices, i.e. taking the underlying inflation trend (i.e. inflation in services and non-energy industrial goods) as an approximation of the movement in these costs in general. That assumption appears justified for labour costs, in view of the indexation mechanisms in Belgium. It also applies the same treatment to operat-ing margins, and is therefore based, to some degree, on the principle that they are indexed to the underlying inflation trend. The analysis concentrates on the period 2007-2009 for energy products and the period 2006-2009 for processed food products, the beginning of 2007 and the beginning of 2006 being the respective starting points for the upward movement in the commod-ity prices relevant to those products.

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For petrol, diesel and heating oil, the relative consumer prices faithfully track the movement in the relative price of the constituent commodity. The upward movement in consumer prices of these products was neither more marked nor more rapid than the downward movement. Via the “programme contract” pricing formulas, fluc-tuations in refined product prices are in fact reflected symmetrically in the maximum price, while distributors’ discounts do not appear to be a significant source of asymmetry either.

In the case of natural gas, relative consumer prices seem to display a slightly less marked fall than the relative price of crude oil, which is traditionally a key determinant of the consumer price of gas, although the latter adjusts to the movement in oil prices after a time lag of around six months. That asymmetry is due essentially to the modifi-cation made by the biggest gas supplier to the constant term in the pricing formula in October 2007, a change which was then copied by the other suppliers. This led to a price increase which can be considered permanent, whatever the level of the oil price. In the case of electricity, a considerable degree of asymmetry is evident. In fact, at its lowest level reached in July 2009, the relative consumer price of electricity was still above its early 2007 level, whereas the relative price of crude oil, used to estimate the movement in the energy cost, had fallen to a level well below its early 2007 figure several months previously. However, if the sharp rises in network tariffs in 2008 and 2009 are taken into account, the transmission of crude oil prices appears to have been far more symmetrical. These results are not surprising since, in principle, the pricing formulas for gas and electricity function in totally symmetrical ways. Only more incidental factors, such as the revision of the pricing formulas for natural gas in October 2007, or the increase in transport and distribu-tion charges in 2008 and 2009, are sources of asymmetry. The movement in consumer prices of gas and electricity in the euro area is less symmetrical than in Belgium, espe-cially for electricity, but – as mentioned earlier – it is much less volatile.

Conversely, for a number of processed foods, there is clearly an asymmetrical reaction by consumer prices. Thus, in mid 2009, the domestic market price for milk powder, in relative terms, had fallen to well below its early 2006 level, whereas the relative consumer price at the end of 2009 was close to the peak attained in the first half of 2008. Even when the price paid by the consumer is adjusted automatically to take account of the 14 cent increase resulting from the agreement described above between the distribution sector and the dairy farming sector, the consumer price of milk did not return to a level corresponding to a symmetrical reaction. As shown in

box 11 in the case of the “best deals” for semi-skimmed milk (i.e. the prices used to entice customers for this type of milk), that absence of symmetry is attributable to the increase in the margin for the dairy industry and the dis-tribution sector. For other processed foods, such as butter and especially bread, clearly asymmetrical reactions were also found.

These asymmetries are not confined to Belgium, but are also a feature of the movement in consumer prices of milk, butter and bread throughout the euro area. In fact, the reaction to the fall in commodity prices is also much slower and less marked there than the response to an increase. In a recent publication, the EC stated that the small size, delayed response and asymmetry of the down-ward adjustment of consumer prices of dairy products indicates that the supply chain is not working efficiently in the EU.

This asymmetric pricing method, for both Belgium and the euro area, is in line with the results of ad hoc surveys of pricing practices conducted in 2004-2005 by a number of Eurosystem central banks, including the Bank, for the Inflation Persistence Network. Those surveys in fact show that cost factors are more significant for price increases than for reductions, whereas the pattern of demand and competitors’ behaviour are more important for price cuts than for increases. It is in fact relatively easy for firms to invoke increases in costs, which are often universally apparent, as the justification for price increases. These surveys also clearly showed that the environment in which firms operate is certainly not one of perfect competition, but that most firms – including those in the food sector and the retail trade – have a degree of market power. Against that backdrop, it is interesting that the reaction of consumer prices of milk and butter in Germany was closer to what might have been expected on the basis of a perfect competition situation. In that country, consumer prices reacted very strongly to world market develop-ments, in both the upward and the downward phase. The high proportion of hard discounters among retailers in Germany is probably a factor here, combined with the fact that they offer primarily, or even exclusively, cheap milk and butter for which margins are small, owing to less differentiation, and the market is more competitive. In other euro area countries, including Belgium, consum-ers have the opportunity to choose cheaper products but seem inclined, at least to some extent, to pay higher prices for certain types of milk or butter, for example.

Finally, it remains possible that the effects of the asym-metries observed during 2008 and 2009 may gradually fade and in the longer term disappear. Moreover, such long-term neutrality is what one might expect on the basis

132

chart 70 aSyMMetrieS in the Setting oF conSuMer priceS

(relative prices, (1), indices January 2007 or 2006 = 100)

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96

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116

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95

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96

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108

112

J

É

B

G

J

É

B

G

J

É

B

G

J

É

B

G

J

É

B

G

J

É

B

G

J

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B G J

É

BGJ

É

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É

B

G

PETROL DIESEL HEATING OIL

BELGIUM

GAS ELECTRICITYELECTRICITY EXCLUDING NETWORK TARIFFS

MILK BUTTER BREAD

MILK BUTTER BREAD

EURO AREA

Consumer prices (2)

Price of the relevant commodity (3) (right-hand scale)

Idem, excluding the increase resulting from the agreement between the distribution sector and the dairy farming industry

(left-hand scale)

Maximum commodity and consumer prices respectively

Minimum commodity price

Point at which the consumer price should have reached its minimum level in the case of a symmetrical reaction (4)

Sources : EC, CBS, CSO, DESTATIS, INE, INSEE, ISTAT, DGSEI.(1) Relative prices compared to the movement in the underlying inflation trend, measured by the HICP excluding food and energy. (2) For the euro area, owing to a lack of detailed data, consumer prices are calculated on the basis of the movement in prices in Belgium, France, Germany, Ireland, Italy, the

Netherlands and Spain. Those countries represented 88 p.c. of the HICP of the euro area in 2009. (3) The movement in commodity prices is measured, for petroleum products, by the prices of refined products in euro, for gas and electricity by the price of Brent in euro, and for

food products by the price on the relevant domestic market, i.e. respectively the price of skimmed milk powder, butter and wheat. (4) The point at which the consumer price should have reached its minimum in the case of a symmetrical reaction is determined by the time taken by the consumer price to

respond to the maximum price of the relevant commodity. If the reaction is totally symmetrical, the consumer price should also have attained a level corresponding to the minimum price of the commodity. The difference between that level and the one actually attained by the consumer price is a good indicator of the degree of asymmetry.

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of theoretical arguments, but where food is concerned it is difficult to test that against historical data, given that the latter were greatly influenced by the stabilising role of the CAP, and are therefore no longer representative for the current situation.

5.3 Underlying inflation trend

During the first half of the year under review, the under-lying inflation trend – measured by the HICP excluding all food and energy products, which therefore corresponds in practice to inflation in services and non-energy industrial goods – continued the rise which had begun in the third quarter of 2008. That acceleration contrasts with the constant downward trend seen in the euro area from the last quarter of 2008, when the financial crisis escalated following the collapse of Lehman Brothers, and contrib-uted to the outbreak of the deepest economic recession of the post-war era. In the second half of the year under review, underlying inflation at last began to recede in Belgium, but remained high in comparison with that of the euro area. At the end of the year under review, it thus dropped to 1.6 p.c. Inflation in both services and non-energy industrial goods outstripped the rates recorded in the euro area. In 2009, the underlying inflation trend was on average 0.7 percentage point higher than the euro area figure, the biggest excess since the start of monetary union, and that diminished only slightly by the end of the year, reaching 0.5 point in December.

The profile of the underlying inflation trend is largely deter-mined by the movement in wages, which are an important cost factor, especially for labour-intensive services, but also for non-energy industrial goods, as the transport and distri-bution of consumer goods similarly make substantial use of labour. Unit labour costs are a relevant cost indicator here since they also take account of the impact of labour pro-ductivity. The way in which fluctuations in unit labour costs are transmitted to consumer prices depends very much on the reaction of profit margins. While temporary increases are often absorbed by margins instead of being passed on directly in prices, larger or more persistent increases gener-ally have a much quicker and stronger impact on consumer prices, since it is not so easy in that case for profit margins to cushion the cost increase. The link between the move-ment in unit labour costs and underlying inflation appears to have become stronger since the outbreak of the eco-nomic and financial crisis, probably because of the very sharp movements in those costs.

Since the start of the crisis, the rise in unit labour costs in the economy as a whole has in fact accelerated very strongly, both in the euro area and in Belgium, attaining

a rate not seen since the launch of monetary union. However, a turning point was reached in the second quarter of 2009 : the rise in unit labour costs then sub-sided to 6.4 p.c. in Belgium and 5.1 p.c. in the euro area, against 7 and 6.1 p.c. respectively in the first quarter. The downward pressure exerted on consumer prices owing to the contraction in demand was largely offset, at least for a time, by the increasing pressure on costs. Underlying inflation therefore only displayed a hesitant fall during the year under review, despite the extremely acute slackening of demand, although it should be noted that these pres-sures on costs were partly absorbed by a narrowing of the margins. Since unit labour costs have risen more strongly in Belgium in recent years, it is unsurprising that underly-ing inflation was higher there than in the euro area during the second half of 2008 and in 2009.

It then remains to determine to what extent the vari-ous components of unit labour costs contributed to the specific profile in Belgium. On the one hand, the gap in relation to the euro area may be due to a divergent move-ment in wages in the strict sense, which in Belgium are determined largely by central and sectoral agreements between the social partners, and by wage indexation. On the other hand, that gap may be due to differences in the movement in productivity, which tends to fall sharply in a recession because firms do not immediately adjust their volume of labour in line with weakening demand. Thus, there are legal and practical obstacles hampering downward adjustment of the volume of labour, at least in the short term. Also, some firms may initially want to retain their workers despite the crisis in order to be better equipped to step up production quickly when the economy recovers and to avoid possibly facing shortages of certain skills.

Since there are no statistics on the number of hours worked for the euro area, unit labour costs have to be broken down in terms of productivity per worker and labour costs per worker. However, in view of the crisis, comparison with Belgium may be risky since the adjust-ment of the number of hours per person in work has not necessarily happened with the same intensity in the other member countries. A breakdown based on the number of hours is nevertheless available for eight member coun-tries, whose aggregate GDP represents 78 p.c. of that of the euro area. Unit labour costs in those countries have followed a pattern very similar to that in the euro area as a whole, so that this aggregate can be taken as a good approximation for developments at the euro area level.

The marked fall in labour productivity turns out to have been the main reason for the surge in unit labour costs. Thus, during the first two quarters of 2009, labour

134

chart 71 underlying inFlation trend and labour coStS in belgiuM and in the euro area

(percentage changes compared to the corresponding quarter of the previous year)

2005 2006 2007 2008 2009

2005 2006 2007 2008 2009 2005 2006 2007 2008 2009

2005 2006 2007 2008 2009

–3

–2

–1

0

1

2

3

–3

–2

–1

0

1

2

3

–2

0

2

4

6

8

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4

6

8

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1

2

3

4

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6

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3

4

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Belgium

Euro area (sample of eight countries (3))

UNIT LABOUR COSTS (1)

PRODUCTIVITY PER HOUR WORKED (1)

Euro area

UNDERLYING INFLATION TREND

LABOUR COSTS PER HOUR WORKED (1) (2)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

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1.0

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Sources : EC, NAI.(1) Total economy.(2) Calculated for the sample of eight countries on the basis of unit labour costs and productivity per hour worked.(3) Figures for the euro area based on a limited sample of countries comprising Austria, Belgium, Finland, France, Germany, Ireland, Italy and Slovakia. That sample covers 78 p.c.

of the euro area’s GDP.

productivity per hour dropped by around 2.5 p.c. in Belgium. In the euro area, a similar fall occurred, so that there must be another explanation for the divergence in unit labour costs.

The explanation therefore lies largely in the divergent movement in labour costs per hour worked, which recorded a persistently stronger rise in Belgium than in the euro area from 2005. In recent years, the increase in labour costs per hour worked in Belgium was only notice-ably lower than in the euro area during the second quar-ter of 2008, owing to the base effect attributable to the redundancy payments in the second quarter of 2007 on account of restructuring in the motor vehicle sector. While labour costs per hour worked were more or less stable in some euro area countries during the year under review, hourly wages increased in Belgium by 4.2 p.c. on average during the first two quarters of 2009, against 3.1 p.c.

in the euro area (sample of eight countries). The strong rise in commodity prices from the beginning of 2007, which had triggered a rapid acceleration of inflation in 2008, contributed via wage indexation to relatively higher wage increases in Belgium in late 2008 and early 2009. However, the ensuing decline in inflation did not begin to curb the rise in labour costs until the second half of 2009.

While the impact of indexation on the movement in labour costs is a factor affecting the rate of price rises in services and non-energy industrial goods, the pressure exerted by the decline in productivity is in principle felt mainly in the branches of the economy most sensitive to the business cycle. It is therefore relevant mainly for the movement in prices of non-energy industrial goods, in which import prices constitute another key determinant. As the decline in productivity was the main cause of the acceleration in unit labour costs between the second

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quarters of 2008 and 2009, it is logical that, in the various euro area countries, unit labour costs exerted a stronger influence on inflation in non-energy industrial goods than in services. Thus, it is striking to find that, in Belgium, the movement in prices of non-energy industrial goods has lately been very similar to that in Germany. These two countries have in fact undergone a relatively marked cyclical decline in labour productivity. Conversely, in the countries where the recession was not only deeper but was also accompanied by a speedier adjustment of employment so that the resulting decline in productivity was not so substantial, such as Spain and Ireland, the rate of price rises in non-energy industrial goods slowed considerably between mid 2008 and mid 2009.

Since, during the 2008-2009 recession, inflation in serv-ices was influenced to a lesser degree by the movement in unit labour costs, its acceleration in Belgium between the second quarters of 2008 and 2009 appears to have been particularly strong. That suggests that the divergent movement in labour costs was not the only factor, and that other costs, including profit margins, also played a role. In some service categories, the movement in prices in Belgium is in fact also determined, at least up to a point, by a tradition of price indexation. That applies in particular to residential rents. These may be freely fixed on renewal of a lease, but during the term of the lease the law limits rent reviews to annual indexation based on the movement in the health index. Thus, although rents

chart 72 inFlation oF non-energy induStrial goodS and SerViceS and unit labour coStS

(percentage points (1))

–10 –5 0 5 10 –10 –5 0 5 10–6

–5

–4

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–1

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1

2

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2

XXX

X

X

X

X

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X X

X

DE

ES

FI

FR

IE

IT

LUNL

EA X

X

X

X

XX

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X

X AT

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IE

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EABE AT FR

NL

Unit labour costs

Pric

es o

f no

n-en

ergy

indu

stria

l goo

ds

Unit labour costs

Pric

es o

f se

rvic

esSource : EC.(1) Difference between year-on-year percentage changes in the second quarter of 2009 and the second quarter of 2008.

may be indexed, their increase was relatively moderate in 2008 and 2009, in contrast with what one might have

chart 73 price indexation practiceS in the SerViceS branch


2007 2009–1

0

1

2

3

4

5

6

20032001 20051999–1

0

1

2

3

4

5

6

Rents

Services with indexed prices (1)

Reference indices for indexed prices (1) (2)

Health index (3)

Sources : DGSEI, NBB.(1) Excluding rents.(2) Weighted average of the various reference indices relevant for services with

indexed prices.(3) National consumer price index, excluding products considered harmful to health,

namely tobacco, alcoholic beverages, petrol and diesel.

136

expected in view of the rise in the health index. Other examples of indexation are the prices of postal services and rail transport, where increases are linked to inflation, or fire insurance premiums which are linked to the ABEX index. Overall, prices of around a quarter of services, or approximately 10 p.c. of the HICP, are adjusted by a more or less formal method of indexation. In contrast to rents, prices of other services featuring one or other form of indexation recorded a much sharper rise in 2008 and 2009. In parallel with the movement in the refer-ence indices relevant for those services, their inflation rate increased significantly in 2008 and in early 2009, before subsiding from the second half of 2009. From then on, indexation also began to contribute towards

moderation of the movement in labour costs. Having reached a peak of 5.2 p.c. in July 2008, the pace of the increase in the health index in fact decelerated sharply, becoming slightly negative from June onwards. Such a source of price and cost moderation is less significant in the other euro area countries, since indexation is less common there. In the third quarter of 2009, unit labour costs slowed more sharply in Belgium than in the euro area, with respective increases of 4.2 and 3.8 p.c. In con-sequence, the underlying inflation gap between Belgium and the euro area, which had already begun to narrow slightly in the second part of the year under review, should continue to dwindle gradually during 2010 and could even become negative.

139

6.

public financEs

Public finances

Table 22 TargeTsforThefinancingrequiremenT(–)orcapaciTyofBelgiangeneralgovernmenT(1)


2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Stability programme and successive updates

December 2006 . . . . . . . . . . . . 0.0 0.3 0.5 0.7 0.9

April 2008 . . . . . . . . . . . . . . . . . –0.2 0.0 0.3 0.7 1.0

April 2009 . . . . . . . . . . . . . . . . . –1.2 –3.4 –4.0 –3.4 –2.6 –1.5 –0.7 0.0

September 2009 (complement) –5.9 –6.0 –5.5 –4.4 –2.8 –1.3 0.0

p.m.Budgets2010and2011 –5.8 –5.6 –5.2

January 2010 . . . . . . . . . . . . . . –5.9 –4.8 –4.1 –3.0 –2.0 –1.0 0.0

Actual figures . . . . . . . . . . . . . . . . 0.3 –0.2 –1.2 –6.0 e

Sources : Chamber of Representatives (budget documents), FPS Finance, NAI, NBB.(1) According to the methodology used in the framework of the excessive deficit procedure (EDP). That methodology differs from that of the ESA 95 which was adapted

in 2001 to exclude from the calculation of the overall balance the net interest gains on certain financial transactions, such as swaps and forward rate agreements (FRAs). The EDP methodology is also used in the other tables and charts in this chapter.

6.1 Revenue, expenditure and overall balance

In the December 2000 stability programme, the govern-ment had expressed its intention to gradually build up a structural budget surplus in order to be able to prefinance a large part of the costs relating to population ageing. During the ensuing years, however, the budget remained relatively close to balance overall and the fiscal targets had been systematically eased ; in consequence, the crea-tion of a surplus had been postponed on each occasion. This means that, leaving aside the prospect of population ageing, it was not possible to form an adequate buffer to absorb the repercussions on public finances of any significant deterioration in the economic environment. In this connection, the opportunity offered by the years of sustained growth from 2004 to 2007 was missed. As in

all other euro area countries, the economic and financial crisis had caused derailment of the government accounts by 2008. While the budget deficit then stood at 1.2 p.c. of GDP, it increased sharply in 2009 to 6 p.c., or twice the threshold beyond which a country is in an excessive deficit situation according to the current European fiscal rules. Among the euro area Member States, only Finland and Luxembourg, which had built up a substantial budget surplus in previous years, managed to prevent their public deficit public from exceeding 3 p.c. of GDP in 2009.

In the April 2009 stability programme, the overall public deficit was still expected to amount to 3.4 p.c. of GDP. That scenario already took account of the economic recov-ery plan approved in December 2008 which – according to the EC’s estimate – would have an impact on the budget of 0.5 percentage point of GDP in 2009. The

140

failure to meet this deficit target is due partly to under-estimation of the seriousness of the economic recession – the stability programme still expected activity to contract by less than 2 p.c. – and of its adverse impact on public finances. Moreover, primary expenditure grew faster than expected, notably owing to two legal cases which resulted in the Belgian State being ordered to repay substantial sums by way of taxes wrongly collected.

However, after assessing the stability programme sub-mitted in April 2009, the EU Council considered that certain basic, compulsory information was missing and that the fiscal targets were not adequately supported by a clearly defined medium-term strategy. Belgium was therefore asked to submit a complement to that programme by no later than 20 September 2009. That addendum took account of the additional deterioration in the economic and fiscal prospects and revised the path of public finances for 2010 and the years ahead. Thus, it took into account a budget deficit of 5.9 p.c. of GDP in 2009, which would remain more or less unchanged in 2010. The target of restoring a balanced budget in 2015, as already announced in the April 2009 version, had been maintained. On the other hand, the budget deficit was to be brought down below 3 p.c. of GDP a year later than originally planned, i.e. in 2013 instead of 2012.

When the federal budget for 2010 was drawn up, on which occasion – by way of exception – the budget for the next year, namely 2011, was already outlined, the fiscal targets were again adjusted slightly. On the basis of an expected deficit of 5.8 p.c. of GDP in 2009, the gov-ernment indicated that it was aiming at a budget deficit of 5.6 p.c. in 2010 and 5.2 p.c. in 2011.

On 2 December, the Ecofin Council considered that Belgium was in an excessive public deficit situation and that it must rectify that more quickly. Pursuant to Articles 126(6) and 126(7) of the Treaty on the Functioning of the EU, and on the proposal of the EC, it was recom-mended that the budget deficit be reduced below 3 p.c. in 2012, if the economic growth conditions conform to those expected in the EC’s autumn 2009 forecasts. In that context, the EC stated that a structural budget adjust-ment averaging around 0.75 p.c. of GDP per annum should be achieved over the period 2010-2012. In its opinion of January 2010, the “Public Sector Borrowing Requirement” section of the High Council of Finance endorsed the aim of eliminating the excessive deficit by 2012 and stood by its recommendation of a return to a balanced budget in 2015. These two recommendations were followed in the stability programme adopted by the government at the end of January 2010.

At the end of the year under review, the public deficit reached a level not seen since the early 1990s. However, its nature was very different, since in 1993 the government had recorded a surplus of more than 3 p.c. of GDP on transactions other than interest charges, whereas in 2009 those transactions ended with a deficit of over 2 p.c.

Revenue

During the year under review, the fiscal and parafiscal revenues of general government declined by almost 5 p.c., contracting more sharply than nominal GDP. Their share in GDP therefore fell substantially, namely by 1.3 percentage points, to 42.4 p.c. Expressed as a percentage of GDP, only social contributions recorded an increase, amounting to 0.4 percentage point, while fiscal revenues were practically all in decline. The impact of the economic and financial crisis was very evident in the revenues generated by corporation tax, withholding tax on income from movable property and registration fees, which contracted sharply. Non-fiscal and non-parafiscal revenues were up by 0.2 percentage point, essentially as a result of payments by financial institutions in connection with the guarantee schemes offered by the government.

Levies on earned incomes were only down slightly as a percentage of GDP. However, that virtual stability masks divergent movements in personal income tax revenues and social contributions, the former having fallen and the latter having increased. Though the marked growth of the share of earned incomes in GDP exerted an upward influ-ence in both cases, that was largely neutralised in the case of personal income tax revenues by the negative effect of structural and temporary measures.

As in previous years, the structural measures taken by the government in fact contributed to the decline in personal income tax revenues by 0.4 percentage point of GDP overall. At federal level, this notably concerned the exten-sion of fiscally attractive forms of remuneration, such as the pay increases of 125 euro in 2009 approved under the central agreement for 2009-2010 (which could be granted in the form of eco-vouchers), which entailed a loss of 113 million euro in revenue, or the non-recurring performance-related bonuses introduced in 2008, which are now having their full impact and therefore cut tax revenues by 60 million. Moreover, the tax allowance for professional expenses was raised, at a cost of 85 mil-lion in revenue. In addition, the increase in the tax-free allowance for low and medium incomes since July 2008 also had a negative influence amounting to 150 million. Furthermore, the system of tax relief for the cost of

141

public financEs

Table 23 RevenueofgeneRalgoveRnment(1)


2005

2006

2007 (2)

2008 (2)

2009 e

Fiscal and parafiscal revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.2 43.8 43.3 43.7 42.4

Levies weighing chiefly on earned income . . . . . . . . . . . . . . . . 25.9 25.2 25.1 25.8 25.7

Personal income tax (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9 11.4 11.2 11.6 11.1

Social contributions (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 13.8 13.9 14.2 14.6

Taxes on company profits (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 3.6 3.5 3.3 2.4

Levies on other incomes and on assets (6) . . . . . . . . . . . . . . . . . . 3.8 3.8 3.8 3.8 3.5

Taxes on goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 11.3 10.9 10.8 10.8

of which :

VAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 7.0 7.0 6.9 6.8

Excise duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 2.2 2.2 2.1 2.1

Non-fiscal and non-parafiscal revenue (7) . . . . . . . . . . . . . . . . . . . . . 5.2 4.9 4.9 5.1 5.2

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.4 48.7 48.2 48.8 47.7

Sources : NAI, NBB.(1) In accordance with the ESA 95, total revenue of general government does not include the proceeds of fiscal revenue which the government transfers to the EU.(2) In 2007, the reform of the method of paying pensions to former BNRC Group staff increased parafiscal levies by around 0.05 p.c. of GDP. In 2008,

social contributions paid by self-employed persons increased by 0.1 p.c. of GDP following the inclusion of “minor risks” in the compulsory sickness insurance.(3) Mainly withholding tax on earned income, advance payments, assessments and the proceeds of additional percentages on personal income tax.(4) Total social contributions, including the special social security contribution and the contributions of persons not in work.(5) Mainly advance payments, assessments and withholding tax on corporate income from movable property.(6) Mainly withholding tax on income from movable property of individuals, withholding tax on income from immovable property (including the proceeds of additional percentages),

inheritance taxes and registration fees.(7) Income from property, imputed social contributions, current transfers and capital transfers from other sectors, plus sales of goods and services produced.

mortgages on personal homes, and personal income tax deductions for energy-saving investments, deductions which were reformed and extended in recent years, gen-erated excess costs of 154 and 273 million respectively during the year under review. Finally, at the regional level, the standard reduction in personal income tax granted by the Flemish Region since 2007, which was originally confined to workers on modest incomes, was extended to all residents of that region provided they were in receipt of earned income ; that depressed personal income tax revenues by a further 350 million euro.

Temporary factors exerted even greater negative pres-sure on personal income tax revenues. The impact of the acceleration in inflation in 2008, which had swollen payroll tax revenues by around 380 million euro in that year, was in fact wiped out by the annual indexation of the scales applicable for the calculation of payroll tax levied in 2009. In addition, the federal government brought forward the personal income tax assessments at the end of the year, and that resulted in a strong rise in tax refunds to households amounting to 0.4 percentage point of GDP.

The personal income tax assessments form the balance of the revenues and the refunds which the government has to pay on the basis of the tax returns. For the federal govern-ment, that means on balance net refunds which, since the implementation of the tax reform approved in 2001 and since the introduction of new or adjusted tax allowances, have increased exponentially, rising from 600 million euro in 2000 to 4.1 billion for the 2008 tax year. The additional percentages on personal income tax are levied by the local authorities jointly with the federal government assess-ments. They are always positive, and for the 2008 tax year they came to around 2.5 billion. The tax assessments for each tax year must be drawn up between the summer of the year in question and June of the following year, at the latest. In recent years, the issuing of tax assessments has started in the closing months of the calendar year, as is evident from the revenues collected by local authorities, but without leading to substantial refunds at federal level during that period, those refunds being made mainly in the initial months of the year following the tax year. Changes in the speed and selection of the assessments are likely to have a considerable influence on the movement in total revenues. During the year under review, the issuing of assessments and the corresponding refunds speeded up significantly, thanks in part to the growing success of

142

chart 74 perSonal incoMe tax aSSeSSMentS (1)

(millions of euro)

2006 2007 2008

2006 2007 2008

2001

2003

2005

2007

2009 e–2,000

–1,500

–1,000

–500

0

500

–2,000

–1,500

–1,000

–500

0

500

FEDERAL GOVERNMENT(monthly data)

LOCAL AUTHORITIES(monthly data)

2009 e0

200

400

600

800

1,000

1,200

1,400

0

200

400

600

800

1,000

1,200

1,400

–8,000

–6,000

–4,000

–2,000

0

2,000

4,000

–8,000

–6,000

–4,000

–2,000

0

2,000

4,000

Federal government

Local authorities

Net impact

200

9 e

IMPACT ON GENERAL GOVERNMENT ACCOUNTS

Sources : FPS Finance, NBB.(1) This chart was produced according to the ESA 95 methodology whereby

revenues are recorded on the date of the notice of assessment, i.e. in principle two months before actual payment. As a result, revenues on a cash basis exhibit a two-month lag, and revenues relating to January and February are allocated to the previous year.

chart 75 iMplicit rate oF leVieS on earned incoMeS (1) (2)

(percentages of labour costs)

1995

1997

199

9

2001

2003

2005

2007

33

35

37

39

41

43

45

33

35

37

39

41

43

45

200

9 e

8.0

–2.6

Belgium

Euro area (3)

Sources : EC, NBB.(1) Calculated on the basis of the national accounts.(2) Defined as the total levies on earned incomes collected by general government,

divided by the wage bill. It excludes the various reductions in payroll tax which are regarded as subsidies to firms, in accordance with the ESA 95 methodology.

(3) Unweighted average.

As a result of the increase in wages as a percentage of GDP, parafiscal levies on earned incomes rose by 0.4 per-centage point of GDP. The rise in social contributions was curbed to some extent by the terms of the negotiated pay increases on top of indexation, granted under the central agreement for the period 2009-2010, as those increases could take the form of meal vouchers or eco-vouchers which are free of tax and social contributions. The phas-ing out of the solidarity contribution on pensions also continued.

Taking account of these developments, the implicit rate of levies on earned incomes – i.e. the fiscal and parafiscal levies expressed as a percentage of the wage bill as cal-culated according to the national accounts – declined by 1.1 percentage points. However, 0.7 point of that decline is due to the acceleration in the rate of personal income tax assessments. The latest statistics available from the EC show that – despite the decline since 1999 – the implicit burden on labour in Belgium was still 8 percentage points above the euro area average in 2007.

Taxes on company profits were down sharply by 0.9 per-centage point, at 2.4 p.c. of GDP. This revenue cat-egory felt the full impact of the financial and economic crisis during the year under review. In nominal terms,

electronic tax returns. In consequence, federal government revenues were down by 0.8 percentage point of GDP, while those of local authorities increased by 0.4 point.

143

public financEs

Table 24 MainfiscalandparafiscalMeasures(1)

(millions of euro, changes compared to the previous year)

2007

2008

2009

Structural fiscal measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –496 –527 –1,123

Federal government and social security . . . . . . . . . . . . . . . . . . . –298 –402 –735

Personal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –335 –240 –835

Taxes on companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –40 17 18

Taxes on goods and services . . . . . . . . . . . . . . . . . . . . . . . . . . 78 –179 82

Communities and Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –187 –50 –350

Local authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –11 –75 –38

Structural parafiscal measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –260 –243 –143

Employers’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –357 –167 –71

Employees’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 –76 –72

Non-recurrent measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –1,432 –95 –1,503

Reduction in VAT on construction of new housing . . . . . . . . . 0 0 –300

Impact of securitisation operations . . . . . . . . . . . . . . . . . . . . . . . –734 233 123

Personal income tax assessments . . . . . . . . . . . . . . . . . . . . . . . . 0 0 –1,326

Tax payable by the nuclear power supply company . . . . . . . . . 0 250 0

Other (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –698 –578 0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –2,188 –865 –2,770

p.m.PercentagesofGDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.7 –0.3 –0.8

Effectofindexationofthepayrolltaxscales . . . . . . . . . . . . 0 380 –380

Sources : Budget documents, NBB.(1) This generally concerns the assumed impact of the measures according to the budget documents. It may differ from the actual impact. No account is taken of measures

to control tax evasion and promote more efficient collection.(2) In 2007, this mainly concerned the disappearance of the effect – equal to 900 million euro in 2006 – of the acceleration of the corporation tax assessments. In that year,

this item also included the positive effect – amounting to 245 million – of the option enabling firms to distribute tax-free reserves at a reduced rate of corporation tax, plus the effect amounting to 233 million generated by the change in the date for payment of social contributions on holiday pay due on termination of employment contracts. In 2008, it was affected mainly by the dissipation of the impact of these last two non-recurrent measures dating from 2007.

withholding tax on incomes from movable property and advance payments by companies were down by almost one-third against the previous year. In the past, it had already been noted that the movement in levies on cor-porate profits was more volatile than that in the reference macroeconomic base. The 2006 introduction of the tax allowance for risk capital (notional interest) may have further heightened cyclical volatility. In fact, since this tax allowance depends on an interest rate in the past and on the level of equity capital, the amount was not immedi-ately affected by the economic recession, and therefore remained fairly stable during the year under review, so that its weight increased significantly in relation to taxable profits, which were in freefall.

Levies on other incomes and on assets decreased consid-erably during the year under review. It was mainly regis-tration fees and the withholding tax paid by individuals on

income from movable property that declined, by 17 and 23 p.c. respectively.

Expressed as a percentage of GDP, revenues from taxes on goods and services remained stable. Under the eco-nomic recovery plan adopted by the Belgian government in response to the economic and financial crisis, it was decided to reduce the rate of VAT temporarily, within certain limits, to 6 p.c. on the construction of new homes and social housing, causing revenues to contract by 300 million euro. Conversely, the reintroduction of the ratchet system on diesel and petrol had a small, positive impact on revenues. Finally, it should be noted that, as in 2008, a payment of 250 million euro was recorded from the nuclear power supply company during the year under review.

144

chart 76 corporate tax reVenueS

(percentage changes compared to the previous year)19

97

199

9

2001

2003

2005

2007

–30

–20

–10

0

10

20

30

–30

–20

–10

0

10

20

30

200

9 e

Taxes on corporate profits

p.m. Tax base (1)

Sources : NAI, NBB.(1) Defined by approximation, according to the macroeconomic approach, as the

gross operating result plus net interest received.

Table 25 PublicrevenuesPergeneralgovernmentsub-sector


Before transfers between sub-sectors

After transfers between sub-sectors

2007

2008

2009 e

2007

2008

2009 e

Entity I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.3 41.2 39.8 29.8 30.4 28.9

Federal government . . . . . . . . . . . . . . . . . . . . . . . 26.6 27.1 25.4 10.6 10.3 8.3

Social security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.7 14.1 14.5 19.2 20.1 20.6

Entity II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.9 7.6 7.8 18.3 18.4 18.8

Communities and Regions . . . . . . . . . . . . . . . . . 4.4 4.4 4.3 11.8 11.7 11.8

Local authorities . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 3.2 3.6 6.6 6.7 7.0

Sources : NAI, NBB.

While the revenues available to the various government sub-sectors after taking account of their mutual transfers are an accurate indication of the resources which each of them can allocate to its own policies, they are not representative of their respective fiscal powers. It is in fact better to measure the scope of those powers against the revenues received by each level of power excluding the impact of those transfers.

The federal government has extensive fiscal powers in relation to total Belgian public revenues, as it is in charge of VAT, corporation tax and most personal income tax. During the year under review, its revenues contracted sharply by 1.8 percentage points of GDP, falling to 25.4 p.c. of GDP. The resources accruing to the Communities and Regions also declined, by 0.1 per-centage point of GDP. Conversely, the revenues of social security and local authorities increased. Social contribu-tions were up as a result of the growing share of earned incomes in GDP, while local authority revenues expanded, mainly as a result of the acceleration of the personal income tax assessments. Following adjustment for trans-fers to other levels of power, the revenues available to the federal government were further eroded during the year under review, as they were down by around 2 percentage points of GDP. The increase in transfers by the federal entity to other levels of power was strongest in the case of the Communities and Regions, owing to the movement in expenditure on pensions for officials formerly employed by those levels of authority. It also contributed to the stronger growth of social security revenues.

Primary expenditure

The primary expenditure of general government, i.e. expenditure excluding interest charges, increased sharply in comparison with 2008, rising from 46.2 to 50 p.c. of GDP. Since that figure is expressed as a percentage of GDP, the particularly adverse change in nominal GDP made a substantial contribution to that deterioration in 2009. Thus, if nominal GDP growth had matched the rate recorded since the early 2000s, the ratio of primary public expenditure to GDP would have risen by 0.9 percentage point. Nevertheless, the particularly strong growth of

145

public financEs

Table 26 PrimaryexPenditureofgeneralgovernment

(deflated by the HICP, percentage changes compared to the previous year, unless otherwise stated)

2005

2006

2007

2008

2009 e

Average 1998-2009 e

Level recorded (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47.9 44.6 44.5 46.2 50.0 44.9

Real growth recorded . . . . . . . . . . . . . . . . . . . . . . . 8.9 –4.5 3.3 2.2 6.1 2.9

Influence of non-recurrent or fiscally neutral factors (2) . . . . . . . . . . . . . . . . . . . 6.9 –5.8 1.2 –0.3 0.8 0.2

Influence of cyclical factors (2) . . . . . . . . . . . . . . . . . 0.0 –0.1 –0.4 –0.2 0.2 0.0

Indexation effect (2) (3) . . . . . . . . . . . . . . . . . . . . . . . . –0.1 –0.5 –0.2 –0.4 1.5 0.0

Real growth adjusted for cyclical non-recurrent or fiscally neutral factors and for indexation effects . . . . . . . . . . . . . . . . . . . 2.3 1.9 2.7 3.1 3.5 2.7

Sources : DGSEI, NAI, NBB.(1) Percentages of GDP.(2) Contribution to real recorded growth of primary expenditure.(3) Effect caused by the difference between the actual indexation of public sector wages and social security benefits and the rise in the HICP.

primary expenditure, amounting to 6 p.c. in real terms, was also a factor.

However, this growth rate does not present a true pic-ture of the underlying trend in the government’s policy on expenditure. To ascertain that, it is in fact necessary to eliminate a whole series of non-structural elements. Those elements include temporary factors, operations which inflate both revenue and expenditure while being neutral for the budget, the influence of the business cycle on expenditure and, finally, differences between inflation and the impact on wages or social benefits of indexation in line with consumer prices.

In 2009, temporary or fiscally neutral factors contributed 0.8 percentage point to the volume growth of primary expenditure. The principal source of the temporary ampli-fication during the year under review was the refund – resulting from court decisions – of certain taxes wrongly levied in the past in the case of companies receiving dividends from foreign subsidiaries, on the one hand, and married unemployed persons, on the other.

The primary expenditure growth rate is also subject to cyclical variations owing to the movement in unemploy-ment benefits, which tracks the economic cycle after a certain time lag. Thus, the gradual slowdown in economic activity, apparent by the end of 2007 and accentuated since then by the recession, had the effect of inflating unemployment expenditure by 18.6 p.c. in real terms in 2009. The business cycle therefore contributed 0.2 per-centage point to the increase in primary expenditure.

The indexation mechanisms for social benefits and civil service pay are a third external factor which influences the real movement in primary expenditure. Thus, social benefits and wages, which account for over 60 p.c. of that expenditure, are linked to the movement in the health index of consumer prices. In 2009, that index rose by an average of 0.6 p.c., whereas the HICP, which is used to deflate expenditure, remained stable. Also, taking account in particular of the smoothing systems and the thresholds applicable under those indexation mechanisms, there was a delay before the speeding-up of the inflation in the summer of 2008 was reflected in indexation, and part of the impact was therefore also felt in the year under review. Overall, the indexation method therefore amplified the real increase in primary expendi-ture by 1.5 percentage points.

After adjustment for the effect of these various factors, primary expenditure expanded by 3.5 p.c. in real terms in 2009, considerably outpacing its average growth since 1998 and the trend growth of GDP.

In 2009, the adjusted primary expenditure of federal gov-ernment increased by 1.9 p.c. in real terms, compared to over 4 p.c. in the two preceding years. This slower growth reflects the attenuation of the pace of the increases in most expenditure categories. However, various measures continued to drive up expenditure in 2009. The reduc-tions in withholding tax on earned incomes – which are recorded as subsidies granted to enterprises in accordance with the ESA 95 – increased at a rate comparable to that of previous years, contributing 1.4 percentage points to

146

chart 77 public health care expenditure (1)

(deflated by the HICP, percentage changes compared to the previous year)

–4

–2

0

2

4

6

8

–4

–2

0

2

4

6

8

J

1995

1997

199

9

2001

2003

2005

2007

200

9 e

Average 1995-2009 e

Change in 2008, including the integration of “minor risks” (2)

Sources : NAI, NBB.(1) Public spending on health care, excluding sickness and invalidity benefits, benefits

for the disabled, transfers to institutions caring for the disabled, and spending on long-term care insurance.

(2) Insurance against “minor risks” concerning health care became compulsory for self-employed persons in 2008, and increased both social security contributions collected and social security expenditure.

Table 27 AdjustedprimAryexpenditurebygenerAlgovernmentsub-sector(1)(2)


2005

2006

2007

2008

2009 e

Average 1998-2009 e

Entity I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 1.6 3.7 3.8 4.4 2.8

Federal government . . . . . . . . . . . . . . . . . . . . . . . 2.7 2.0 4.4 4.2 1.9 2.3

Social security . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7 1.5 3.4 3.6 5.6 2.9

Entity II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 2.4 0.8 1.9 1.9 2.7

Communities and Regions . . . . . . . . . . . . . . . . . –0.2 2.7 1.6 2.5 1.3 2.5

Local authorities . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9 1.9 –0.3 1.1 2.9 2.9

General government . . . . . . . . . . . . . . . . . . . . . . . . 2.3 1.9 2.7 3.1 3.5 2.7

Sources : DGSEI, NAI, NBB.(1) The expenditure of the general government sub-sectors does not include mutual transfers.(2) Real growth adjusted for the influence of cyclical, non-recurrent or fiscally neutral factors, and for indexation effects.

the expenditure growth. For the second year running, and in contrast to what usually happens, the postponement of year-end payments for current purchases of goods and services was limited, a sound measure, especially in the context of the economic revival. Payments of current transfers to households and, to a lesser extent, current transfers to the rest of the world – comprising interna-tional cooperation and a part of the European budget funding – again outpaced trend GDP growth.

The volume growth of the adjusted social security expend-iture surged strongly in 2009 to 5.6 p.c., a particularly high figure. That was due to an acceleration in disburse-ments under all the main categories of social expenditure. Health care expenditure made the largest contribution, rising by around 7.2 p.c. in real terms, one of the highest growth rates seen in recent years. Owing to its significant size – at over one-third of total social spending – and volatility, health care expenditure generally has a decisive influence on the movement in social security spending. However, the substantial rise in health care expenditure in 2009 is due partly to several specific factors, such as the lagged effect of inflation on a range of expenditure, including doctors’ fees. Nevertheless, even disregarding these factors for which the information available is not sufficiently accurate to permit adjustment for analysis purposes, this category of expenditure grew significantly faster than its long-term trend rate, since the effect of those factors explains at the very most only 2.5 percent-age points of the 2009 increase.

The growth of expenditure on pensions, which had already been considerable in 2008, was further amplified. For one thing, the increase in the number of pensioners

continued to accelerate, as a result of general demo-graphic trends and especially the baby boom following the Second World War. Nonetheless, that growth was due mainly to the rise in the number of pensioners during the previous year since – during the year under review – the

147

public financEs

chart 78 priVate Sector penSionerS

(as at 1 January in each year, unless otherwise stated)

1995

1997

199

9

2001

2003

2005

2007

200

9

200

9

J

J

JJJ

J

JJJJJ

J J

J

J J

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

Thousands (right-hand scale)

Percentage changes (left-hand scale)

1,600

1,620

1,640

1,660

1,680

1,700

1,720

1,740

1,760

1,780

1,800

Dec

.

Sources : NPO, NBB.

chart 79 SubSidieS granted to enterpriSeS : SerVice VoucherS and reductionS in withholding tax on earned incoMeS

(millions of euro)

Reductions in withholding tax on earned incomes, of which :

Shift work and night work

General reduction

Other

Service vouchers

2005 2006 2007 20080

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2009 e

Sources : Budget documents, NAI, NBB.

increase was curbed by the raising of the statutory retire-ment age for women from 64 to 65 years with effect from 1 January 2009. Also, the government again took a series of social measures which benefited certain pensioners and totalled around 350 million euro, mainly by way of adjustments in line with prosperity, in order to counteract the downward trend in the relative wealth of the oldest pensioners, and increases in certain minimum amounts.

Even following adjustment for the effects of the business cycle and for temporary measures taken to limit some-what the impact of the crisis, unemployment expenditure also contributed to the acceleration in social security spending. Measures to raise the minimum amounts and the benefits at the start of the unemployment period were particular factors in this growth. New social adjustments which took effect in 2008 or 2009 also contributed to the strong growth of other spending categories, such as family allowances and incapacity benefits, by around 150 million euro overall.

Finally, as in previous years, the subsidies paid to enter-prises by social security recorded a strong increase, prin-cipally as a result of the general reduction in withhold-ing tax on earned incomes and expenditure relating to service vouchers. The total budget allocated to the latter increased by almost 200 million euro, to over 1 billion. That figure disregards the tax allowances also granted to users of these vouchers.

chart 80 inFluence oF the electoral cycle on groSS Fixed capital ForMation oF local authoritieS (1) (2)

(percentage changes in volume compared to the previous year, excluding property sales)

1989

1991

1993

1995

1997

199

9

2001

2003

2005

2007

–30

–20

–10

0

10

20

30

40

–30

–20

–10

0

10

20

30

40

200

9 e

Sources : NAI, NBB.(1) The vertical grey lines indicate the end of the local authority legislative terms.(2) Deflated by the prices of gross fixed capital formation of general government.

148

Box 12 – Pattern of primary expenditure of general government in Belgium

Examination of the pattern of general government primary expenditure – i.e. expenditure excluding interest charges – over the past forty years reveals successive periods of expansion and restraint. From the early 1970s to the beginning of the 1980s, the growth of primary expenditure had been particularly vigorous, rising from 36.8 p.c. of GDP in 1970 to 53.5 p.c. in 1981. A major consolidation effort had then succeeded in cutting the ratio of primary expenditure to GDP, bringing it down to 40.7 p.c. in 1990. In 1993, that ratio had climbed back to around 44 p.c. and then gradually eroded during the remainder of the decade. Finally, in the 2000s, the share of primary expenditure in GDP began growing relatively strongly again, as expenditure rose from 42.5 p.c. of GDP in 2000 to 50 p.c. in 2009, thus reaching its highest level since the beginning of the 1980s.

However, these movements are affected both by changes in GDP and by a range of factors which mask the underlying trend in primary expenditure, as explained in the body of the text. Nevertheless, even after neutralising the effect on the denominator of the 2009 fall in GDP – by assuming that GDP grew then at the rate recorded since the early 2000s – and the impact on the numerator of cyclical, non-recurring or fiscally neutral factors, the primary expenditure ratio still recorded a strong increase during the past decade, amounting to 3.6 percentage points of GDP.

priMary expenditure oF general goVernMent


1970

1973

1976

1979

1982

1985

198

8

1991

199

4

1997

200

0

2003

200

6

35

40

45

50

55

35

40

45

50

55

200

9 e

Sources : NAI, NBB.

4

In contrast, the volume growth of the adjusted primary expenditure of the Communities and Regions diminished in 2009, reaching only 1.3 p.c. This deceleration is due to the return to moderate growth in a number of expendi-ture categories, such as social benefits and subsidies paid to NPIs, which had risen strongly in 2008.

The pattern of the adjusted primary expenditure of local authorities is greatly influenced by the impact of the electoral cycle on their investment. Thus, investment generally expands strongly in the third year after the local elections – last held in 2006 – while declining in the two post-election years. These changes of tempo are reflected in the total local primary expenditure, which increased by 2.9 p.c. in 2009.

149

public financEs

Subsidies paid to enterprises were the principal factor driving up primary expenditure. Their growth was due partly to the reductions in withholding tax on earned incomes – which are recorded as subsidies to enterprises in accordance with the ESA 95 – and partly to the success of the service voucher system introduced in 2003, which augmented the primary expenditure of general government by 0.3 percentage point of GDP.

From 2001 to 2009, social benefits, which account for half of primary expenditure, also made a major contribution to the growth of that expenditure. Social adjustment measures alone contributed 0.9 percentage point of GDP to the increase in expenditure. They mainly affected pensions, which have also felt the first impact of population ageing, principally in the past two years. As a result, real expenditure on pensions grew at an average annual rate of 2.6 p.c. from 2001 to 2009. Health care spending recorded a very steep rise, growing by 3.8 p.c. annually. Among the other social benefits, there was also a large increase in invalidity benefits.

Compensation of employees, which represents almost a quarter of primary expenditure, increased more slowly than expenditure as a whole, by an annual average of 2.3 p.c. from 2001 to 2009. That rise is due partly to the expansion of general government employment, averaging 1.3 p.c. per annum. The share of current purchases of goods and services in primary expenditure remained stable, both growing at practically the same rate, namely an average of 2.7 p.c. per annum.

4

Main categorieS oF priMary expenditure oF general goVernMent (1)

(average annual percentage changes from 2001 to 2009, at constant prices (2), unless otherwise stated)

0 2 3 6 81 4 5 7 9

Subsidies to enterprises

Health care

Other primary expenditure

Total

Pensions

Compensation of employees

Capital expenditure

Real GDP growth

3.0

13.8

4.8

100.0

18.9

8.1

20.6

23.4

7.4

4.6

14.9

5.0

18.9

8.0

6.2

100.0

20.1

22.2

p.m.Shares in 2000 (percentages)

p.m.Shares in 2009 e

(percentages)

Other social benefits

Purchases of goods and services

Sources : NAI, NBB.(1) Real growth adjusted for cyclical, non-recurring or fiscally neutral factors and indexation effects.(2) Deflated by the HICP.

150

Other current primary expenditure grew by an average of 3.3 p.c. per annum, mainly as a result of the rise in current transfers to NPIs and to the EU budget.

Expressed as a percentage of GDP, capital expenditure was down slightly, so that the whole of the increase in primary expenditure originates from current spending.

Meaningful analysis of the pattern of primary expenditure for each level of power is possible only for the period following implementation of the 1988-1989 reform of the State, since it was that reform that gave the Communities and Regions their present important position in public finances. That reform produced its full effects in the early 1990s, so that it is the growth of primary expenditure per government sub-sector in the period 1992-2009 that is considered here. In order to identify changes in the spending policy of the various sub-sectors, that period is itself divided into three sub-periods of six years each, to neutralise the effect of the local authority election cycle. This reveals that the pattern varied considerably from one sub-sector to another. In fact, the growth of the adjusted primary expenditure of Entity I was significantly slower than trend GDP growth during the sub-period preceding the introduction of the euro, and has since accelerated in the case of both the federal government and social security. Conversely, Entity II – which comprises the Communities and Regions plus the local authorities – has gradually curbed the growth of its expenditure, which nonetheless slightly outpaced trend GDP growth during the most recent sub-period. That deceleration was more marked for the local authorities than for the federated entities.

Adjusted primAry expenditure of generAl government And by sub-sector (1) (2)


1992-1997

1998-2003

2004-2009 e

1992-2009 e

General government . . . . . . . . . . . . . . . . . . . . . . . . 2.1 2.6 2.8 2.5

Entity I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 2.5 3.2 2.4

Federal government . . . . . . . . . . . . . . . . . . . . . 1.2 1.9 3.2 2.1

Social security . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 2.7 3.1 2.5

Entity II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 2.8 2.2 2.8

Communities and Regions . . . . . . . . . . . . . . . 3.4 2.3 2.4 2.7

Local authorities . . . . . . . . . . . . . . . . . . . . . . . . 3.4 3.6 2.0 3.0

Sources : NAI, NBB.(1) The expenditure of the general government sub-sectors does not include mutual transfers.(2) Real growth adjusted for the influence of cyclical and non-recurrent or fiscally neutral factors, and for indexation effects.

Interest charges of general government

Since reaching a peak of 11.6 p.c. of GDP in 1990, the interest charges of general government have systemati-cally declined, falling to 3.7 p.c. of GDP during the year under review. This substantial reduction is largely attribut-able to the steady fall in the implicit interest rate on the public debt. That interest rate was reduced by refinancing loans at a lower market rate once they matured or, in some cases, following early redemption. The decline in the debt ratio also had a favourable impact.

In recent years, the rate of decline in the interest charges has slowed considerably. Their fall in 2009, which came to only 0.1 percentage point of GDP, is due solely to the very favourable movement in the implicit interest rate, as the general government debt ratio was significantly increased both by the worsening of the budget deficit and by the capital injections which the government had effected for a number of financial institutions in the final quarter of 2008.

151

public financEs

The implicit interest rate on the short-term debt roughly halved during the year under review. In fact, the Eurosystem slashed the rate on its main refinancing operations in response to the economic and financial crisis, triggering a sharp fall in interest rates on treasury certificates. Thus, the implicit interest rate on 12-month certificates dropped from 4 p.c. in 2008 to 2.2 p.c. in 2009. The implicit interest rate on the long-term debt also declined during the year under review to 4.5 p.c., i.e. just over half a percentage point above the interest rate on new issues of ten-year government bonds. Historically, the implicit interest rate on the long-term debt and the market interest rate on long-term government securities are fairly close to one another, at a low level. A further marked fall in the implicit interest rate on the public debt in the years ahead is therefore rather unlikely.

Overall balance of general government sub-sectors

The movement in the general government budget bal-ance is due to a deterioration – to varying degrees – in the accounts of each of the constituent sub-sectors. Both Entity I, comprising the federal government and social security, and Entity II, encompassing the Communities and Regions plus local authorities, recorded a marked deterioration in their overall balance during the year under review.

The federal government deficit grew to 4.3 p.c. of GDP. Its primary balance deteriorated sharply, and – for the first time since 1987 – moved from a surplus position to a deficit of almost 1 p.c. of GDP. That development was due both to the substantial decline in revenues and to the sustained growth of primary expenditure as a percentage of GDP. The federal government’s interest charges showed a very slight fall.

Social security recorded a historically large deficit of 0.8 p.c. of GDP, owing to the strong expansion of expenditure which could only be partly financed by the increase in revenues. Social contributions grew faster than GDP, as a result of the larger share of wages in the latter. Moreover, expressed as a percentage of GDP, “alternative funding”, which is based on the sharing of the tax revenues collected by the Treasury, increased. The sustained expansion of expenditure is due mainly to the growth of expenditure on health care and pensions, and to the increase in unemployment benefits in the wake of the economic crisis.

The Communities and Regions ended the year with a defi-cit of 0.7 p.c. of GDP, a level not seen since the mid 1990s. Although the expenditure of this sub-sector recorded very

chart 81 breakdown oF the change in intereSt chargeS

(percentages, unless otherwise stated)

2001 2003 2005 2007 20090

1

2

3

4

5

0

1

2

3

4

5

2001 2003 2005 2007 20093

4

5

6

7

3

4

5

6

7

2001 2003 2005 2007

Twelve-month

Six-month

Three-month

Market interest rate (3)

Implicit interest rate (2)

INTEREST RATE ON TREASURY CERTIFICATES (1)

INTEREST RATE ON LONG-TERM TREASURY DEBT IN EURO

CHANGE IN INTEREST CHARGES AND EFFECT OF THE IMPLICIT INTEREST RATE(percentages of GDP)

2009 e–0.8

–0.6

–0.4

–0.2

0.0

0.2

–0.8

–0.6

–0.4

–0.2

0.0

0.2

Change in interest charges

of which :

Effect of the implicit interest rate (4)

Sources : FPS Finance, NAI, NBB.(1) Average implicit rate on treasury certificates.(2) Ratio between interest charges (including issue premiums) and the average

monthly outstanding debt.(3) Average interest rate on ten-year government bonds.(4) Ratio between interest charges in the current year and debt at the end of the

preceding year.

152

chart 82 reVenueS oF the coMMunitieS and regionS (1)

(percentage changes compared to the previous year)

2006 2007 2008–20

–15

–10

–5

0

5

10

–20

–15

–10

–5

0

5

10

X XX

X

Own fiscal and parafiscal revenues and transfers under the Finance Act

Nominal GDP growth

Transfers under the Finance Act

Own fiscal and parafiscal revenues

2009 e

Sources : NAI, NBB.(1) The data have been adjusted to take account of the change in Aquafin’s funding,

which is no longer based on the revenues generated by water charges but on the fees paid by the Flemish Region water supply companies.

Table 28 OverallbalanceOfgeneralgOvernment,andpersub-sectOr


2005

2006

2007

2008

2009 e

Primary balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 4.2 3.6 2.6 –2.3

Entity I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 4.1 3.1 2.4 –1.8

Federal government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 3.8 2.6 2.0 –0.9

Social security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.3 0.5 0.5 –0.8

Entity II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.2 0.6 0.2 –0.5

Communities and Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 0.3 0.5 0.1 –0.5

Local authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.1 –0.1 0.1 0.1 0.0

Interest charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 3.9 3.8 3.8 3.7

Overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –2.7 0.3 –0.2 –1.2 –6.0

Entity I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –2.6 0.3 –0.5 –1.0 –5.1

Federal government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –2.5 0.0 –1.1 –1.6 –4.3

Social security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.3 0.5 0.5 –0.8

Entity II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.2 –0.1 0.3 –0.1 –0.9

Communities and regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 0.2 0.4 –0.1 –0.7

Local authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.3 –0.2 0.0 –0.1 –0.2

Sources : NAI, NBB.

moderate growth, it rose sharply as a percentage of GDP, owing to the economic recession. Revenues contracted as a result of a sharp decline in registration fees. The exten-sion of the standard tax reduction granted by the Flemish Region also depressed revenues. Conversely, the shares of personal income tax and VAT allocated to the feder-ated entities under the Finance Act remained more or less unchanged as a percentage of GDP. Those resources were calculated for the year under review on the basis of an over-optimistic estimate of economic activity and an exaggerated inflation forecast, two variables which largely determine the scale of those transfers. However, that was partly offset by the balance remaining after the final settlement for 2008, which was negative since – in that year – both economic growth and the rise in consumer prices fell short of the figures projected at the time of the calculation of the Finance Act resources.

Finally, the local authorities saw their deficit edge up to 0.2 p.c. of GDP. Revenues generated by the additional percentages on personal income tax for this sub-sector increased sharply as a result of the acceleration of the assessments during the year under review. In line with the usual profile of the influence of the electoral cycle on investment by local authorities, the latter’s expenditure also recorded a steep rise.

153

public financEs

6.2 Cyclically adjusted and structural budget balances

Analysis of the fiscal policy stance cannot be based exclu-sively on the apparent movement in budget balances. It is necessary to make an adjustment for cyclical influences and the impact of one-off factors. That approach makes it possible to ascertain the level of the structural budget balances and how they have changed. These concepts must nevertheless be treated with some caution. For one thing, some revenue categories, such as corporation tax, sometimes prove more volatile than the cyclical compo-nent estimated according to traditional cyclical adjust-ments methods. Also, data for the recent period may be subject to substantial revisions, in view of the difficulty of estimating the output gap or the trend growth in activ-ity in real time. In either case, the uncertainty inherent in both the method used by the ESCB and that employed by other international institutions, such as the EC, is greater in times of large cyclical fluctuations, as during the year under review.

Indicators constructed according to the ESCB’s cycli-cal adjustment method show that the economic cycle contributed only 0.9 percentage point of GDP to the deterioration in the budget balance during the year under review. While economic activity fell sharply, therefore deviating significantly from its trend growth, the nega-tive impact of the cycle was largely offset by composition

Table 29 MoveMentinthestructuralbudgetarypolicy

(change compared to the previous year, percentage points of GDP, unless otherwise stated)

2006

2007

2008

2009 e

Recorded overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 –0.5 –1.0 –4.8

Cyclical component (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 0.6 –0.3 –0.9

GDP effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.9 –0.1 –2.4

Composition effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.2 –0.2 –0.2 1.6

Non-recurrent factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 –0.9 0.1 –0.9

Structural overall balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.4 –0.2 –0.8 –3.1

p.m.Levelofthestructuraloverallbalance(2)

AccordingtotheESCBmethodology . . . . . . . . . . . . . . . . . . –0.8 –1.0 –1.9 –5.0

AccordingtotheECmethodology. . . . . . . . . . . . . . . . . . . . . –1.4 –1.4 –2.2 –4.2

Interest charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.2 –0.1 –0.1 –0.1

Structural primary balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –0.6 –0.3 –0.9 –3.2

Sources : EC, NAI, NBB.(1) According to the methodology described in Bouthevillain C., Ph. Cour-Thimann, G. van den Dool, P. Hernández de Cos, G. Langenus, M. Mohr, S. Momigliano and M. Tujula

(2001), Cyclicallyadjustedbudgetbalances:analternativeapproach, ECB, Working Paper 77. A less technical explanation of this methodology is presented in box 6 entitled Cyclicallyadjustedbudgetbalances:methodofcalculationusedbytheESCB in the NBB’s 2003 Report (Part 1), pp. 83-84.

(2) Percentages of GDP.

effects favourable to public finances. In fact, the decline in certain components of income and expenditure which have a considerable influence on the general government account – such as private consumption, and particularly earned incomes –, and, hence, the degree to which these variables deviated from their trend growth, were much less marked than for economic activity as a whole.

Non-recurrent factors also contributed to the deteriora-tion in the budget balances. While their effect had been neutral in 2008, those factors had an adverse impact on the budget balances of 0.9 percentage point of GDP in 2009. That is due essentially to the acceleration of the personal income tax assessments, the temporary increase in capital expenditure resulting from the refund of taxes wrongly collected, in compliance with the court rulings against the Belgian State, and certain one-off measures adopted under the federal recovery plan.

When the Stability and Growth Pact was reformed in 2005, the structural budget balances became more important for the assessment of fiscal policy under the European surveillance procedures. The reformed pact in fact stipulates that the budget outcomes must be adjusted for cyclical and temporary factors when com-pared with the medium-term objective set for public finances, and with the budget path required to achieve it. Under the European budgetary rules, the cyclical adjust-ment method differs from that used by the ESCB. The

154

chart 83 public debt in belgiuM and in the euro area


199

6

1997

199

8

199

9

200

0

2001

2002

2003

200

4

2005

200

6

2007

200

8

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140

200

9 e

Belgium

Euro area

Sources : EC, NAI, NBB.

former method, which is the one used by the EC, is based on the concept of potential GDP rather than trend GDP, variables which are calculated respectively on the basis of a production function and by using a purely statistical smoothing method (Hodrick-Prescott filter). It excludes, on an annual basis, the composition effects of economic growth. Moreover, the non-recurrent measures taken into account are not necessarily the same in the two adjust-ment methods. These differences of methodology and the fact that the EC, in its latest estimates, takes account of a slightly smaller recorded deficit – of 5.9 p.c. of GDP – explain why the structural borrowing requirement for the year under review is higher according to the Bank’s calculations than according to those of the EC. According to the Bank, that requirement amounts to 5 p.c. of GDP, while the EC estimated it at 4.2 p.c. in its economic fore-casts published in November 2009.

Since interest charges hardly changed, the marked dete-rioration in the structural balance expressed as a percent-age of GDP is attributable exclusively to the further con-traction of the structural primary surplus, which became negative in 2009. That decline reflects a substantial easing of fiscal policy as a result of the structural fall in revenues as a ratio of trend GDP, and the fact that the structural growth of primary expenditure far outstripped the trend growth of activity, which was revised downwards.

6.3 Debt of general government

From 1993 to 2007, the consolidated gross debt of gen-eral government had fallen by an average of 3.6 percent-age points of GDP per annum. At its low point of 84.2 p.c. of GDP in 2007, the gap in relation to the general govern-ment debt in the euro area as a whole had narrowed to 18.3 percentage points of GDP.

The interventions in a number of financial institutions at the end of 2008, with an estimated impact on the debt amounting to 21 billion euro, or 6.1 p.c. of GDP, had inter-rupted the downward trend in the Belgian public debt, which then increased to 89.8 p.c. of GDP. That rise was bigger, on average, than in the other euro area countries.

In 2009, that rise was amplified and the Belgian public debt reached 97.8 p.c. of GDP by the end of the year. That increase of 8 percentage points of GDP is the biggest since 1984. Nevertheless, it was slightly smaller than that seen in the euro area as a whole, partly because nominal GDP recorded a smaller decline in Belgium than in the rest of the euro area, and partly because exogenous factors, i.e. factors which affect the debt but not the overall bal-ance, had a virtually zero influence on the Belgian debt

whereas they did have some impact on the government liabilities in certain euro area member countries, whose credit institutions sometimes felt the effects of the finan-cial crisis at a later stage.

That largely neutral impact of exogenous factors on the movement in Belgium’s public debt in 2009 was due to the mutually negating effects of various operations. The debt was increased by the Flemish Community loans to KBC – totalling 3.5 billion euro – and by the Federal State’s loan to the Grand Duchy of Luxembourg in con-nection with the takeover of Kaupthing Luxembourg by other companies, by the capital injection effected by the municipalities and provinces into the Municipal Holding company, and by capital which the Flemish Community contributed to an institution set up in order to pro-vide guarantees for enterprises experiencing problems in obtaining bank credit following the financial crisis. However, the impact of these operations on the debt was counterbalanced by the substantial downward adjustment of the indirect State interventions in the defeasance struc-ture created in 2008 to take over a portfolio of structured products from Fortis Bank Belgium, named Royal Park Investments (RPI). In fact, whereas the Federal Holding and Investment Company (FHIC) had borrowed funds in December 2008 via the Treasury, amounting to 5.6 billion euro, in order to finance the acquisition of shares in RPI and loans granted in connection with that arrangement, the revision of the agreement between the State, Fortis and BNP Paribas meant that the federal government, via

155

public financEs

the FHIC, ultimately only acquired a share of 740 million euro in the capital of RPI, whereas it granted various guar-antees which, according to the ESA 95 methodology, have no impact on the debt or on the overall balance so long as they are not exercised. The revision of the State’s interven-tion method therefore contributed towards a reduction in the general government debt of around 4.9 billion euro.

During the year under review, the growth of the public debt was due almost exclusively to an endogenous increase – the first since 1997 – caused by the combined

effects of the fall in nominal GDP and the substantial deterioration in the primary balance. That development revived the spectre of the snowball effect of interest charges on the public debt, referring to the way in which interest charges themselves fuel the debt. Box 13 explains the basis of that effect and illustrates how the public debt will once again enter an upward spiral if the policy remains unchanged. Considerable discretionary efforts will be needed to restore a primary surplus sufficient to halt the snowball effect and return the public debt ratio to a downward path.

Table 30 Consolidatedgrossdebtofgeneralgovernment

(percentages of GDP, unless otherwise stated)

1993

Average 1994-2006

2007

2008

2009 e

Change between 1994

and 2009 e

Debt level (end of period) . . . . . . . . . . . . . . . . . . . 134.1 84.2 89.8 97.8

Change in the debt . . . . . . . . . . . . . . . . . . . . . . . . . –3.5 –3.9 5.6 8.0 –36.3

Endogenous change (1) . . . . . . . . . . . . . . . . . . . . . . . –2.9 –4.2 –1.2 7.8 –34.7

Primary balance required to stabilise the debt (1) 2.2 –0.6 1.4 5.5

Implicit interest rate on the debt (2) (3) . . . . . . 6.0 4.7 4.7 4.1

Change in nominal GDP (2) . . . . . . . . . . . . . . . 4.0 5.3 2.9 –2.0

Actual primary balance . . . . . . . . . . . . . . . . . . . . 5.0 3.6 2.6 –2.3

Change resulting from other factors . . . . . . . . . . . –0.7 0.3 6.8 0.1 –1.7

Transactions with the NBB (including capital gains on gold) . . . . . . . . . . . . –0.3 0.0 0.0 0.0

Equity investments (4) . . . . . . . . . . . . . . . . . . . . . . –0.2 0.3 3.6 0.4

Securities other than shares (5) . . . . . . . . . . . . . . 0.0 0.0 1.0 1.1

Deposits and cash (6) . . . . . . . . . . . . . . . . . . . . . . . –0.2 0.3 1.9 –1.7

Other (7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 –0.3 0.3 0.3

Sources : NAI, NBB.(1) The endogenous change in the public debt is indicated by the difference between the primary balance required to stabilise the debt – i.e. the balance equal to the difference

between the implicit interest rate on the debt and the nominal GDP growth rate, multiplied by the ratio between the debt at the end of the previous year and the GDP of the period considered – and the actual primary balance.

(2) Percentages.(3) Adjusted to neutralise the impact of FISIM on interest charges.(4) Net equity investments, excluding transactions with the NBB.(5) Including the securities acquired by the Belgian government in connection with the refinancing of KBC.(6) The exceptional changes in this item in 2008 and in 2009 are due to a deposit placed on a bank account between the end of 2008 and the spring of 2009 by the FHIC,

which is part of the general government sector. (7) Principally changes in sector classification, loans, the impact of foreign exchange differences and issue and redemption premiums, and statistical discrepancies.

Box 13 – Return of the snowball effect in public finances

Between the 1970s and the early 1990s, Belgium faced a rapid and self-perpetuating rise in its general government debt. That explosive process whereby the public debt is fuelled by the interest charges on the debt itself is commonly called the “snowball effect” of interest charges on the public debt.

4

156

Numerous studies have identified the conditions in which the snowball effect develops. Leaving aside operations which influence the debt without affecting the overall balance, an explosive debt dynamic requires not only that nominal GDP growth must be less than the implicit interest rate on the debt, but also that the primary surplus, i.e. the balance of budgetary operations other than interest charges, must be insufficient in the light of that differential between the growth rate and the interest rate. The primary balance expressed as a percentage of GDP sufficient to stabilise the public debt ratio (spt*) depends on the debt ratio at the end of the previous year (dt-1 ) and the difference between the implicit interest rate on the debt (it ) and nominal GDP growth (nt ), i.e. :

If the actual primary balance (spt) is smaller (bigger) than the result of that calculation, the debt ratio increases (declines) endogenously : the endogenous change in the debt is therefore given by spt – spt*. Consequently, the size of the snowball effect depends on the difference between the implicit interest rate and the nominal GDP growth rate, the general government debt ratio and the actual primary balance.

So long as the nominal GDP growth rate exceeds the implicit interest rate, there is no risk of a snowball effect : with substantial primary deficits, exceeding the level compatible with debt stabilisation, the debt may certainly increase endogenously but the growth will not be explosive, unless of course the fiscal policy adopted leads, in itself, to unrestrained growth of the primary deficit. Ex ante, the analysis of debt dynamics requires a multi-annual approach, so as to be able to judge whether the presence or absence of a snowball effect is structural, or is due simply to an exceptional economic situation.

During the period 1971-1976, Belgian general government had been spared the snowball effect since the rate of nominal GDP growth, propelled by galloping inflation, exceeded the implicit interest rate on the debt. Although market interest rates in those days had risen considerably, that increase was only gradually reflected in the implicit rate as loans contracted at lower rates reached maturity and were refinanced at the higher market rate. In that context, in the absence of substantial primary deficits, the debt ratio followed a downward trend on the basis of its endogenous dynamics.

From 1977 onwards, the implicit interest rate had exceeded nominal GDP growth, and the excess tended to increase up to the beginning of the 1980s. Consequently, an ever bigger primary surplus was needed to avoid triggering the snowball effect, whereas at the same time the deficits resulting from operations other than interest charges were constantly growing, thus contributing to a particularly explosive debt dynamic.

From 1984 to 1990, the actual primary balance had steadily improved, thus curbing the endogenous increase in the debt. Thanks also to a cyclical upturn, the primary surpluses achieved from 1988 to 1990 had even been sufficient to have a negative influence on the debt ratio and temporarily halt the snowball effect. However, in the early 1990s the slackening pace of economic activity had led to an increase in the primary surplus required to achieve endogenous debt stabilisation. The actual primary surplus had therefore proved insufficient to counteract a recurrence of the snowball effect, especially as, owing to the adverse economic climate, that surplus had deteriorated. That resurgence of the snowball effect had propelled the public debt to its historical peak of 134.1 p.c. of GDP in 1993.

In contrast, from 1994 to 2007 the general government debt had again declined endogenously, at a rate averaging roughly 3 percentage points of GDP per annum, bringing it down to 84.2 p.c. of GDP in 2007. That was due both to primary surpluses close to or exceeding 4 p.c. of GDP – except in 2005 – and the trend decline in the implicit interest rate resulting from the fall in nominal interest rates on the financial markets.

4

spt* = dt-1*(it – nt )

(1 + nt )

157

public financEs

In 2008, although the actual primary surplus had fallen, it was still sufficient to prevent the snowball effect from making a comeback. In contrast, in 2009 the debt showed an endogenous increase of 7.8 percentage points of GDP. The decline in nominal GDP necessitated a primary surplus of around 5.5 p.c. of GDP to avoid an endogenous increase in the debt ratio, whereas the primary balance was converted at that time from a surplus to a deficit of

4

Snowball eFFect oF intereSt chargeS on the conSolidated groSS debt oF general goVernMent

1973

1976

1979

1982

1985

198

8

1991

199

4

1997

200

0

2003

200

6

–5

0

5

10

15

20

–5

0

5

10

15

20

1973

1976

1979

1982

1985

198

8

1991

199

4

1997

200

0

2003

200

6

–8

–6

–4

–2

0

2

4

6

8

–8

–6

–4

–2

0

2

4

6

8

200

9 e

CONDITION NECESSARY TO TRIGGER THE SNOWBALL EFFECT

Implicit interest rate on the debt (1)

Nominal GDP (percentage changes compared to the previous year)

200

9 e

CONTRIBUTION OF THE SNOWBALL EFFECT TO THE CHANGE IN THE DEBT(percentages of GDP)

Actual primary balance (1)

Primary balance required to avoid the snowball effect (1) (2)

Risk of snowball effect (2)

No risk (2)

Endogenous debt increase

Endogenous debt reduction

Sources : NAI, NBB.(1) From 1995, adjusted to neutralise the impact of FISIM on interest charges.(2) On the assumption that the interest rate and nominal GDP growth remain constant in the ensuing years.

158

more than 2 p.c. of GDP, notably as a result of the economic and financial crisis and the recovery measures taken in that context.

Without a change of policy, the snowball effect should persist. Thus, on the basis of the macroeconomic assumptions made in Belgium’s stability programme, as supplemented in September 2009, namely nominal GDP growth averaging 3.5 p.c. per annum from 2010 to 2015 and an average implicit interest rate of 4.4 p.c. over that same period, the government debt ratio could only be stabilised by means of a primary surplus of 0.8 p.c. of GDP, provided that exogenous factors are neutral. Yet according to the stability programme scenario with no change of policy, the primary balance during the said period would record an average deficit of 2 p.c., therefore implying an endogenous increase in the public debt averaging around 3 percentage points of GDP per annum. A discretionary effort of 3 percentage points of GDP will therefore be needed just to stave off that snowball effect.

Nevertheless, avoiding the snowball effect is not enough to ensure the sustainability of public finances. That term refers to the government’s ability to remain solvent both now and in the future, without needing to make major changes to fiscal policy : the underlying idea is that a sustainable fiscal policy can be pursued for an indefinite period of time. In that connection, it is necessary to take account more particularly of the impact of population ageing on public social security expenditure in the coming years, and to ensure that the growth of that expenditure can be financed without causing an explosion in budget deficits and in the government debt ratio. It is also vital to ensure that the fiscal and parafiscal pressure can be kept at an acceptable level, and not to neglect productive public spending, namely that which is most likely to support economic growth, such as public investment, education and research.

In the 2000s, in order to encourage sustainable fiscal policies, the “Public Sector Borrowing Requirement” section of the High Council of Finance had advocated the creation of budget surpluses. In its opinions issued in September 2009 and January 2010, following the substantial increase in the deficit during the year under review, that body recommended a return to a balanced budget by no later than 2015. The objective of a balanced budget in 2015 was confirmed by the government in the September 2009 complement to Belgium’s April stability programme, and in the January 2010 update of the latter.

161

7.

financial accounts of housEholds, EntErprisEs and gEnEral govErnmEnt

Financial accounts of households, enterprises and general government

chart 84 breakdown oF the change in the outStanding total oF Financial aSSetS held by houSeholdS

(billions of euro)19

99

2001

2003

2005

2007

200

9 (1)

–140

–120

–100

–80

–60

–40

–20

0

20

40

60

80

100

120

140

–140

–120

–100

–80

–60

–40

–20

0

20

40

60

80

100

120

140

Change in the outstanding total

New financial savings

Valuation effect

Source : NBB.(1) Data for the first nine months.

7.1 Consequences of the financial crisis

The financial crisis which began in the summer of 2007 raged until the first quarter of 2009. After that, the finan-cial markets began to recover, benefiting all sectors of the Belgian economy.

The stock markets were no exception to this general picture. Following a further dip in prices right at the beginning of the year, the markets staged a strong recov-ery overall from the spring. While, in 2008, households had suffered heavy losses on their financial assets, they thus benefited in 2009 from a positive valuation effect. During the first nine months, gains on the portfolio of financial assets held by households, which also include their assets in the form of unlisted shares, came to 47 bil-lion euro. Taking account of the movement in the stock market indices, which was neutral overall during the fourth quarter, almost half of the losses which households had suffered in the previous year were thus recouped in 2009.

During the first three quarters of 2009, households formed financial assets amounting to 25 billion euro, or more than in the whole of 2008. That brought the out-standing total financial assets of households to 872 billion as at 30 September 2009, against 800 billion at the end of December 2008. At the same time, real estate prices, essentially prices of large houses, recorded a very slight fall. That decline, which bore no comparison with the substantial adjustments on some other European mar-kets, was probably due to the sluggishness of demand for housing. However, as a result of the constant expansion of the housing stock, the value of the real estate assets of households as at 30 September roughly equalled the year-end 2008 figure at 1,005 billion euro.

Furthermore, the financial liabilities of households con-tinued to grow, reaching a total of 181 billion as at 30 September. Despite that increase, which has to be deducted from the change in the assets discussed above, the total net assets of households grew further to around 1,700 billion.

162

chart 85 houSehold wealth

(outstanding total, end of quarter, billions of euro)19

99

2001

2003

2005

2007

200

9

0

200

400

600

800

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1,000

1,200

1,400

1,600

1,800

Financial assets

Financial liabilities

Real estate assets (2)

Total net wealth (1)

Sources : DGSEI, NBB.(1) Sum of the financial and real estate assets of households, less the value of their

liabilities.(2) Estimate based on the number of houses and apartments recorded by the land

registry in the three Regions of Belgium. The housing stock is valued on the basis of the average prices of property transactions (houses and apartments) and per region. The value of building plots and other real estate (castles, rental property, etc.) is not included in the estimate, neither is the value of any property in other countries. Conversely, the estimate is based on the assumption that all the housing recorded in national territory belongs to resident households.

In 2008, the financial crisis had also resulted in a large increase in financing costs for non-financial corpora-tions. Overall, from the outbreak of financial turbulence in August 2007 to the end of 2008, the total external financing cost of non-financial corporations – calculated by weighting the nominal cost of the various funding sources according to their respective share of the total outstanding financial liabilities – had risen by over 34 p.c. During the year under review, the trend was reversed and that cost declined steadily as the months went by.

Whereas the total financing cost stood at 7.7 p.c. in January 2009, the December figure was 5.1 p.c., i.e. below the average of 6.1 p.c. recorded during the period from 1996 to 2009. Initially, this situation reflected the contraction of bank credit interest rates, and subsequently the easing of tensions on the financial markets, bringing a reduction in financing costs associated with issues of shares and corporate bonds, thus contributing to the decline in the total financing cost by the second quarter of the year.

Interest rates applied to new bank loans began to decline in November 2008 and that decline continued until the fourth quarter of 2009, reflecting the transmission of the rapid easing of monetary policy in the euro area from mid October 2008. The rates which banks charge for loans in fact depend on what it costs those institutions to obtain finance. That depends mainly on the – actual and expected – central key interest rate of the Eurosystem. In principle, any adjustment to that rate is transmitted to the money market and thus influences the costs which credit institutions incur in obtaining finance, particularly via the short-term interbank market, where rates were head-ing downwards until the end of the year. After having already been cut three times during the final quarter of 2008, the ECB’s key rate was reduced to 1 p.c. as a result of four consecutive cuts in the first half of the year. In December 2009, short- and medium-term credit interest rates for businesses were respectively 237 and 195 basis points below those prevailing a year earlier, while for long-term loans the rate dropped to 4.6 p.c., compared to 5.3 p.c. a year before.

Analysis of bank interest rates and margins is not enough to define the lending policy of banks, as the latter also have other instruments available for adjusting the supply of credit. In particular, when the economic outlook dete-riorates sharply and borrower quality becomes more dif-ficult to assess, banks may prefer to ration credit rather than increase their rates, so as to minimise adverse selec-tion and moral hazard problems. The risk of adverse selec-tion occurs if the banks’ credit managers allow themselves to be guided solely by the interest rates which customers are prepared to pay : that could cause them to select bor-rowers who have a preference for highly risky projects, and are therefore more likely to go bankrupt or to default. The moral hazard problem concerns the fact that, in order to be able to meet the additional costs resulting from a rise in interest rates, a borrower may be persuaded to take more risks and to speculate on the possibility of escaping at least some of his obligations in the event of default. Banks’ responses to the Eurosystem’s bank lending survey (for more details, see box 15) show that, in the first quar-ter of 2009, banks continued to tighten the conditions on which firms could obtain credit, whereas those conditions remained unchanged during the rest of the year. Those responses seem to point to a reversal of the trend seen since mid 2007, in which banks had gradually tightened their credit conditions to a significant extent.

Apart from obtaining bank finance, enterprises – and especially the largest ones – can raise funds directly on the financial markets by issuing listed shares or debt instru-ments. These financing channels were gradually restored during the year.

163


chart 86 external Financing coStS oF non-Financial corporationS in belgiuM

(quarterly averages, percentages)

1997

199

9

2001

2003

2005

2007

200

9

3

4

5

6

7

8

9

10

11

3

4

5

6

7

8

9

10

11

Listed shares (2)

Corporate bonds (3)

Bank loans (4)

Total weighted cost (1)

Sources : Thomson Reuters Datastream, NBB.(1) Obtained by weighting the cost of financing by listed share issues, bond issues

and bank loans according to their respective share in the total of these financial liabilities.

(2) Estimated on the basis of a dividend discount model. According to that model, the cost of financing by share issues declines (increases) following a rise (fall) in stock market prices and increases (contracts) in response to an increase (reduction) in dividends (not only those actually paid but also those expected).

(3) Yield on a euro-denominated bond with a maturity of five to seven years, BBB rating.(4) Weighted average applied by Belgian banks to business loans. The weighting is

based on the respective total of the various types of credit. The interest rates are derived from two separate surveys (RIR until 2002, MIR from 2003), causing a break in the series in 2003.

In nominal terms, the cost of financing by issuing debt securities declined significantly from the second quarter of 2009. The yield on BBB corporate bonds denominated in euro with a maturity of five to seven years reached 5.9 p.c. at the end of December 2009, whereas it had stood at 9.6 p.c. a year earlier. For bonds with similar char-acteristics but an AAA rating, which had seen a smaller increase in the yield following the financial crisis, the cost dropped from 5 to 3.3 p.c. over the same period.

The cost of offering shares on the stock market also fell sharply during the past year. On the basis of a dividend discounting method, discussed in more detail in box 19 of the 2005 Report, it is possible to calculate the movement in this cost. The stock market rally from the first quarter of 2009 led to a substantial fall in the cost of raising finance via share issues. Estimated at 11.3 p.c. at the beginning of the year, that cost fell steadily throughout the year to reach 6.5 p.c. in December 2009, a figure close to the average for the years 1996 to 2007.

7.2 Households

In the first nine months of the year under review, house-holds formed financial assets totalling 24.7 billion euro, or considerably more than during the corresponding period of 2008 when the increase had come to 10 billion. Over the first three quarters of 2009, the financial liabilities of households grew up by 7.1 billion euro, compared to 9.7 billion the year before, resulting in a large financial surplus of 17.6 billion, whereas the surplus in the previ-ous year had been negligible. That development reflects the rise in the savings ratio of households and, to a lesser extent, the decline in their investments following the eco-nomic and financial crisis.

Formation of financial assets

The deterioration of the economic and financial environ-ment also induced Belgian households to be more cau-tious in their choice of investments. There was unprec-edented demand for short-term assets and fixed-income

chart 87 ForMation oF Financial aSSetS by houSeholdS

(billions of euro)

199

8

200

0

2002

200

4

200

6

200

8

–30

–20

–10

0

10

20

30

40

50

200

8

200

9

–30

–20

–10

0

10

20

30

40

50

First ninemonths

Claims on insurance technical reserves (1)

Shares and other equity

Other (2)

UCI units

Fixed-income securities

Notes, coins and deposits

Total

Source : NBB.(1) This item essentially comprises the net claims of households on life insurance

technical reserves and pension funds or occupational pension institutions.(2) This item comprises, so far as they could be recorded, trade credit and

miscellaneous assets on general government and financial institutions.

164

Box 14 – Reasons for the success of savings deposits in 2009

The amounts which households deposited in regulated savings accounts grew strongly from the end of 2008. During the first nine months of 2009, the regulated savings deposits of households expanded by 24.6 billion euro, bringing the outstanding total to a historically high level.

A first reason for this obvious success lies in the clear preference of investors for liquid assets at a time when they faced very great uncertainty, particularly regarding the risk of becoming unemployed. In these circumstances, creation of a readily available financial reserve is an obvious motive for saving. The liquidity of savings deposits also attracts households temporarily curbing their expenditure and/or investments, but wanting to be able to mobilise their assets very quickly for investment in real estate or consumer durables once the economy picks up again.

regulated SaVingS depoSitS and terM depoSitS oF houSeholdS

(quarterly data, billions of euro, unless otherwise stated)

2001

2003

2005

2007

200

9

–10

–5

0

5

10

15

(left-handscale)

Formation of regulated savings deposits

Formation of term deposits

Interest rate on savingsdeposits (1)

Interest rate on term deposits (1) (2)

(right-handscale)

4.5

3.5

2.5

4.0

3.0

2.0

1.5

Source : NBB.(1) Implicit interest rate as indicated by the profit and loss accounts of credit institutions ; quarterly averages.(2) Less the 15 p.c. withholding tax.

4

securities, while equities and to a lesser extent UCI units were generally shunned.

In regard to short-term assets, households considerably expanded their savings in the form of sight deposits and

cash, namely by 6.1 billion euro, and in the form of regu-lated savings deposits, up by 24.6 billion, at the expense of term deposit investments which declined by 18.7 bil-lion. Box 14 goes into more detail on the popularity of savings deposits during the year under review.

165


In addition, various measures, and more particularly the raising of the deposit guarantee ceiling from 20,000 to 100,000 euro, helped to restore the confidence of individuals in the banking system, following the shock of early autumn 2008.

A third important reason is the decline in the opportunity costs of investments in savings deposits, as the gap between the interest rate on term deposits and that on savings deposits became much smaller. Since the interest rate offered on term deposits is more closely linked to the market than the rate on savings deposits, it was quicker to reflect the fall in the central key interest rate of the Eurosystem and interbank rates. In September 2009, the gap between the interest rate on term deposits – after tax – and the rate on untaxed savings deposits was down to just 10 basis points.

On 1 April 2009 the new legislation on savings deposits took effect. It sets additional limits on the interest rates on regulated savings deposits : in fact, it stipulates that the interest rate applied to savings deposits must not exceed the higher of two rates, namely 3 p.c. or the main key interest rate of the Eurosystem in force on the 10th day of the month preceding the current calendar half year. Owing to the particularly low level of the Eurosystem key interest rate, it was only the 3 p.c. maximum that applied in 2009. Moreover, the reform also concerned the bonuses supplementing the basic rate. The growth bonus was abolished, leaving only a loyalty bonus paid either on sums kept in the same account for twelve consecutive months, or per calendar year on sums kept in the same account for at least eleven consecutive months in that same year. The rate of this bonus may range between 25 p.c. of the basic rate offered and 50 p.c. of the maximum basic rate.

These new legal rules on regulated savings deposits, which entered into force on 1 April 2009, during a period when interest rates were admittedly at a historically low level, limited competition on the savings deposit market. Not only was there a decline in the general level of interest rates applied to savings deposits during the year under

intereSt rateS on SaVingS depoSitS

2003 2004 2005 2006 2007 2008 20090

1

2

3

4

5

0

1

2

3

4

5

Third quartile (1)

First quartile (1)

Interval between quartiles (2)

Central key interest rate of the Eurosystem

Source : NBB.(1) The quartiles are taken from the ranking of interest rates offered by credit institutions taking part in the monthly MIR survey (MFI Interest Rates). The first and third

quartiles correspond to the rate below which respectively ¼ and ¾ of the recorded rates are ranked. Each rate is an average of the rates applied by a credit institution to the various categories of deposits redeemable at up to three months, weighted by the amounts deposited during the month in each category.

(2) Difference in percentage points between the first and third quartiles.

4

166

Despite the historically low level of long-term interest rates, households effected net acquisitions of fixed-income securities with a maturity of over one year totalling 10 billion euro during the first nine months of 2009. The expansion of the fixed-income securities portfolio – the first since 2001 – began in the second quarter of 2008. During the year under review, households invested mainly in securities of private issuers ; they thus took advantage of a premium – which was particularly large at the start of the year under review – in relation to the government bond rate. In so doing, they also responded to a manifest demand for funds on the part of those issuers. In fact, following the stock market collapse, both financial and non-financial enterprises turned to the primary market in fixed-income securities. Moreover, large non-financial cor-porations went in quest of alternative sources of finance following the tightening of lending by banks. Households mainly bought securities at over one year issued by the

chart 88 Fixed-incoMe SecuritieS held by houSeholdS and long-terM yield rateS

(percentage changes compared to the corresponding quarter of the previous year, unless otherwise stated)

2001

2003

2005

2007

200

9

–25

–20

–15

–10

–5

0

5

10

15

20

25

30

35

40

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Fixed-income securities held by households (left-hand scale)

Yield rate on the secondary market in OLOs with five years remaining to maturity (quarterly averages) (right-hand scale)

Source : NBB.

financial sector. The fact that these securities are largely covered by protection funds is probably part of the reason for that keen interest. Households also – but to a lesser extent – acquired corporate bonds, a very large volume of which were issued during the year under review.

Households sold almost as many listed shares as they bought, as net investment flows in these instruments rep-resented only 0.2 billion euro during the first nine months of the year. That is due essentially to the net sales of shares on Belgian and foreign stock markets during the first quar-ter. However, a turnaround occurred in the second quar-ter : Belgian households again started buying shares issued by listed companies. Moreover, the value of the aggregate equity portfolio of households grew strongly again, as a result of rising share prices from the second quarter.

Net disposals of units in non-monetary UCIs, which had been substantial in 2008, declined sharply during the first nine months of 2009. In 2008, households had disposed of units in almost all types of funds, either because the stock markets had collapsed, or because unfavourable tax measures specifically affected bond funds and certain mixed funds in which the income is capitalised. From the start of the year under review, investors displayed far less aversion to funds than in 2008. Both bond and equity funds recorded net purchases.

Just as in 2008, when investors had considerably reduced their investments in insurance products, the growth of indi-vidual and group insurance slowed again. Moreover, the crisis revealed that very many products, such as insurance bonds and accounts, were less secure than expected. The stock market crash in 2008 made investors wary of class 23 products, especially if the premiums are invested mainly in equities. Pension funds or occupational pension institutions also suffered as a result of this growing loss of confidence at the end of 2008 and the beginning of 2009.

New financial liabilities

Net subscriptions to mortgage loans made up the bulk of the new financial liabilities of households. During the first nine months of 2009, those loans grew by 6.5 billion euro,

review, but the difference between the highest and lowest rates was also greatly reduced, the interval between quartiles dwindling to half its peak 2008 level. That development indicates that the most fiercely competitive institutions – on-line banks and others – play a less important role on the regulated savings deposit market.

167


chart 89 reSultS oF the euroSySteM’S bank lending SurVey : Mortgage loan Supply and deMand in belgiuM

(quarterly data)

2003 2004 2005 2006 2007 2008 2009 2010–75

–50

–25

0

25

50

75

100

–75

–50

–25

0

25

50

75

100

H

J

H

J

Development observed by respondents

Development expected by respondents

Household demand for loans (2) (3)

Criteria for granting loans to households (1) (2)

Development observed by respondents

Development expected by respondents

Source : NBB.(1) Weighted net percentages of responses by credit institutions to the Eurosystem’s

bank lending survey indicating the degree to which lending criteria were eased or tightened (–).

(2) The responses are weighted according to the distance from a “neutral” response : mention of a “considerable” change in the lending criteria or demand for loans is accorded double the weighting of the mention of a “slight” change.

(3) Weighted net percentages of responses by credit institutions to the Eurosystem’s bank lending survey indicating the degree of increase or decrease (–) in demand for credit.

falling short of the figure for the corresponding period of 2008 when growth had amounted to 7.9 billion.

According to the results of the Eurosystem’s bank lending survey, banks tightened their mortgage loan criteria a little further during the first six months of 2009, while demand for these loans dipped slightly. In the second half of the year, banks reported that they had ceased tightening the loan criteria, while demand increased for the first time in four years.

The average size of new mortgage loans, which had risen continually between 1998 and 2007 from 60,000 to over 100,000 euro, fell by around 10 p.c. during the period 2008-2009. There are several reasons for this break in the trend. A first factor lies in the fall in property prices from mid 2008, which mainly affected the amount of mortgages for the purchase of existing homes. At the beginning of 2009, the federal govern-ment approved the reduction of the VAT rate to 6 p.c.

for new buildings and home renovations, and for the purchase of social housing. That measure is also likely to have affected the size of mortgage loans, albeit after a certain time lag. Thus, mortgage loans for the refur-bishment of existing housing – averaging relatively small amounts – surged strongly, their number increasing by around 43 p.c. in 2009. Moreover owing to the financial crisis, the supply of credit is itself a factor cutting the size of mortgage loans. In fact, banks limit the risk per loan granted, particularly by reducing the loan to value ratio, i.e. the percentage of the house price financed by a mortgage loan.

Demand for mortgage loans was bolstered by the fall in interest rates on those loans. While that fall applied to all types of interest rates, it was particularly noticeable in the case of loans with an initial fixed-rate period of one year. It led to a decline in interest charges and, in contrast to the previous year, a reduction in the term of new loans.

chart 90 rate diFFerential and breakdown oF new Mortgage contractS by type oF intereSt rate (1)

(monthly data, percentages of the total number, unless otherwise stated)

2003 2004 2005 2006 2007 2008 2009

200

150

100

50

0

–50

–100

80

60

40

20

100

0

(left-handscale)

Fixed-variable rate differential (2)

(right-hand scale)

Variable (from one year to less than three years)

Variable (from three years to less than five years)

Variable (from five years to less than ten years)

Variable (from ten years or more)

Fixed

Sources : PLU, NBB.(1) For the variable rates, the term mentioned corresponds to the initial fixed-rate

period.(2) Difference in basis points between the interest rate on new loans granted to

households with an initial fixed-rate period of over ten years and the interest rate on new loans with an initial fixed-rate period of one year.

168

chart 91 non-regulariSed deFaulting loanS

(data as at 31 December, percentages of total current loans)

2005 2006 2007 2008 20090

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

Instalment loans

Hire purchase

Credit lines

Mortgage loans

Source : NBB (Central Individual Credit Register).

The fall in mortgage interest rates also explains why far more variable-rate contracts than before were concluded at the end of 2008, but especially from the beginning of 2009. However, the share of fixed-rate contracts still remained close to 50 p.c.

The Central Individual Credit Register statistics show that the number of non-regularised defaults remained stable as a percentage of the total number of mortgage loans recorded, at 1.1 p.c. Conversely, there was a considerable increase in the average level of arrears and sums payable.

In the case of consumer credit, the fall in the propor-tion of non-regularised defaults came to an end. For the second consecutive year, the percentage of hire purchase contracts in default increased. Taking all loans together, 8,157,065 contracts were recorded in the Central Individual Credit Register at the end of 2009, of which 434,330 presented a non-regularised default.

Consumer credit continued to expand during 2009. The amounts granted in the form of credit lines and instal-ment loans or hire purchase grew by 4.9 p.c. compared to the end of 2008. To some extent, mortgage loans, instalment loans and hire purchase may all have ben-efited from the decision to subsidise “green loans”. In order to encourage energy-saving investments, the federal government in fact decided, under the Economic Recovery Act of 27 March 2009, to subsidise loans

intended to finance certain quite specific investments. The federal government thus grants an interest subsidy at a rate of 1.5 p.c. on all consumer credit (installment loan or hire purchase) or all mortgages concluded for the purpose of financing environment-friendly investments, plus a reduction in tax on the remaining interest. That reduction amounts to 40 p.c. of the interest paid after deduction of the interest subsidy. The borrowed capital must amount to between 1,250 and 15,000 euro. That limit applies per calendar year, per home and per bor-rower. The borrower supplies his bank with certificates showing that the planned investments actually qualify for the subsidy, whereupon the bank itself has to apply to the Treasury to obtain payment of the interest subsidy. The Royal Decree of 12 July 2009 setting out the imple-menting procedures entered into force with retroactive effect and applies to all loans concluded between 1 January 2009 and 31 December 2011 which satisfy the above conditions.

7.3 Non-financial corporations

The financial liabilities of non-financial corporations – referred to in this chapter equally as companies, enterprises or firms – expanded by 34.5 billion euro during the first three quarters of 2009 : that was a relatively small amount in historical terms, and well below the 99.3 billion in liabilities contracted during the corresponding period of 2008. The reasons lay in the collapse of investments, the decline in firms’ stocks and the weaker demand for finance for the purpose of mergers and acquisitions or restructuring. However, the decisive factor is that firms limited their financial liabilities by curbing the growth of their financial asset portfolio. Thus, the formation of financial assets totalled 44.7 billion euro during the first three quarters of 2009, compared to 107.5 billion during the same period of 2008. The contraction occurred mainly at the level of short-term assets, which grew by 17.1 billion, whereas they had expanded by 60 billion during the correspond-ing period of 2008. Firms facing financial difficulties probably liquidated short-term assets in order to cope, and that was reflected in the steep decline in their cash assets. Following these movements, firms saw their net financial liabilities diminish by 10.2 billion during the first nine months of 2009.

However, these figures mask contrasting developments from one quarter to another : thus, the formation of both assets and new financial liabilities was rather subdued in the first quarter of 2009, whereas they both gained momentum during the second quarter, before languish-ing thereafter.

169


chart 92 new Financial liabilitieS oF non-Financial corporationS : breakdown by inStruMent

(billions of euro)

2000

2002

2004

2006

2008

–40

–20

0

20

40

60

80

100

120

140

160

180

2008

2009

–40

–20

0

20

40

60

80

100

120

140

160

180

Listed shares

Unlisted shares and other equity


Bank loans

Non-bank loans (1)

Other (2)

Total

First ninemonths

Source : NBB.(1) Mainly loans granted by Belgian and foreign non-financial corporations, also

referred to as inter-company loans.(2) Includes technical reserves of non-autonomous occupational pension institutions

and transitory items.

During the year under review, non-financial corporations scaled down their investment plans, as is evident from the annual growth rate of gross fixed capital formation, down sharply compared to 2008. Having reached 8.1 p.c. in the previous year, this indicator became decidedly negative in 2009, at –9.7 p.c.

Conditions for obtaining funding by the issue of securi-ties or shares continued to deteriorate up to March 2009, owing to the increased costs. However, by the second quarter, it became more attractive to raise finance via market issues of fixed-income securities or listed shares. It was also from then on that, according to their responses to the Eurosystem’s bank lending survey, credit institutions ceased to tighten their corporate credit conditions.

The decline in new liabilities mainly took the form of a substantial reduction in share issues. In the first nine months of 2009, issues of shares and other equity rep-resented around 25 billion euro, compared to a figure of more than 73 billion in the corresponding period of 2008.

In contrast, recourse to issues of securities, especially long term, increased strongly. Issues of new securities totalled around 11 billion euro between January and September 2009, or almost twice as much as in the corresponding period of 2008.

Finally, bank lending slowed sharply compared to 2008. In the first nine months of 2009, the growth of bank credit to Belgian firms thus came to 1.8 billion euro, consider-ably less than in previous years.

Bank lending

This deceleration in bank lending to firms continued throughout the year. The annual growth of lending by resident banks – representing about three-quarters of the total bank debts of firms – stood at 5.4 p.c. in January, then declined to become negative from October ; the amplification of the downward movement in December was due to substantial securitisation operations on the part of the banking sector. Looking at the flow data during the year rather than the change in the outstanding

chart 93 loanS granted by belgian bankS to reSident non-Financial corporationS, breakdown by loan terM (1) (2)

(monthly data, contribution to total lending growth, unless otherwise stated)

200

4

2005

200

6

2007

200

8

200

9

–10

–5

0

5

10

15

20

–10

–5

0

5

10

15

20

Short-term loans

Long-term loans

Total (annual percentage change)

Source : NBB.(1) Short-term loans have a maturity of up to one year ; long-term loans have a

maturity of over one year.(2) Data influenced in December 2009 by securitisation operations.

170

chart 94 credit VoluMe and utiliSation rate according to the central corporate credit regiSter : breakdown oF FirMS by Size (1)

(end-of-quarter data)

2003 2004 2005 2006 2007 2008 2009 2003 2004 2005 2006 2007 2008 2009

40

50

60

70

80

90

40

50

60

70

80

90

–10

–5

0

5

10

15

–10

–5

0

5

10

15

LOANS GRANTED(contribution to credit expansion, percentage points, unless otherwise stated)

Small enterprises

Medium-sized enterprises

Large enterprises

Total (annual percentage change)

Large enterprises

Medium-sized enterprises

Small enterprises

AUTHORISED CREDIT UTILISATION RATE (percentages)

Source : NBB (Central Corporate Credit Register).(1) Companies which filed their annual accounts in the abridged format are deemed to be small enterprises. Those which filed full-format accounts are regarded as large or

medium-sized depending on whether or not their turnover exceeded 37.2 million euro for two consecutive years.

amount year-on-year, it is evident that resident firms repaid more loans to Belgian banks than they contracted. The net flows thus became negative, at –6.6 billion euro, whereas in 2008, they had totalled 8.7 billion. Regarding loans by foreign banks, for which data are only available for the first nine months, the pattern varied according to whether or not the banks are established in the euro area. Lending by banks located outside the euro area gave rise to net repayments of 2.4 billion euro during that period. Conversely, the inflow of funds from foreign banks in other euro area countries totalled 3.5 billion during the first three quarters, compared to 3.9 billion during the corresponding period of 2008.

The pattern of lending by Belgian banks to resident firms differed in 2009 according to whether the loans were short-term or long-term. The annual growth of loans for a term of up to one year became negative from April 2009. At the end of December, the outstanding total of short-term loans was down by 14.7 p.c. year-on-year. In contrast, the volume of long-term loans continued to rise through-out the first eleven months of the year, before a slight fall

of 1 p.c. in December. That movement follows the banks’ tendency to prefer short-term loans in 2008, since they faced less favourable and highly volatile financing condi-tions, and the tightening of liquidity constraints. These short-term loans were probably repaid during the year under review, making way for longer-term loans in view of more favourable economic prospects, a less negative risk perception and the decline in long-term interest rates.

The statistics collected by the Central Corporate Credit Register permit more detailed analysis of credit develop-ments according to the size of the borrower firms and their branch of activity. However, they are not entirely comparable with the statistics compiled on the basis of the accounting records of credit institutions, notably because their coverage is limited to loans of an individual value of more than 25,000 euro.

Up to the third quarter of the year, all firms – regard-less of size – made a positive contribution to the overall growth of bank lending. However, that lending declined during the year, principally in the case of medium-sized

171


firms. During the first half of 2009, the expansion was attributable mainly to large firms. Conversely, in the third quarter, it was due mainly to small firms. In the final quarter, only the latter still made a positive contribution to lending growth, the total of which was down against the end of 2008.

On the basis of information reported by banks to the Central Corporate Credit Register, it is also possible to calculate the credit utilisation rate, showing the degree to which firms draw on their credit lines. In 2007 and in 2008, that indicator increased almost continuously and for all categories of firms from the start of the financial turbulence. That reflected firms’ desire to mobilise their existing credit facilities to the maximum, whereas new loans were harder to obtain.

During the past year, small firms again made more use of their credit lines. The authorised credit utilisation rate for this category of firms came to 86.9 p.c. at the end of December 2009, the highest percentage recorded since 2000. Regarding the other categories of firms, in contrast, that upward trend ceased in December 2008 for large firms and in March 2009 for medium-sized enterprises. In December 2009, the authorised credit utilisation rate stood at 70.7 and 54.2 p.c. respectively for medium-sized and large firms, percentages which in spite of everything still exceeded the averages for previous years. The differing pat-tern according to company size may be due to the recovery of the markets in equities and debt securities, which are accessible only to large and medium-sized enterprises.

The utilisation rate varies considerably according to the firms’ branch of activity. Thus, enterprises in manufactur-ing industry have the largest “unused credit” margins, as suggested by a structurally lower utilisation rate. Conversely, enterprises in the hotel and restaurants sector or the real estate sector – very often SMEs – gener-ally make more use of the credit lines at their disposal.

chart 95 credit utiliSation rate according to the central corporate credit regiSter : breakdown oF FirMS by Sector oF actiVity

(end-of-quarter data, percentages)

2006 2007 2008 2009

40

50

60

70

80

90

100

40

50

60

70

80

90

100

Real estate


Construction

Trade

Hotels and restaurants

Source : NBB (Central Corporate Credit Register).

A restrictive attitude towards bank lending may therefore be particularly damaging to firms in these sectors.

During the past year, the authorised credit utilisation rate in construction and the hotel and restaurant sector – two branches of activity in which firms tend to be rather small, on average – increased by 3.1 and 3 percentage points respectively. Conversely, it declined in the real estate sector, in trade and in manufacturing by 1.4, 3.2, and 8.6 points respectively.

Box 15 – Corporate loan supply and demand : lessons drawn from the surveys of banks and businesses

When corporate lending decelerates as it has done since the spring of 2008, it is very difficult to distinguish between the effects due to the supply of funds and the demand-side effects. Actual statistics show the balance on the credit market in terms of quantity, but they do not permit the identification of any imbalances between supply and demand. Thus, it may be that part of the demand is not satisfied because the banks ration the volumes granted, or demand may be limited because the cost of credit is considered too high. The survey data, which

4

172

are generally qualitative, are very useful for distinguishing between effects on the supply side and those due to demand : by questioning banks and firms directly about their credit perception, the surveys provide a clearer picture of the influence of the forces at work and the factors behind the developments.

In Belgium, two quarterly surveys provide information on supply and demand conditions on the credit markets. The first covers credit institutions and is harmonised at euro area level, namely the Eurosystem’s bank lending survey (BLS). The Belgian sample comprises four large banks active in Belgium (Dexia, BNP Paribas Fortis, ING Belgium and KBC). This is a qualitative survey and encompasses credit conditions offered to enterprises (margins, maturity, collateral required, charges, etc.), the banks’ perception of demand, and the factors explaining the developments seen. The survey concerns developments observed (“over the past three months”) and expected (“over the next three months”) on the credit markets.

Since April 2009, the Bank has polled enterprises on a quarterly basis, in response to the government’s request for speedier collection of the data required to examine credit conditions ; up to 2008, business leaders were asked for their opinion once a year, in November, in the investment survey. Since the frequency of this second survey is now aligned with that of the BLS, and some questions are similarly worded, it is now possible to compare firms’ assessment of the conditions governing their access to credit with the banks’ perception on that subject in the same quarter.

reSultS oF the euroSySteM bank lending SurVey : Supply and deMand For loanS to enterpriSeS

(quarterly data)

2003 2004 2005 2006 2007 2008 2010–75

–50

–25

0

25

50

H

J

2003 2004 2005 2006 2007 2008 201020092009–75

–50

–25

0

25

50

H

J

H

J

Change observed by respondents

Change expected by respondents

Demand for credit originating from enterprises (2) (3)

Lending criteria applied to enterprises (1) (2)

Change observed by respondents

Change expected by respondents

BELGIUM EURO AREA

Sources : ECB, NBB (Eurosystem bank lending survey).(1) Weighted net percentages of responses by credit institutions to the Eurosystem’s bank lending survey indicating the degree to which lending criteria were eased or

tightened (–).(2) The responses are weighted according to the distance from a “neutral” response : mention of a “considerable” change in the lending criteria or demand for loans is

accorded double the weighting of the mention of a “slight” change.(3) Weighted net percentages of responses by credit institutions to the Eurosystem’s bank lending survey indicating the degree of increase or decrease (–) in demand for

credit.

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173


It is evident from the bank lending survey that – according to the banks polled – corporate demand for loans recorded a further very steep decline in the first quarter of 2009, after successive, and ever bigger falls during 2008. That development was due mainly to the reduction in gross fixed capital formation by enterprises and the fall in demand relating to mergers and acquisitions or corporate restructuring. In the July and October surveys, banks reported a further contraction in demand for loans on the part of enterprises, though it was less acute than that seen in the preceding quarters. At the end of the year, credit institutions reported a stabilisation of corporate demand for loans. In the opinion of the banks, in the second half of the year recourse to other financing methods, such as issuance of debt securities, was also a factor affecting demand.

The responses by Belgian banks to the BLS show that they tightened their credit policy yet again in the first quarter of 2009. That movement had begun in the second quarter of 2007 and was considerably amplified in 2008. During the rest of the year under review, credit standards – according to the banks polled – remained more or less unchanged, indicating the halting of that trend.

The picture of corporate credit supply and demand which Belgian banks reported is similar to that described, on average, by banks in the euro area. However, the latter continued to report a tightening of their credit standards up to the fourth quarter of the year, although to an ever-diminishing degree.

Banks used various ways of adjusting the supply of credit in Belgium. They increased the margins on standard loans again in the first quarter of 2009, and on riskier loans in the first and second quarters, and tightened the other lending criteria (such as miscellaneous charges and the amount of the loan). However, in the third quarter, all these

reSultS oF the euroSySteM bank lending SurVey in belgiuM : lending criteria (1) (2)

(quarterly data)

2007 2008 2009–100

–80

–60

–40

–20

0

20

40

60

–100

–80

–60

–40

–20

0

20

40

60

Margins on standard loans

Margins on riskier loans

Other lending criteria

Source : NBB (Eurosystem bank lending survey).(1) Weighted net percentages of responses by credit institutions to the Eurosystem’s bank lending survey indicating the criteria used to ease or tighten (–) lending.(2) The responses are weighted according to the distance from a “neutral” response : mention of a “considerable” change in the lending criteria is accorded double the

weighting of the mention of a “slight” change.

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174

criteria remained unchanged, and the easing recorded at the end of the year in the case of margins on standard loans could presage a reversal of the trend towards tightening which started in mid 2007.

Lending criteria were tightened mainly for large firms and for long-term loans, whereas there was a tendency towards stabilisation in the case of SMEs by the second quarter of the year, and an easing was recorded for short-term loans in the third quarter. Regarding demand, banks reported that they had seen a much more pronounced fall on the part of large firms and for long-term loans.

The initial tightening of the banks’ credit policy and the stabilisation which followed are also apparent from the Bank’s survey of corporate credit access conditions. At the beginning of the year, 37 p.c. of the firms polled – in manufacturing industry, construction and business services – considered that the conditions governing access to bank finance were unfavourable. That figure dropped steadily during the year, falling to 26 p.c. in the fourth quarter compared to 48 p.c. at the end of 2008. At the same time, the percentage of firms assessing conditions as favourable, which had been 8 p.c. at the end of 2008, increased to 20 p.c. by the end of the year, after having remained steady at around 16 p.c. during the first three quarters. Despite these slight improvements, the balance of responses, which increased from – 22 p.c. in the first quarter to – 6 p.c. in the fourth quarter of 2009, continued to indicate generally unfavourable conditions, far worse than during the previous tightening in 2002.

Regarding the various criteria, firms reported an improvement in interest rates during the first three quarters of the year, followed by stabilisation at the end of the year ; that tallies with the recorded movement in retail rates applied to firms. On the subject of the other credit conditions (other charges, loan amount and collateral required), firms continued to express serious dissatisfaction, though their discontent did diminish from one quarter to the next.

FirMS’ aSSeSSMent oF bank credit acceSS conditionS (1)

(quarterly data from 2009)

2002

2003

200

4

2005

200

6

2007

200

8

0

20

40

60

80

100

2002

2003

200

4

2005

200

6

2007

200

8

–70

–35

0

35

0

20

40

60

80

100

–70

–35

0

35

Interest rates

Loan amounts

Collateral requirements

Other charges

Neutral

Favourable

Unfavourable

200

9 Q

1

200

9 Q

2

200

9 Q

3

200

9 Q

4

200

9 Q

1

200

9 Q

2

200

9 Q

3

200

9 Q

4GENERAL CONDITIONS(percentages)

DETAILED CONDITIONS PER LOAN CRITERION(net percentages (2))

Source : NBB.(1) Sample of firms in manufacturing industry, construction and business services.(2) Net percentage of responses by firms questioned indicating a favourable or unfavourable (−) assessment of bank credit access conditions.

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175


It is mainly in regard to collateral that firms consider credit institutions to have been too demanding in 2009 : at the end of the year, 31 p.c. of firms still regarded the banks’ attitude as excessive in that respect.

The breakdown of firms by size category shows that very large enterprises (500 or more employees) took a considerably less favourable view of general financing conditions throughout the year, although the net percentage of responses became less negative over time. These findings are in line with the statements made by credit institutions as recorded in the BLS. Regarding branches of activity, the general assessment of credit conditions improved mainly in manufacturing industry and construction, although the net responses remained negative throughout the year in those sectors. At the end of the year, business service companies were the most critical in their assessment of credit conditions, with particular emphasis on the level of collateral demanded by banks. In construction, credit-related charges and the collateral required remained the principal concerns.

The stabilisation of the bank criteria for loans to enterprises in Belgium may be due to the gradual ebbing away, during the year, of the uncertainties over financing problems and balance sheet constraints facing the banks. Conversely, the banks’ risk perception, which depends on the prospects for economic activity in general, or in specific branches or firms, became the most significant explanatory factor over the year as a whole.

The gradual tightening of the banks’ policy on the supply of corporate credit from mid 2007 onwards was due essentially to these two factors : the increasing financing difficulties and worsening of balance sheet constraints, on the one hand, and the deterioration in risk perception on the other. It was in these two areas that the government intervened at the end of 2008 and during 2009.

tightening oF lending criteria applied to enterpriSeS in belgiuM : Main explanatory FactorS (1) (2)

(quarterly data)

2007 2008 2009–150

–100

–50

0

50

100

–150

–100

–50

0

50

100

Financing costs and balance sheet constraints

Competitive pressure

Risk perception

Source : NBB (Eurosystem bank lending survey).(1) Weighted net percentages of responses by credit institutions questioned about the explanatory factors. A negative (positive) percentage corresponds to a factor which

has contributed to a tightening (easing) of credit conditions.(2) The responses are weighted according to the distance from a “neutral” response : mention of a “considerable” change in the explanatory factors of lending criteria is

accorded double the weighting of the mention of a “slight” change.

4

176

The provision of liquidity by the ECB and the modification of its monetary policy instruments undeniably helped to supply financial institutions with sufficient funds. The Belgian government also provided the banks with capital, plus State guarantees when that proved necessary. Moreover, in regard to the improvement in risk perception, they took some useful initiatives, notably by developing new credit and guarantee instruments designed for SMEs. A credit mediator, acting as the contact for any firm facing financing problems, was appointed and attached to the Knowledge Centre for SME financing (BeCeFi). Furthermore, the activities of the Participation Fund were extended. Its lending capacity was boosted by 300 million euro as a result of a new bond loan, and supplementary products were launched : via Initio, SMEs can obtain Fund aid in effecting their bank loans ; the government also introduced an instrument named Casheo, which enables small firms to obtain subordinated loans against the mobilisation of their claims on public institutions. Finally, like the federal government, the regions increased the budgets of the regional guarantee and investment companies, relaxed the mechanisms for granting guaranteed aid, and extended their scope.

In addition, the federal government took targeted measures to limit any liquidity problems. Thus, for the period from March to August 2009, a three-month postponement was granted for payment of the payroll tax deducted from the remuneration of employees and business managers.


During the first nine months of 2009, Belgian firms issued fixed-income securities totalling 11.1 billion euro, the largest issues taking place in the second quarter. Net issues of short-term securities in the form of commercial paper declined to 0.4 billion, while the net amounts raised by issues of long-term securities came to almost 11 billion. That figure – which is very high by historical standards – is due to sizeable bond issues by a number of large Belgian firms, whose shares are generally included in the BEL 20 and which, probably encountering difficulties in obtaining bank credit, took advantage of the recovery of the mar-kets in debt securities and the decline in the costs associ-ated with that method of financing. The bulk of these bonds were subscribed by institutional investors in other euro area countries (accounting for 64 p.c.) or outside the euro area (16 p.c.).

Shares

During the first nine months of 2009, net issues of unlisted shares came to 25.4 billion euro, far short of the 73.5 bil-lion issued in the corresponding period of the previous year, though admittedly that figure had been inflated by the Arcelor Mittal group’s operations. While share issues had been numerous in the years directly preceding and following the introduction of the law on the deduction of notional interest in 2006, they declined sharply in the past year. Leaving aside the financial crisis and its consequences,

it can be assumed that the incentive effect of the measure concerning notional interest has come to an end.

As in the previous year, firms made very little use of the stock market. At the beginning of the year, in fact, the fall in stock market prices and investors’ preference for low-risk assets made it expensive to issue listed shares. During the first nine months of 2009, this source of finance had virtually dried up, with issues of only 0.1 billion. Some companies were obliged to issue shares from the second quarter of 2009 in order to repair their balance sheet structure, for regulatory or contractual reasons.

On the Brussels Stock Exchange, there were five intro-ductions in 2009, one on Eurolist and the others on Alternext (three introductions) and the Free Market (one introduction), the two markets which are more specifi-cally intended for SMEs, with simplified admission criteria, while nine companies were delisted (seven on Eurolist and two on the Free Market).

On the basis of the monthly averages, the price index for all listed Belgian companies excluding enterprises in the financial sector recovered from January 2009 onwards. Between January and December 2009, the Belgian stock market index jumped by 64 p.c. The similar index compiled for euro area firms began rising later, from April 2009, then gaining 52 p.c. up to December. This price rebound was reflected in a marked rise in the price-earnings ratio, though admittedly it was amplified purely mechanically by the fact that corporate results were at

177


the same time particularly depressed compared to the previous period.

This ratio gives an indication of the appropriateness of share valuations. From the start of the financial crisis, it had begun falling in the case of listed companies : at the end of 2007, it dropped below its long-term average in the case of Belgian stocks, then at the beginning of 2008 the same applied to euro area stocks. After that, the price-earnings ratio slumped to a historic low, at the end of 2008 and at the beginning of 2009 respectively, before

chart 96 Stock Market priceS and price-earningS ratio in belgiuM and in the euro area (1)

(monthly averages)19

87

1989

1991

1993

1995

1997

199

9

2001

2003

2005

2007

200

9

0

100

200

300

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SHARE PRICES(indices January 1987 = 100)

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PRICE-EARNINGS RATIO

Average 1987-2009 = 15.3

Average 1987-2009 = 15.6

Source : Thomson Reuters Datastream.(1) Indices covering all listed companies on each market, except financial companies.

recovering during the months which followed. At the end of December 2009, in both Belgium and the euro area, it had returned to a value similar to that prevailing just before the outbreak of the financial crisis, though in both cases it remained below its late 1990s level.

7.4 General government

During the first nine months of the year under review, the financial accounts of general government showed a deficit of 20.7 billion euro, compared to 5.4 billion during the corresponding period of 2008. The marked deteriora-tion in these accounts reflects the severe worsening of the general government budget balance, for both structural and cyclical reasons, as explained in detail in chapter 6 on public finances. Whereas in 2008, the outstanding amount of the government’s financial assets had risen strongly following capital injections or loans provided in order to rescue financial institutions, it subsided by around 10 billion euro during the first nine months of the year under review, notably because the finance provided by the federal government – via the Federal Holding and Investment Company (FHIC) – for the portfolio of structured products of Fortis Bank Belgium, placed in the Royal Park Investment (RPI) defeasance structure, was less than initially expected. For their part, the government’s liabilities grew by 10.4 billion.

New Treasury issues

In January 2009, the Treasury proceeded as usual to issue a new benchmark loan in the form of the ten-year OLO. In March and then in June, new lines of OLOs were issued with terms of five and three years respectively. In all three cases, the Treasury opted for consortium issues in order to ensure that the new lines had sufficient immediate liquid-ity. Insurance companies and occupational pension insti-tutions subscribed over a quarter of the amounts issued for ten years, reflecting the manifest interest in the long term among certain investors with long-dated liabilities. In contrast, the three-year and five-year issues were more inclined to attract other categories of investors : UCIs accounted for 45 p.c. of five-year subscriptions and the banks took up 41 p.c. of those at three years. The Treasury also topped up the existing OLO lines via tenders, bringing the total number of issues to ten during 2009, against eight in the previous year. Thus, the Treasury was able to use a wide range of issues with a residual term ranging from two to nineteen years, adjusting the calendar of maturity dates while seeking to minimise the financial cost. Altogether, the OLO issues enabled the Treasury to raise 35 billion euro in 2009.

178

As in the previous year, the Treasury engaged in arbitrage on the market by issuing bonds denominated in US dollar. Issued under its Euro Medium Term Notes (EMTN) pro-gramme, these securities were immediately swapped into euro, in fine permitting borrowing at an advantageous rate, in view of the attractive conditions on the swap market. The EMTN issues raised 2.5 billion euro.

During the year under review, State notes benefited hardly at all from households’ preference for fixed-income securities. Altogether, households subscribed to State notes totalling around 670 million euro, which was com-parable to the previous year’s figure. Like the December 2008 issue, the one in March 2009 was exceptional, accounting on its own for more than half of the funds raised over the whole year. That interest among savers was undoubtedly due to the maximum security offered by State notes, as a fixed-income product protected from defaulting banks. The low rates offered, which should be seen in context given the low inflation, did not appear to discourage certain households – probably the most risk-averse – from subscribing to these issues. True, bank deposits were hardly more attractive. The risk aversion of households seems to have diminished thereafter, since the subsequent issues of State notes produced results more in line with the average for recent years.

Overall, medium- and long-term issues totalled 38.3 bil-lion euro in 2009, or almost 5 billion more than the already large volumes issued in the previous year.

Management of the Treasury debt

In contrast to the situation in 2008, medium- and long-term loans issued during the year under review more than covered the Treasury’s gross financing requirement, which stood at 28.8 billion euro. Admittedly, the size of these issues was intended to permit the refinancing of the excess short-term loans issued in 2008 to support the govern-ment’s rescue operations for a number of large banks or insurance companies. The Treasury’s short-term debt was indeed cut considerably during the year under review.

In 2009, the financing requirements of the federal State returned to a level close to that prevailing before the financial crisis. Thus, while the Treasury had ended its 2008 operations with a cash deficit of 27.5 billion euro, the budget deficit declined to 7.8 billion, a much lower figure but, if it is compared with deficit in the years prior to the economic and financial crisis, it indicates substan-tial derailment of the federal government’s finances. Moreover, loans maturing during the year and needing to be refinanced totalled only 17.9 billion euro, against 26.5 billion in 2008. Finally, the Treasury effected the early redemption of securities maturing later, for a total of 3.1 billion.

By redeeming securities ahead of maturity, the Treasury can smooth out its financing requirements from one year to the next. For example, only one OLO line matured in 2009. The Treasury took advantage of that to effect the

Table 31 FinancialassetsandliabilitiesoFgeneralgovernment

(billions of euro)

First nine months

2004

2005

2006

2007

2008

2009

2008

2009

Formation of financial assets (1) . . . . . . . . . 3.4 0.4 0.8 12.6 21.8 n. –0.7 –10.4

New financial liabilities . . . . . . . . . . . . . . . 4.5 8.7 0.5 13.4 25.9 n. 4.7 10.4

Securities denominated in euro . . . . . . –1.1 5.5 –1.1 10.3 18.6 n. 3.9 19.5

of which :

Treasury . . . . . . . . . . . . . . . . . . . . . . –1.2 4.0 –0.6 12.6 18.2 12.9 3.5 14.8

At up to one year . . . . . . . . . . . –0.2 0.8 0.4 4.4 14.3 –6.4 7.0 0.9

At over one year . . . . . . . . . . . . –1.0 3.2 –0.9 8.2 3.9 19.2 –3.4 14.0

Other liabilities denominated in euro (1) 6.9 4.0 1.8 3.5 3.5 n. 0.4 –6.2

Treasury liabilities denominated in foreign currencies . . . . . . . . . . . . . . . –1.3 –0.8 –0.1 –0.5 3.7 –4.0 0.4 –2.9

Financial balance . . . . . . . . . . . . . . . . . . . . –1.1 –8.3 0.3 –0.8 –4.1 n. –5.4 –20.7

Source : NBB.(1) Including “Ageing Fund Treasury Bonds”.

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Table 32 FinancingrequirementsandresourcesoFtheFederalstate(1)

(billions of euro)

2008

2009

Gross balance to be financed . . . 57.3 28.8

Gross financing requirements . . 54.0 25.7

Budget deficit or surplus (–) (2) 27.5 7.8

Medium- and long-term debt maturing during the year . . . 26.5 17.9

In euro . . . . . . . . . . . . . . . . . 26.0 17.9

In foreign currencies . . . . . 0.5 0.0

Redemptions and exchanges (securities maturing the next year or later) . . . . . . . . 3.3 3.1

Other financing requirements . . 0.1 0.0

Medium- and long-term funding resources . . . . . . . . . . . . . 33.8 38.3

Issues in euro . . . . . . . . . . . . . . . 32.4 35.8

Linear bonds (OLOs) . . . . . . . 31.8 35.0

State notes . . . . . . . . . . . . . . . 0.7 0.7

Issues in foreign currencies . . . . 1.4 2.5

Net change in the short-term debt in foreign currencies . . . . . . . . . . . 4.3 –4.0

Net change in the outstanding amount of Treasury certificates . . 11.1 –1.4

Net change in other short-term debt in euro and in financial assets . . . 8.1 –4.1

Source : FPS Finance.(1) Before swap operations.(2) The budget balance is calculated on a cash basis and, among other things,

takes account of financial transactions which are not included in the overall balance of general government which, in accordance with the ESA 95, is calculated on a transaction basis.

early redemption of securities maturing in 2010, a year in which the volume of loans to be redeemed, and hence refinanced, will be larger.

This smoothing of maturities is designed to limit the risks that excessive financing requirements in a given period may force the Treasury to borrow at an interest rate higher than the prevailing market rate. That risk is measured by the proportion of the loan portfolio which is to be refinanced during the period considered. The maxi-mum limits which the Treasury sets for the refinancing risk at twelve months and at five years are 25 and 60 p.c. respectively. At the end of 2009, those ratios stood at 22.9 and 59.8 p.c.

The Treasury also monitors a second type of risk : the interest rate risk, defined as the percentage of the port-folio subject to an interest rate review during a particular period. The limits for the twelve-month and five-year

risks were set at 27.5 p.c. and 65 p.c. respectively of the euro-denominated debt. At the end of 2009, the twelve-month risk came to 27.9 p.c. and the five-year risk stood at 66.5 p.c.

The movement in interest rates on government bonds is closely linked to another type of risk, namely the risk which investors run if the issuer fails to meet his liabili-ties. The decline in long-term interest rates on sovereign

chart 97 yield on ten-year goVernMent bondS (1)

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YIELD ON THE OLO AND THE GERMAN BUND(weekly averages)

YIELD DIFFERENTIALS ON TEN-YEAR GOVERNMENT BONDS (1) IN RELATION TO THE GERMAN BUND(weekly averages, basis points)

Ireland

Greece

Source : BIS.(1) For Belgium, secondary market yield on government benchmark loans (OLOs).

180

chart 98 proportion oF Foreign-held oloS and treaSury certiFicateS iSSued by the belgian State

(end-of-quarter data, percentages of the total)

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loans, which had begun during the summer of 2008, was halted at the start of the year under review. Interest rates on Belgian and German ten-year loans then increased significantly, as the markets were concerned about the deterioration in public finances following the rescue operations, the economic recovery plans and the reces-sion. The rates on the benchmark OLO and the German Bund subsequently resumed their downward trend, as a result of sustained demand for long-term assets induced by the steeply rising yield curve.

Yield differentials between loans of sovereign issuers in the euro area and the German Bund peaked at the beginning of the year, when risk aversion dominated the markets. That widening was more marked in some coun-tries than in others. This applied particularly to Ireland, in view of fears of default on the substantial debt which the Irish government had to contract in order to bail out the financial sector. The Irish Treasury, like that of other euro area countries such as Spain, also saw its debt rating downgraded. Conversely, the rating agencies kept the Belgian public debt rating unchanged. Most of the yield differentials then diminished from April onwards. On 31 December, the spread between Belgian and German long-term government bonds stood at 46 basis points, whereas it had peaked at over 120 points at the end of January. Relative calm was restored on the financial markets from the second quarter, and the investors’ flight to quality and liquidity, which had benefited the German Bund to a greater extent than other government loans, faded away somewhat, causing a partial narrowing of spreads. However, Greece is an exception : the yield differential applied to its sovereign loans returned in December to the peak levels attained at the start of the year. The Greek Treasury was thus a victim of the lack of confidence among investors, worried about the marked deterioration in the State’s finances.

However, the decline in spreads was not sufficient to offset the substantial increase seen in 2008. The yield differential on ten-year OLOs in relation to German public loans of the same duration remained much larger than before the crisis. Investors still regarded German bonds as more liquid and less risky, therefore demanding a premium for the purchase of bonds issued by other euro area countries. That premium maintained the interest of foreign investors in Belgian public debt securities. The percentage of Belgian public loans held abroad remained high in 2009. As at 30 September, that ratio was 58 p.c. for OLOs and 88 p.c. for treasury certificates.

183

8.

financial stability

Financial stability

8.1 International financial markets

At the beginning of 2009, the international financial system was experiencing particularly tense conditions, as it slowly recovered from the crisis following the collapse of the American investment bank Lehman Brothers, which had almost brought the system down. The accelerated deleveraging and the freezing of almost all segments of the interbank and wholesale finance markets – a key source of financing for many systemic financial institutions – put heavy pressure on the liquidity position of the leading international banks and insurance companies. Since these problems forced the financial institutions to sell their assets under market conditions which were already difficult, result-ing in a price fall which further exacerbated the pres-sure on their solvency, the central banks increased the amount of credit supplied, and eased the conditions for their market interventions.

Although these transactions did alleviate the finan-cial sector’s liquidity problems, the banks’ solvency remained under stress owing to substantial valuation losses recorded on the assets in their trading portfolio. Such assets are acquired for the purpose of resale, and under the current rules they must therefore be recorded at fair value. The continuous slide in the market prices of these assets combined with mounting loan losses in the other ‘bank’ portfolios, which contain all the financial assets not held for trading purposes, forced American and European banks to write down assets by a total of 343.9 and 176.7 billion US dollars respectively over the period from the last quarter of 2008 to the first quarter of 2009. The biggest losses were recorded on structured finance products, since their initial decrease in value was rapidly reflected in an abrupt reduction in their liquidity, causing prices to slip further.

In order to cover these substantial losses, recapitalisations peaked in the final quarter of 2008 and the first quarter of 2009, at 385.4 billion dollars for American banks and 267.8 billion for European banks. Since financial institu-tions had virtually lost their access to the stock markets, most of these recapitalisations were government funded, namely 87.2 p.c. in the case of American banks and 71.9 p.c. for their European counterparts.

These recapitalisations were necessary, not only to top up the reserves after the losses already booked in the trading and bank portfolios, but also as a buffer against the impact of the deterioration in the global economy, via feedback effects, on the quality of the total loans and advances granted by financial institutions. Unlike the losses on trading portfolios, which are recorded imme-diately owing to their recognition at fair value, losses on loans and advances are not recorded in the form of writedowns until they are incurred. At the beginning of the year, estimates of these future losses were very high, because the market expected the contraction in economic activity, amplified by rising unemployment and the col-lapse of the property market in a number of countries, to be the most severe and protracted since the Second World War. Expectations regarding bankruptcies were constantly revised upwards, while the opposite applied to recovery rates i.e. the percentage of loans that can be recovered in the event of default. Thus, the default rate on speculative bonds had risen from less than 1 p.c. at the end of 2007 to 7.4 p.c. by mid March, and one of the leading rating agencies estimated that in the fourth quarter of 2009 it would reach 16.4 p.c. in the United States and 19.6 p.c. in Europe, thus breaking the previous record of 15.9 p.c. in 1933. Since fears of such negative feedback effects were particularly acute in the case of countries such as Ireland, or certain Central and Eastern European countries, where the strong economic growth

184

chart 99 aSSet writedownS and recapitaliSationS oF the world’S large Financial inStitutionS

(billions of US dollars)

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Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (1)

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (1)

AMERICAN FINANCIAL INSTITUTIONS

Asset writedowns

Other capital increases

Capital injections by governments Total recapitalisation

EUROPEAN FINANCIAL INSTITUTIONS

Source : Bloomberg.(1) The figure for writedowns in the fourth quarter of 2009 is partial, since many

institutions had not yet published their results for that quarter when this Report went to press.

chart 100 preMiuMS on 5-year credit deFault SwapS


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had been based to an excessive degree on credit and had been accompanied by a deterioration in savings ratios and in the balance of payments current account, it was pri-marily financial institutions with large exposures on those markets that were particularly weakened.

Apart from losses on their trading portfolios, financial institutions therefore faced a second wave of losses which principally threatened the traditional loan port-folio, thus compounding the sector’s losses. In its October 2009 Global Financial Stability Report, the IMF

estimated that, over the period 2007-2010, these losses could total 1,025 billion dollars in the United States, 814 billion in the euro area and 604 billion in the United Kingdom, of which 610, 350 and 260 billion respectively had already been booked at the end of the second quar-ter of 2009. The uncertainty over the total amount of the losses yet to be recorded heightened fears concerning counterparty risks and focused attention on the banks’ core capital, particularly the equity and reserves, which are the first components of own funds to be affected in the event of losses.

185

financial stability

chart 101 ratio between the Market Value and the book Value oF liSted bankS

(daily data, percentages)

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The climate of uncertainty was reflected in premiums on credit default swaps (CDS) of financial institutions which, in their simplest form, can be compared to insurance pre-miums which investors pay in return for protection against credit risks. CDS premiums on banks, which had peaked following the collapse of Lehman Brothers, remained high throughout the first quarter of 2009. The markets demanded those levels in view of not only the scale of the losses already incurred but also the problems of assessing the real financial position of the financial institutions and question marks over their future profitability against the backdrop of a shortage of liquidity on the financial mar-kets and a deterioration in the economic prospects. CDS premiums on banks thus reached a new peak in March. At the same time, CDS premiums on American monoline insurers, who had sold insurance to banks on a massive scale against losses on structured products, also rocketed. They peaked in November, partly as a result of the liquid-ity problems encountered by AMBAC, one of the leading market players. Other insurers also recorded a steep rise in their CDS premiums, owing to the adverse influence on their financial results of the movement in bond and share prices.

The increase in the premiums on CDS contracts at the beginning of 2009 was accentuated by fears of a new wave of bank nationalisations, as they could lead to the exercise of certain CDS contracts. Taking account of the bad results published by the banks in the initial months of 2009, investors considered in many cases that the

core capital, the only element of the own funds which under no circumstances can trigger default, would be insufficient to compensate for the losses of numerous financial institutions without further government inter-vention. With the private capital markets virtually closed to the banks, recapitalisation by the government seemed, in practice, the only way for financial institutions to fulfil market expectations regarding the strengthening of their core capital.

These difficulties were reflected in the ratios indicating the relationship between the market value of bank shares and their book value. Whereas those ratios had been in the region of 200 p.c. for American banks and 150 p.c. for European banks during the five years preceding the crisis, the market value of the own funds on 9 March averaged only 42 and 34 p.c. respectively of the book value. Apart from fears of dilution of the shareholder-ship and nationalisation, these ratios also reflected the markets’ mistrust about the exact situation of the banks’ balance sheets, owing to doubts about the reliability of the valuation of their intangible fixed assets and certain financial assets. In that context, the fact that the banks had reclassified some of their assets, switching them from their trading portfolios recorded at market value to their bank portfolios valued at historical cost, did not help to improve transparency.

The continuing crisis necessitated at the beginning of 2009 a more vigorous, comprehensive and better coor-dinated approach than the measures already taken in 2008. The aim was not only to tackle the symptoms of the financial crisis via measures to support financial insti-tutions and markets, but also to remedy the underlying causes by devising new regulations in the financial sector and adjusting macroeconomic policy.

During the first quarter of 2009, numerous governments launched large-scale programmes comprising both eco-nomic recovery plans and aid for the financial sector. The recovery plans consisted of general economic support measures, such as tax cuts, infrastructure projects and private sector investment subsidies, plus more targeted measures to assist specific sectors, such as the property sector and the car industry. As stated in chapter 1, the more direct support for the financial sector took the form of capital injections to reinforce the solvency posi-tion, guarantees covering bank deposits, guarantees for new issues of securities aimed at improving liquidity, and a range of measures covering the risks on certain inferior quality assets, in the form of either insurance against default risks or repurchase of those assets. The insurance mechanisms against default, such as the British Asset Protection Scheme, enable banks to buy

186

protection against losses beyond a certain threshold, with-out any initial payment by the government. An example of the asset repurchase system is the American Public-Private Investment Program (PPIP), which is designed to relieve credit institutions of certain structured assets while releasing funds to strengthen their balance sheet : that programme, totalling up to 1,000 billion dollars, involves public and private capital augmented by the leverage effect of state-guaranteed loans. In addition, the American “Geithner” plan announced on 10 February provided for capital injections in the main financial institu-tions, depending on the results of the stress tests which they were to undergo, and extension of the US Federal Reserve’s TALF programme (Term Asset-backed Securities Loan Facility), increasing it from 200 to 1,000 billion dollars in order to support the credit and securitisation markets via the repurchase of assets. In all, according to an estimate published by the IMF in November 2009, the financial sector aid packages represented 23.4 p.c. of the GDP of the G20 countries.

Central banks also implemented various support meas-ures, as described at the beginning of this Report. They cut their key interest rates to historically low levels, lengthened the terms of their loans to financial institu-tions, extended the range of financial assets qualifying as collateral for their operations, supplied liquidity in foreign currencies and adopted quantitative easing policies to inject liquidity into key sectors of the financial system. Examples of these last measures included, in the United States, the TALF programme already mentioned, provid-ing support for the credit and securitisation markets, in the United Kingdom, the Bank of England’s programme for purchasing assets (Asset Purchase Facility) totalling 200 billion pounds sterling, and, for the euro area, the Eurosystem’s 60 billion euro programme for the purchase of covered bonds. All these measures were designed to strengthen the liquidity position of financial institutions, to improve the general conditions on the money markets and the wholesale finance markets, and to halt the con-traction of lending. In August 2009, the liquidity injections and support measures of the central banks represented 9.7 p.c. of the GDP of the G20 countries.

In the climate of panic and uncertainty prevailing in the first quarter of 2009, many of these measures by central banks and governments initially got a rather chilly recep-tion from the markets. In particular, the latter were disap-pointed by the “Geithner” plan which fell short of expec-tations and left many of the practical details unknown. Central banks and governments stepped up their efforts to rescue the financial markets, and reasserted their deter-mination at the G20 meetings of finance ministers and central bank governors on 14 March, and heads of state

and government on 2 April. The G20 leaders agreed on a recovery programme amounting to 1,100 billion US dol-lars, which included an immediate 250 billion increase in the IMF lending facility, and the promise of further increases. At the same time, the national authorities unveiled details of their rescue plans, while the uncer-tainty over the banks’ financial situation diminished as a result of the coordinated organisation of “stress tests” in the main systemically important institutions in the finan-cial sector.

During March, these efforts began to yield results when a number of systemic financial institutions announced that their results were likely to be better than expected. In the ensuing weeks, investor optimism was boosted by the first signs of stabilisation on the property markets and in other economic sectors, by the G20’s undertakings, by the extra 1,125 billion dollars promised by the Federal Reserve to support the credit market in the United States, by the announcement of changes to the accounting rules and by further clarification concerning the central bank and government rescue plans. The more favourable view of the financial sector’s health was also reinforced by the publication of the results of the “stress tests” conducted in the United States, which – though indicating that some banks still needed to be recapitalised – were reassuring in regard to the amount of capital entailed. Similar “stress tests” were conducted in Europe during the summer on twenty-two large European banking groups. Although they indicated that these groups could yet suffer losses of around 400 billion euro in an adverse scenario, these tests showed that, even in that eventuality, the basic solvency ratio, the Tier I, would still exceed 6 p.c. in all those banks during the period 2009-2010. The dwindling uncertainty over the banks’ viability also led to substantial falls in the CDS premiums on those institutions.

In addition, the reduction of systemic risks gave rise to a fall in the premiums on sovereign credit default swaps, the premiums demanded by sellers of credit insurance covering the risk of states defaulting. Those premiums had risen steeply in the last quarter of 2008 and the first quarter of 2009, as the financial sector rescue plans had led to substantial risks being transferred to the states, an increase in their deficits and frequently an even sharper deterioration of their debt levels. Combined with the uncertain economic prospects and the growth of other government spending, these developments had fuelled doubts about the ability of the governments to cope with such costs. That was also reflected in an increase in the spreads on the bonds of most states compared to those issued by the US or German Treasury, and in rating down-grades for certain countries. Although the premiums on sovereign credit default swaps declined as fears of further

187

financial stability

chart 102 preMiuMS on FiVe-year SoVereign credit deFault SwapS


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Greece


transfers of financial sector risks to governments and the threat of systemic risks ebbed away, they still remained well above their pre-crisis levels. However, the recent fall was neither continuous nor widespread, since investors’ optimism remained heavily dependent on the recovery and on the need to repair public finances, which varied in urgency from one economy to another.

After the first quarter of 2009, bank profits often exceeded expectations, especially in the second quarter, partly as a result of more favourable market develop-ments, the recovery of the yield curve and signs initially heralding a deceleration in the economic downturn and then a revival in economic activity. After the first quarter, value losses on financial assets also declined, as the improvement in market conditions had helped to revive a degree of risk appetite and drive up prices. Thus, expressed as a percentage of their level on the eve of the collapse of Lehman Brothers, price indicators for struc-tured finance products climbed from a low of 65.3 p.c. in March 2009 to 93.4 p.c. at the end of December 2009 for commercial mortgage-backed securities and, over the same period, from 43.8 to 66.4 p.c. for subprime mortgage-backed securities, two of the asset classes most affected. That recovery enabled some banks to announce revaluations of toxic assets in their trading portfolio. Combined with the waning liquidity problems and the

reduction in systemic risks, these developments triggered a surge in financial sector share prices, compared to their low point in March. At the end of 2009, the stock market indices of European and American banks stood at 84.4 and 64.2 p.c. respectively of their level on the day preceding the collapse of Lehman Brothers, and those of European and American insurers had reached 85 and 78.1 p.c. of that level.

However, the improvement in the banks’ stock market indices was decidedly uneven, and in some cases the announcement of better than expected results by finan-cial institutions caused prices to fall owing to uncertainty over the representativeness of the figures (especially if they were due to one-off factors), and over account-ing methods and the scale of the loan losses. Investors clearly remained very cautious in their assessment of the banks’ future profitability. In particular, financial institu-tions specialising in lending and having few trading activities appeared heavily dependent on the substantial spread between short- and long-term rates for secur-ing an adequate profit margin. Conversely, banks with many trading activities recorded much higher profits, but are more exposed to the risk of adverse market developments.

The change in the perception of systemic risks and the abundant liquidity provided by central banks also caused a sharp contraction of interest rate spreads on the money market. From the summer of 2009, the spreads between the three-month Euribor on non-guaranteed interbank loans and the three-month Eonia swap for overnight loans, or between the Eurepo on three-month guaranteed loans and the Euribor on the financing of non-guaranteed three-month interbank loans, were well below the levels on the day preceding the collapse of Lehman Brothers. Combined with the historically low level of central bank key interest rates, these developments enabled financial institutions to obtain funding at low cost. The diminished use of central bank emergency facilities and the reduction in the financial sector’s deposits with the central banks also pointed to stabilisation of the interbank and whole-sale finance markets. Nevertheless, this normalisation was still heavily dependent on government support, and was not equally apparent for all banking institutions.

On the securities market, confidence also recovered from March 2009, as is evident from the decline in the VIX index – which measures the implied volatil-ity of the equity markets – or the narrowing spreads between bonds issued on emerging markets and US Treasury bonds which, at the end of 2009, had returned to 82.4 p.c. of their level on the eve of the collapse of Lehman Brothers.

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Table 33 MoveMentsinfinancialassetpricesandriskpreMiuMs

(daily data, percentages of the level recorded on 12 September 2008, the day before the failure of the bank Lehman Brothers)

Extreme level in October 2008 (1)

Level on 31 December 2008

Extreme level in March 2009 (1)

Level on 31 December 2009

Price indices of structured products (2)

Commercial mortgage-backed securities – AAA tranche . . . . . 93.6 77.5 65.3 93.4

Subprime mortgage-backed securities – AAA tranche . . . . . . . 88.0 72.1 43.8 66.4

Money market spreads

Spread between three-month Euribor and three-month Eonia swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289.1 178.1 156.3 48.8

Spread between guaranteed and non-guaranteed interest rates 295.4 173.9 147.7 48.1

Interest rates

Three-month Euribor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106.7 58.4 36.6 14.1

Risk aversion

VIx index (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291.4 145.9 188.1 76.2

Spreads on emerging market bonds (4) . . . . . . . . . . . . . . . . . . . . 249.3 202.7 199.9 82.4

Equity yield indices

American equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.3 72.3 55.1 92.5

of which :

Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74.5 64.7 27.4 64.2

Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66.8 72.0 45.1 78.1

European equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69.2 73.1 57.5 93.5

of which :

Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55.1 54.7 34.2 84.4

Insurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.8 71.3 43.6 85.0

Commodity prices

Gold bars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.2 114.2 118.1 145.2

Index of industrial commodities (5) . . . . . . . . . . . . . . . . . . . . . . . . 71.0 52.5 53.1 91.3

Sources : J.P. Morgan Chase, The Economist, Thomson Reuters Datastream.(1) The October 2008 and March 2009 money market spreads, risk aversion parameters and interest rates are the highest daily levels recorded. In the case of the indices of

structured credit and share prices and commodity prices, they are the lowest daily levels recorded.(2) The J.P. Morgan CMBX NA.3 AAA Clean Price is the index for the commercial mortgage-backed securities market, and the ABX 2006-2 AAA Closing Price is the index

used for the subprime mortgage-backed securities market.(3) The VIx index measures the implied volatility of the Dow Jones Industrial index.(4) The yield spreads on emerging market bonds correspond to the yield differentials between long-term bonds in US dollar of emerging market issuers and US government

bonds with a comparable term.(5) The index used for industrial commodities is the one published by The Economist.

By their policy of keeping their key interest rates close to zero and massive injections of liquidity in the finan-cial system, central banks made a major contribution to restoring relative normality in the financial sector and financial markets. However, there is always a chance that this easing could lead to price bubbles in certain asset categories. Towards the end of 2009, initial signs seemed to be appearing on some commodity market segments, particularly gold, and on financial and property markets in Asia and South America. In that context, the arrange-ments for terminating the exceptional liquidity support measures adopted by monetary authorities in response to the crisis will require careful judgment.

8.2 Changes to the regulation and supervision in response to the crisis

The global financial crisis revealed serious deficiencies in the arrangements for financial system regulation and supervision, concerning such points as the level and qual-ity of the capital and liquidity reserves in the banking sector, practices relating to provisioning and valuation, and remuneration policies which encourage excessive debt levels and risk-taking. Led by the heads of state and government of the advanced and emerging G20 countries, the main international bodies responsible for designing prudential rules and standards tried to draw

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lessons from the crisis, and proposed a series of reforms to improve the regulation and supervision arrangements.

These proposals do not only aim to strengthen the microprudential dimension, centring on the resilience of individual financial institutions. They are also intended to widen the scope of regulation and supervision to include systemic risks, by reinforcing the macroprudential dimension and improving the general risk management systems. This should reduce the likelihood of failure of an important institution or infrastructure which, by contagion, could threaten the entire system, and also the risk of a large number of financial institutions adopt-ing similar behaviour and responding simultaneously to changes in market conditions, thus amplifying cyclical movements. In addition, various reforms were introduced at European and Belgian level in order to modify the institutional architecture of financial system regulation and supervision.

Strengthening the resilience of individual financial institutions

Many of the reform programme measures are intended to strengthen the ability of individual institutions to with-stand economic and financial shocks by remedying the weaknesses revealed in risk management procedures, and in the institutions’ solvency ratios and liquidity levels. In the case of the banking sector, that analy-sis is conducted by the Basel Committee on Banking Supervision, which is responsible for drawing up pru-dential rules at international level for credit institutions. That Committee, whose secretariat is provided by the Bank for International Settlements (BIS), was created in 1974 by the central bank governors of the Group of Ten countries (G10), including Belgium. In 2009, the Committee was greatly enlarged to include participants from G20 countries not originally represented on the Basel Committee.

In response to the recent financial crisis, the Committee announced the implementation, in two major steps, of a package of measures to strengthen regulation, supervi-sion and risk management in the banking sector. They form part of the general rules defined by the Basel II Accord, which is based on three main pillars, namely regulation, prudential supervision and market discipline.

On 16 January 2009, the Committee presented an initial consultation paper relating to changes to the rules and procedures which had been introduced by the Basel II agreement. The intention of those changes is that the capital requirements, internal management procedures

and market communication should better reflect the risks associated with the trading portfolios, securitised instru-ments, structured finance products and off-balance-sheet vehicles of the banks. Those different activities were in fact a major source of losses during the crisis. Following the consultation period, the Committee finalised the new measures in July 2009.

Under the first pillar of the Basel II framework, the capital requirements for trading portfolios will be increased to take better account of the credit risks attached to market activities and to include a requirement concerning cov-erage of the “value at risk” based on a twelve-month period of serious financial stress. The treatment of cer-tain securitisation operations, both in the bank portfolio and in the trading portfolio, will also be tightened up. A higher weighting coefficient for risks will be introduced for exposures relating to re-securitisation, such as col-lateralised debt obligations which in themselves consist of tranches of asset-backed securities (ABS CDOs) ; the credit risk conversion factor for short-term lines of liquidity provided for off-balance-sheet vehicles will be increased ; banks will be required to conduct more rig-orous credit risk analyses on securitised assets with an external rating.

The Committee also issued additional recommendations concerning the second pillar of Basel II relating to pru-dential supervision procedures. Those recommendations aim to remedy the deficiencies in risk control arrange-ments highlighted by the crisis. They include tightening the institutions’ governance and management standards, better risk monitoring in the case of off-balance-sheet operations, securitisation activities and concentration of exposures, and the development of incentive mechanisms encouraging the banks to improve the long-term man-agement of the balance of risks and returns, including the implementation of principles of sound remuneration practices. All these new recommendations for pillar 2 took effect immediately, while the enhancement of pillar 1 will apply at the end of 2010.

In a second stage, the Basel Committee published two new consultation papers, on 17 December 2009, with a view to strengthening the regulation, supervision and risk management of the banking sector. These various propos-als will be defined in more detail and calibrated after a con-sultation period ending on 16 April 2010 and on the basis of a quantitative impact analysis launched at the begin-ning of 2010. The new set of rules is to be finalised by the end of 2010 and will be phased in, with due regard for the improvement in financial conditions and the recovery of the economy, the aim being full implementation by the end of 2012.

190

The first of the two consultation papers focuses on the general strengthening of capital regulations. A first sec-tion concerns enhancing the quality, transparency and international coherence of the capital requirements. The Basel Committee thus agreed that the capital base, Tier I, should essentially be confined to ordinary shares and retained earnings, and that the prudential deductions and filters – to be harmonised at international level – should apply to that core capital. The minimum requirements in terms of total own funds and Tier I capital will be cali-brated on completion of the impact analysis mentioned above.

A second section deals more specifically with counter-party risk. The capital covering counterparty risks on derivatives, repo transactions, and securities financing will be strengthened, to supplement the new require-ments already announced in July, in the case of trading portfolios and securitised assets. Banks will also have to manage their counterparty risks by using stress scenarios and taking account of losses on the market value of their positions in the case of a deterioration in the credit quality of their counterparties. The rules on collateral manage-ment and margin calls will also be tightened up. Finally, to contribute to the efforts made to control systemic risk on derivatives markets, the Basel Committee proposes dif-ferential risk weighting of derivative exposures according to whether or not they are contracted in relation to cen-tralised counterparties and markets. Such differentiation, combined with the raising of the capital requirements for positions in private derivative contracts (OTC markets), should be a major incentive for banks to use these cen-tralised counterparties and markets.

A last section of the document plans to introduce a new supplementary solvency requirement, in the form of a ratio linking the core capital to the total assets held by the bank. That coefficient, known as the leverage ratio, should help to curb excessive use of the leverage effect in the banking system, to safeguard against the model risk and to provide additional protection against any arbitrage between financial assets motivated by differences in risk weighting coefficients. To ensure international coherence, the rules for applying that leverage ratio will be harmo-nised, to take account of such factors as differences in accounting standards. The ratio will be calibrated so as to form a suitable complement to the risk-weighted capi-tal requirements resulting from the various adjustments made under Basel II.

The second consultation paper published on 17 December proposes introducing an international framework for the assessment, monitoring and imposition of regulatory requirements concerning liquidity risk. That risk relates to

the maturity transformation activity of the banks, which attract short-term funds, particularly deposits, and use them to finance long-term assets, notably in the form of loans. In order to take account of the mismatch of matu-rities which that activity creates on the balance sheets of banks, two new coefficients are to be introduced : a ratio imposing minimum requirements concerning liquidity in stress situations, and a long-term structural liquidity ratio. The liquidity coverage ratio for stress situ-ations will oblige the banks to ensure that they have a sufficiently high quality liquidity buffer to withstand a crisis which severely restricts their scope for refinancing liabilities maturing within thirty days. That measure con-cerning short-term liquidity risks will be accompanied by requirements relating to the mismatch permitted over a long period between, on the one hand, funding sources regarded as stable, and on the other hand, illiquid assets and potential liquidity needs generated by off-balance-sheet liabilities.

Strengthening the resilience of the financial system as a whole

The reform proposals are not confined to measures intended to increase the resilience of individual financial institutions, but also aim to reinforce the emphasis on systemic risk prevention in the framework for regulation and supervision. The crisis in fact confirmed that, in a closely interlinked financial system which amplifies cyclical fluctuations, regulators and supervisors cannot confine themselves to monitoring the soundness of individual institutions, by considering economic and financial shocks as purely exogenous idiosyncratic events. Although micro-prudential supervision makes a vital contribution to the stability of the financial system, it is not sufficient and must be complemented by effective macroprudential supervision, designed to prevent any risk of systemic imbalances.

The pro-cyclicality of the financial system is undoubt-edly one of the principal factors contributing to the propagation of systemic risks during the crisis. Although it is usual for bank lending to tend to grow excessively when economic conditions are favourable, and then to decline sharply during a slowdown, that mechanism was greatly amplified by various channels, such as changes in margin calls to cover the loans, sudden reversals of positions financed via leverage, and fluctuations in the book value of financial assets held by banks. In order to introduce a counter-cyclical dimension into the system, the Basel Committee wants to oblige credit institutions to form a buffer in growth periods, when such reserves are relatively easy to accumulate. Those reserves could

191

financial stability

then be mobilised at the time of a downturn in order to attenuate the risk of tighter credit restrictions. Examples of this type of measure are the introduction of an anti-cyclical component in the capital requirements and the request made to the accounting standards organisations, FASB and IASB, for in-depth revision of the accounting rules governing the valuation of financial instruments and the review of the system of creating provisions for loan losses. The provisions should be less dependent on losses incurred and be geared more closely to the losses expected, so that – when a loan is granted – the total expected statistical loss over its full term is taken into account.

The actions intended to strengthen the overall resil-ience of the financial system are not confined to the counter-cyclical measures mentioned above. The mul-tiple interconnections between banks mean that some large institutions expose the whole financial system to risks, without internalising them in the conduct of their operations. The Basel Committee is therefore trying to develop an analysis framework capable of measuring an individual bank’s relative contribution to systemic risk. The options envisaged for reducing the risk of failure of a systemic bank include the application of supplementary capital or liquidity requirements. The provisions already mentioned for encouraging the financial markets to make greater use of central counterparties are also part of this effort to strengthen the resilience of the system to specific risks involved in the activities of large institu-tions. The same applies to the development of national and international procedures for resolving bank failures. This type of measure could help to reduce the systemic repercussions of the failure of a large bank or one closely interconnected with other institutions. That same concern subtends the request to systemically important banks to develop structures and forms of organisation facilitating dismantling of the institutions or their division into more homogeneous entities in the event of serious financial difficulties.

In Belgium, a draft law was submitted to parliament, in order to extend the government’s power to intervene if a credit institution, insurance company or settlement infra-structure faces problems which threaten the stability of the financial system.

Adjustment of the supervision structures

In order to improve the efficiency of the oversight and supervision of the financial system, proposals aiming to adapt the institutional arrangements have also been made at both national and international level.

In the EU, it was agreed, following the report of a com-mittee of wise men chaired by Mr de Larosière, to rein-force the oversight and macroprudential supervision of the European financial system by creating a European Systemic Risk Board (ESRB) and to establish a pan-European framework for the supervision of individual financial institutions via the European System of Financial Supervisors (ESFS). The main task of the ESRB will be to examine all the risks threatening financial stability in the EU ; the ESRB will also have authority to issue warnings and to recommend corrective measures, notably to the ESFS. The latter will comprise three European Supervisory Authorities – a European Banking Authority, a European Insurance and Occupational Pensions Authority and a European Securities and Markets Authority – whose work will be coordinated with the network of national supervi-sors. The national authorities will remain responsible for the day-to-day supervision of individual institutions, while the European supervision authorities will be in charge of such matters as standardising the collection of micropru-dential information and the application of identical rules by the national supervisors.

The General Board of the ESRB will be composed mainly of central bank representatives, since the President of the ECB and the governors of the twenty-seven national central banks will be members. In addition, the chairman of each of the three European Supervisory Authorities and a representative of the European Commission will be members of the Board. A representative of the national supervisory authorities and the Chairman of the EU’s Economic and Financial Committee will also have a seat, but without voting rights.

In Belgium, the federal government announced, during the year under review, its intention to transfer to the National Bank of Belgium, between now and 2011, the CBFA’s powers relating to the prudential supervision of credit institutions, insurance companies, occupational pension institutions and other financial institutions. The first phase of this integration process will consist in the creation, in 2010, of a Committee for Systemic Risks and Systemic Financial Institutions combining the boards of directors of the two entities, chaired by the governor of the Bank. That committee will prefigure the final phase of the reform, after which the Bank will be responsible for all prudential supervision in Belgium. In addition, a committee on the preparation of the new supervision architecture will oversee the gradual interlinking of the teams from the CBFA and the Bank responsible for pru-dential supervision. The new CBFA, which will remain separate from the Bank, will take charge of all aspects concerning financial market supervision, the proper application of the rules of conduct, and the supervision

192

chart 103 preMiuMS on FiVe-year credit deFault SwapS For belgian and european Financial inStitutionS


0

100

200

300

400

500

600

700

800

0

100

200

300

400

500

600

700

800

20092007 2008

iTraxx Europe Financials Senior (1)

Fortis Bank

Dexia group

KBC group

Source : Thomson Reuters Datastream.(1) Index of credit default swaps with a term of five years for a sample of twenty-five

European financial institutions.

of listed companies and financial products and services. It will also have wider powers in regard to consumer pro-tection and the supervision of the disclosure of financial information.

Such a two-pillar system (the ‘twin peaks’ model) is becoming the preferred option in a growing number of countries. It centralises all the microprudential and macro-prudential information, offering an integrated picture of all the risks incurred by financial institutions and permit-ting the coordinated implementation of the instruments of supervisory policy. It makes full use of the central banks’ strong points for risk supervision : their involve-ment in the money market and payment systems, and – in the EU – their participation in a closely integrated network of central banks. Finally, it facilitates the independent exercise of two different functions, namely the supervi-sion of individual institutions and the safeguarding of the integrity of the stock markets.

8.3 Belgian banking sector

Developments in the main bancassurance groups

The extremely fragile international environment in the first quarter of 2009 brought renewed tensions for the premiums on credit default swaps (CDS) of the large, systemic financial institutions in Belgium, although those premiums did remain below the peaks reached at the end of September 2008, in the case of Dexia and Fortis, and in mid October 2008 in the case of KBC. As explained in the previous Annual Report, the peak CDS levels had been due to both the acute anxiety of the counterparties in regard to Dexia and Fortis at the height of the global financial crisis unleashed by the collapse of the American investment bank Lehman Brothers, and to the announce-ment by KBC of heavy losses on collateralised debt obliga-tions (CDO). In all three cases, the government had had to intervene to stabilise or strengthen market confidence. That action had led to a reduction in the premiums on the CDS of those banks.

While the Dexia CDS premium had fallen very steeply, that fall was temporary since the premium gradually began rising again from October 2008. In November, Dexia had implemented a vital element of its restructur-ing plan, namely the transfer of the insurance activities of its American subsidiary, the monoline insurance com-pany Financial Security Assurance (FSA), to the American company Assured Guaranty. Although, in the ensuing months, important wholesale markets on which Dexia depended for its liquidity, particularly the covered bond

market, gradually reopened, it was not until the sale of FSA had been completed in mid 2009 that the Dexia CDS premium returned to a lower level.

While the Fortis CDS premium stabilised at around 75 basis points at the end of 2008 and in early 2009, it climbed to a new peak in February following the rejec-tion, by a general meeting of shareholders, of the planned merger with BNP Paribas. That event attracted the most media attention of all the legal actions that delayed the execution and implementation of the rescue plan for the banking activities of the Fortis group, which was disman-tled following the cancellation of an initial operation set up over the weekend of 27 and 28 September 2008 by the Belgian, Luxembourg and Dutch governments. Following the sale of the Dutch activities (including the stake in ABN Amro) to the Dutch State on 3 October, the Belgian government had agreed to the sale to the French bank BNP Paribas of a majority stake in Fortis Bank. That agree-ment was revised following the decision of the general meeting. A majority of the Fortis shareholders approved the revised terms of the agreement with BNP Paribas at general meetings of shareholders of Fortis SA/NV and Fortis NV, at the end of April 2009.

The late 2008 announcement by Moody’s of a revi-sion of the assumptions forming the basis of its ratings for corporate synthetic collateralised debt obligations

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financial stability

(CDOs referencing corporate debts) and the serious con-cerns over the economic prospects for a number of coun-tries in which KBC operates via subsidiaries, particularly in Central and Eastern Europe, led at the beginning of 2009 to a marked decline in that bank’s share price and a rise in the CDS premium applied to it. In response, KBC’s solvency – which had already been strengthened at the end of October 2008 by a federal government subscrip-tion to a 3.5 billion euro issue of debt securities qualifying as core capital – was further reinforced by a government capital injection, in this case by the Flemish Community. That operation concerned a contribution of 2 billion euro in January 2009 with the option of a 1.5 billion increase ; that option was exercised on 14 May 2009. On that same date, the Belgian State granted an additional guarantee for a nominal value of 20 billion euro on structured finance instruments held by KBC. That guarantee, which covers 90 p.c. of the default risk beyond an initial loss of 3.2 billion assumed entirely by KBC, was granted follow-ing significant further losses resulting from reductions in the fair value of a portfolio of collateralised debt obliga-tions covered by the monoline insurance company MBIA (Municipal Bond Investors Assurance). Those losses con-tributed to the negative result of 3.6 billion euro recorded by KBC for the first quarter of the year. The value of this credit protection acquired in the case of MBIA, which concerned an outstanding total of 14 billion euro, in fact declined sharply when the MBIA group announced a restructuring plan. On 18 November, the EC – acting in its capacity as the competition regulator – approved the guarantee granted in May 2009 by the Belgian State and the restructuring plan submitted by KBC, whereby the group is to refocus on its core markets and activities and repay the government aid received. The 25 p.c. reduc-tion in the risk-weighted assets will take place gradually up to 2013 and will mainly concern the portfolio of foreign loans and market activities, plus certain activities in Belgium and in Eastern Europe. In order to be able to repay the federal and Flemish governments by no later than 2013, KBC will use the profits made over the coming years plus the income from its divestments and the capital released by scaling down its activities, and the proceeds of the stock market introduction of a minority stake in its Czech subsidiary, CSOB. KBC is thus keeping its ban-cassurance model intact, but refocusing on the markets central to its strategy, namely Belgium and Central and Eastern Europe.

Change in balance sheet structures

The balance sheet total of Belgian credit institutions, which had already recorded a marked fall during the second half of 2008, particularly following the exclusion

chart 104 balance Sheet Structure oF belgian credit inStitutionS

2003 2004 2005 2006 2007 20080

102030405060708090

100

0200400600800

2003 2004 2005 2006 2007 20080

102030405060708090

100

0200400600800

2003 2004 2005 2006 2007 2008 20090

100

200

300

400

500

0

100

200

300

400

500

Sept.2009

1,0001,2001,4001,6001,800

ASSETS (1)

(consolidated end-of-period data, percentages of total assets unless otherwise stated)

Interbank claims

Loans

Securities

Derivatives and other assets (2)

Total (billions of euro) (right-hand scale)

Sept.2009

1,0001,2001,4001,6001,800

LIABILITIES (1)

(consolidated end-of-period data, percentages of total liabilities unless otherwise stated)

Interbank debts

Deposits and savings notes

Own funds, minority interests and subordinated debts

Certificates of deposit, bonds and other debt securities

Total (billions of euro) (right-hand scale)

Derivatives and other liabilites (2)

Consolidated

Non-consolidated

INTERBANK CLAIMS(billions of euro)

(left-handscale)

(left-handscale)

Sources : CBFA, NBB.(1) Data compiled according to the Belgian accounting rules (Belgian GAAP) until

2005 and according to the IAS/IFRS standards from 2006.(2) Derivatives are recorded at their market value.

194

of Fortis Bank Nederland from the consolidation scope of Fortis Bank, continued to contract in 2009. That total had dropped to 1,261 billion euro at the end of September 2009 compared to 1,578.4 billion at the end of December 2007.

That fall contrasts with the rapid rise from 2003 to 2007, when the large Belgian banks had embarked on major foreign expansion and had also stepped up their trading activities by obtaining large volumes of finance on the wholesale markets. Taking advantage of the abundant liquidity on those markets, these banks had made use of the leverage effect to accumulate portfolios of structured finance products in a context in which the widespread use of securitisation had facilitated risk transfers on a large scale within the financial system. The holding of those portfolios was a major factor in the vulnerability of the banks when the financial crisis erupted, forcing them to put an end to their balance sheet growth.

In particular, the outstanding amount of interbank claims and debts declined steeply from mid 2008 in both abso-lute terms and as a percentage of the balance sheets. While that was due partly to the removal of Fortis Bank Nederland from the consolidation scope of Fortis Bank, it also reflects the sharp contraction in the volumes traded on the interbank market. That development was one of the main channels through which the financial crisis infected the Belgian banking sector, in view of the dependence of institutions such as Fortis or Dexia on wholesale finance. That decline in interbank assets and liabilities continued in 2009. Those assets dropped from 213.2 billion euro at the end of 2008 to 185.1 billion at the end of September 2009, while the liabilities, including debts to central banks, fell from 341.2 billion at the end of 2008 to 207.7 billion at the end of September 2009.

The reduction in interbank financing was concentrated mainly on operations between non-associated credit institutions, since – in contrast – interbank finance between entities belonging to the same group remained at a high level. In fact, Belgian banks have for some years been lending on a large scale to other entities in the group to which they belong, be it their parent company or their subsidiaries. In the latter case, the operations are neutralised by consolidation, which explains why the interbank claims of Belgian credit institutions are smaller on a consolidated basis than on a non-consolidated basis. The difference between the two actually increased steadily from mid 2006, with the exception of the break in the series caused when Fortis Bank ceased financing Fortis Bank Nederland.

Assets in the form of securities also declined, partly as a result of a deliberate policy of portfolio downsizing adopted by certain institutions, and the transfer to the defeasance structure Royal Park Investments of some of the structured finance instruments previously acquired by Fortis Bank. More generally, it was mainly this category of securities that Belgian credit institutions endeavoured to reduce. The outstanding amount of bonds issued by governments – a key variable in the banks’ liquidity man-agement since they can be readily mobilised as collateral – remained stable in the first nine months of the year.

The proportion of the balance sheet represented by derivatives also declined in 2009, owing to the combined effects of a reduction in positions and the fall in the fair value of those products, resulting from diminishing volatil-ity on many financial markets in recent months. The value of derivatives recorded as assets of Belgian credit institu-tions dropped from 223.1 billion euro at the end of 2008 to 155.4 billion at the end of September 2009.

Unlike the portfolios of securities and interbank claims, loans to customers remained stable in the first nine months of 2009 at around 555 billion. That stabilisation comprises an increase in outstanding loans to Belgian cus-tomers, from 292 to 315.8 billion, and a reduction in loans to foreign counterparties, down from 263.6 to 239 billion.

These divergent movements in the main types of assets of Belgian banks indicate a return to more traditional intermediation activities. In accounting terms, that was reflected in the expansion of the percentage of assets valued at amortised cost, as opposed to those recorded at fair value. That shift was further amplified by the asset reclassifications between various book valuation meth-ods, made possible by the October 2008 amendments to IAS 39 (for more details, see box 16).

On the liabilities side, Belgian banks can still obtain finance via a large volume of deposits by non-bank com-panies and households. However, the outstanding total of those deposits dropped from 516.6 billion euro at the end of 2008 to 484.9 billion at the end of September 2009. That fall is due to a reduction in corporate deposits – a category that also includes non-bank financial coun-terparties – which were down by 51.5 billion. Over the same period, deposits by households grew by 19.8 billion. Their percentage share of the liabilities increased from 18 p.c. at the end of December 2008 to 22 p.c. at the end of September 2009. The amount of savings notes held by customers also increased from 29.9 billion to 37.9 billion euro in the first nine months of the year.

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Box 16 – Reclassifications of assets between IAS / IFRS categories following the amendments to IAS 39

The reduction in the exposures of Belgian credit institutions, on a consolidated basis, in the form of debt securities was accompanied by a continuation of the operations which had started at the end of 2008 whereby assets “held for trading” or “available for sale” were reclassified as assets recorded under the “loans and receivables” item, a reclassification permitted, subject to certain conditions, by the amendments made to IAS 39 in October 2008.

“Held-for-trading” and “available-for-sale” assets are recorded at fair value, i.e. the amount for which a financial instrument could be traded between well-informed, consenting parties in a transaction effected under normal competition conditions. That figure may be determined by the market value or, in the absence of an active market, by the use of another valuation technique. Conversely, “loans and receivables” and “held-to-maturity” investments are recorded at amortised cost.

Credit institutions effecting reclassifications in accordance with the conditions specified by IAS 39 may thus record a larger part of their portfolio at amortised cost, established at the time of reclassification, instead of at fair value, ensuring more stable valuations. In that way, they can limit the impact of fluctuations in financial asset prices on their profit and loss account and their capital, since changes in the fair value of assets “held for trading” have to be recorded directly in the profit and loss account, while changes in the fair value of assets “available for sale” have to be incorporated in accounting equity. The reclassification as “loans and receivables” avoids those implications. Nonetheless, valuation losses on those assets which, unlike fair value adjustments, are permanent must always be recorded directly in the profit and loss account.

If “available-for-sale” assets are transferred to the “loans and receivables” portfolio, the changes previously recorded in the fair value of the assets transferred are still recorded in the equity under the revaluation reserve. The amount corresponding to those past changes is amortised according to the maturity of the assets in question, and no longer fluctuates in relation to later changes in the fair value of those assets.

The two charts below illustrate the scale of these reclassifications for securities issued respectively by non-bank companies and credit institutions. As well as showing the sizeable reduction in these two portfolio categories since June 2008, these charts reveal that Belgian credit institutions made fairly substantial use of the reclassifications authorised by the amendments to IAS 39. This led to the inclusion, in the ”loans and receivables” item, of a large proportion of securities issued by non-bank companies or credit institutions, including structured finance instruments.

During the period from the end of June 2008 to the end of September 2009, the amounts of the debt instruments issued by non-bank and bank companies and recognised as “loans and receivables” increased by 26 and 11.8 billion euro respectively. During the same period, instruments recognised as “held for trading” and “available for sale” declined by 15.2 and 51.6 billion respectively in the case of securities issued by non-bank companies, and by 6.4 and 13.6 billion for securities issued by credit institutions.

4

Together with the contraction of market activities, the reduction in interbank transactions and the stabilisation of lending to the real economy, this growth in the relative

share of finance raised from non-professional customers confirms that Belgian credit institutions are returning to a more traditional banking model.

196

breakdown oF the portFolio oF SecuritieS held by belgian credit inStitutionS by iaS/iFrS accounting category

(consolidated end-of-period data, billions of euro)

0

10

20

30

40

50

60

70

80

90

0

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90

Dec. 2007 June 2008 Dec. 2008 Sept. 2009

Held for trading

Fair value through profit or loss

Available for sale

Loans and receivables

Held to maturity

DEBT SECURITIES ISSUED BY NON-BANK COMPANIES (1)

Dec. 2007 June 2008 Dec. 2008 Sept. 2009

DEBT SECURITIES ISSUED BY CREDIT INSTITUTIONS (1)

Sources : CBFA, NBB(1) Including structured finance instruments.

Profitability

While the profits growth recorded in previous years con-tinued in the first half of 2008, the financial crisis dealt a heavy blow to the results of Belgian credit institutions in the second half of the year. Over 2008 as a whole, the profit and loss account of the Belgian banking sector had ended with a net loss of 21.2 billion euro, a deterioration amounting to

almost 28 billion compared to 2007. This was due mainly to developments concerning three items. First, the sharp fall in prices of structured finance products included in the held-for-trading portfolio had exerted downward pressure on the item comprising realised and unrealised gains or losses on financial instruments, which had posted a nega-tive result of 3.8 billion euro, a deterioration of 7.6 billion compared to 2007. The second item leading to substantial

197

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losses was impairments and provisions, which had reached 13.3 billion, or 10.1 billion more than in 2007, and had concerned not only debt securities and structured finance products recorded as assets available for sale, but also amortisation of intangible assets (goodwill). Finally, the heavy losses realised on discontinued operations, amount-ing to 9 billion euro, are due to the sale of the Fortis par-ticipation in the consortium RFS Holdings B.V., an entity created by Fortis, Royal Bank of Scotland (RBS) and Santander at the time of the joint purchase of ABN Amro.

In comparison with these exceptional losses, the results improved in the first nine months of 2009, although the Belgian banking sector still recorded a net loss of 1.3 bil-lion euro. That loss consists of a deficit in the first two quarters and a surplus in the third quarter.

This negative result is attributable mainly to realised or unrealised losses of 2.5 billion euro on financial instru-ments, and to impairments and provisions amounting

Table 34 ProfitandlossaccountofBelgiancreditinstitutions

(consolidated data, billions of euro, unless otherwise stated)

2007

2008

First nine months

First half-year

Second half-year

Year

2008

2009

Banking income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.3 13.4 5.9 19.3 17.5 13.7

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 7.3 7.2 14.5 10.9 11.2

Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . 13.0 6.1 –1.3 4.8 6.7 2.5

Gains or losses on financial instruments . . . . . 3.8 1.8 –5.6 –3.8 0.6 –2.5

Net commission income and other non-interest income . . . . . . . . . . . . . . . . . 9.3 4.4 4.3 8.6 6.1 5.0

Operating expenses (–) . . . . . . . . . . . . . . . . . . . . . . 16.1 8.2 8.4 16.6 12.5 11.0

Staff expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 4.7 4.6 9.2 7.0 6.1

Other operating expenses . . . . . . . . . . . . . . . . . . 6.9 3.6 3.8 7.4 5.4 5.0

Operating result before tax, impairments and provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 5.2 –2.5 2.7 5.1 2.7

Impairments and provisions (–) . . . . . . . . . . . . . . . 3.2 1.4 11.9 13.3 7.2 3.7

Impairments on loans and receivables . . . . . . . 0.4 0.4 2.5 2.8 1.4 3.1

Impairments on other financial assets . . . . . . . 2.5 1.0 6.5 7.5 3.9 –0.3

Other impairments and provisions . . . . . . . . . . . 0.3 0.1 2.9 3.0 1.9 0.9

Operating result before tax (1) . . . . . . . . . . . . . . . . . 7.7 4.2 –15.6 –11.4 –2.7 –1.0

Profit or loss on discontinued operations, after tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0 0.0 –9.0 –9.0 –9.0 0.0

Profit or loss (net) (2) . . . . . . . . . . . . . . . . . . . . . . . . . 6.7 3.2 –24.4 –21.2 –12.7 –1.3

Sources : CBFA, NBB.(1) Also includes the share of profits or losses of associated entities and joint entities accounted through the equity method, negative goodwill recorded immediately in

the profit and loss account, and the total profits and losses of non-current assets and groups intended for sale, classified as held for sale and not meeting the conditions for a terminated activity.

(2) After deduction of taxes on profits from ordinary activities and minority interests.

to 3.7 billion. These two profit and loss account items recorded, as a percentage of the total assets, a decidedly negative result in the fourth quarter of 2008. They subse-quently recovered, but without regaining a normal level in the third quarter of 2009. Their highly volatile pattern in the last few quarters contrasted with the greater stability of the other cost and income categories of Belgian credit institutions.

The refocusing of the activities of Belgian banks is clearly apparent in the breakdown of sources of income. Expressed as a percentage of the total assets, net interest income showed a marked increase from the fourth quar-ter of 2008, while non-interest income – which comprises not only net commission income but also gains or losses on financial instruments – remained below its pre-crisis level. Whereas in 2007 total banking income was evenly divided between net interest income and non-interest income, during the first nine months of 2009 the latter represented only 18 p.c. of total income.

198

chart 105 Main incoMe and coSt categorieS oF the belgian banking Sector

(percentages of total assets, basis points)

2006 2007 2008 2009–50

–40

–30

–20

–10

0

10

20

30

40

–50

–40

–30

–20

–10

0

10

20

30

40

Net interest income

Gains or losses on financial instruments

Net commission income

Operating costs

Impairments and provisions

Sources : CBFA, NBB.

chart 106 deterMinantS oF the net intereSt incoMe oF belgian credit inStitutionS

(unconsolidated data, percentages)

1997

199

9

2001

2003

2005

2007

–15

–10

–5

0

5

10

15

75

85

95

105

115

125

135

200

9 (1)

Intermediation volume (left-hand scale) (2)

Interest margin (basis points)(right-hand scale) (3)

Sources : CBFA, NBB.(1) Annual percentages calculated on the basis of the data for the first nine months.(2) Average of the annual growth rates of the interest-bearing assets, percentages.(3) The interest margin corresponds to the difference between the average implicit

rates charged and paid on the outstanding amount of the interest-bearing assets and liabilities respectively.

Net interest income grew from 10.9 billion euro in the first nine months of 2008 to 11.2 billion for the corresponding period of 2009, a 3 p.c. increase. That growth, recorded despite a sizeable decline in volumes, was made possible by the marked improvement in the interest margin, which measures the difference between the interest rates received on assets and those paid on liabilities. That widening of the margin was due to the multiple cuts in the central key interest rate of the ECB and of other central banks, which led to a recovery of the yield curve favourable to maturity transformation activities. Banks also made bigger margins on their loans, in relation to the reference rate. Furthermore, the con-traction of the outstanding volume of low margin assets, such as interbank claims, boosted the average margin via a composition effect.

In stark contrast to the steady growth of interest income, the results of trading in financial instruments, recorded in the form of realised or unrealised gain or losses, pro-duced a negative balance of 2.5 billion euro in the first nine months of 2009. However, that was an improvement compared to the last six months of 2008, when losses had reached 5.6 billion. In the first nine months of 2009, losses were recorded mainly on credit derivatives and simi-lar products included in the held-for-trading assets and liabilities, and comprised, in particular, losses on synthetic collateralised debt obligations held by KBC Bank.

The effects of the crisis also continued to be felt in net commission income and other non-interest income, which amounted to only 5 billion euro in the first nine months of 2009, against 6.1 billion for the corresponding period in 2008, a decline of 18 p.c. That fall was due essentially to the contraction of activities and trading on financial markets, reflected in a fall in commission earned on securities and fund management.

Regarding costs, operating expenses were down in the first nine months of 2009, at 11 billion, compared to 12.5 billion in the first nine months of 2008. Disposals of business lines or entities by large banking groups, particularly the departure of Fortis Bank Nederland from the consolidation scope of Fortis Bank, are part of the reason for that decline. The Belgian banking sector also set up restructuring plans in order to cut costs, notably by reducing the size of the workforce via natural wastage or voluntary departures, or by limiting the variable compo-nent of salaries.

In 2008, impairments and provisions were limited to 1.4 billion euro in the first half of the year, but had grown to 11.9 billion in the second half. They represented

199

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3.7 billion in the first nine months of 2009. Over the same period, their composition changed since they consisted almost exclusively of provisions on loans and receivables, whereas in 2008 it was mainly valuation losses on finan-cial instruments that had depressed the profit and loss account of Belgian banks. For the latter, a small amount was written back in the first nine months of 2009.

Credit risk

The changes in the nature of the provisions reflect devel-opments in the credit risks incurred by Belgian banks ; those risks gradually shifted from the portfolios of struc-tured finance products towards more traditional loans. On an annualised basis, loan loss provisions increased con-tinuously from 2007 onwards to reach 56.8 basis points by the end of September 2009, a level well above that seen in the last economic recession period.

The amount of the provisions is determined both by the percentage of impaired claims and by the provisioning rate, i.e. the percentage of impaired claims covered by provisions. The first of these two determinants rose from 2 p.c. at the end of December 2008 to 3.1 p.c. at the end of September 2009, while the second declined over that period from 41.1 to 33.2 p.c. These opposing movements are particularly marked in the case of loans to non-bank companies for which the impaired claim percentage increased from 2.4 to 4.4 p.c. and the provision rate dropped from 47.1 to 32.9 p.c.

chart 107 loan loSS proViSionS oF belgian credit inStitutionS (1)

(basis points)

J J

J

J

1997

199

9

2001

2003

2005

2007

200

9 (2)0

10

20

30

40

50

60

0

10

20

30

40

50

60

Consolidated

Belgian GAAP IAS / IFRS

Unconsolidated

Sources : CBFA, NBB.(1) Net flow of new provisions for credit losses expressed as a percentage of the

outstanding claims. Data from 2006 onwards relate to the provisions for the category “Loans and receivables” according to IAS / IFRS.

(2) Annualised on the basis of data for the first nine months.

Table 35 IndIcatorsofthequalItyofloansgrantedbybelgIancredItInstItutIons

(consolidated data)

Total loans (1)

Percentages of impaired claims (2)

Coverage ratio (3)

December 2008

September 2009

December 2008

September 2009

December 2008

September 2009

Credit institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . 213.2 185.1 0.4 0.7 68.2 58.5

Non-bank companies (4) . . . . . . . . . . . . . . . . . . . . . . 290.7 261.8 2.4 4.4 47.1 32.9

Households (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208.0 241.9 3.4 4.0 33.6 31.4

Non-credit institutions (6) . . . . . . . . . . . . . . . . . . . . . 43.5 40.3 1.3 0.8 19.9 4.7

total(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768.7 739.8 2.0 3.1 41.1 33.2

Sources : CBFA, NBB.(1) Billions of euro.(2) Percentages of total lending.(3) Percentages of impaired claims covered by specific or general provisions.(4) Exposures on non-financial corporations and some SMEs, plus some non-bank financial corporations.(5) Also includes self-employed persons and some SMEs.(6) Exposures on certain non-bank financial institutions and local authorities.(7) Also includes loans to central governments.

200

chart 108 geographical breakdown oF aSSetS held by belgian credit inStitutionS in the ForM oF loanS and debt SecuritieS

(Consolidated end-of-period data (1), billions of euro)

2007

200

8

200

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2007

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2007

200

8

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9

0

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2007

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820

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2007

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820

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2007

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820

09

0

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250

GEOGRAPHICAL BREAKDOWN (2)

Loans

Debt securities

Belgium Euro area Rest ofthe world

POSITIONS ON THE MAIN FOREIGN MARKETS (3)

Credit institutions

Public sector

France UnitedKingdom

Netherlands

Non-bank private sector

Other

UnitedStates

Centraland

EasternEurope

Sources : BIS, CBFA, NBB.(1) Data at the end of September for 2009.(2) Data from reporting to the CBFA on a consolidated basis by Belgian credit

institutions.(3) Data from reporting of foreign exposures to the BIS, compiled in accordance with

the Belgian accounting standards (Belgian GAAP). The assets are broken down on the basis of ultimate risk, i.e. after risk transfers.

The increase in the amount of the provisions was therefore less than the rise in the percentage of impaired claims, which – up to the end of September 2009 – helped to limit the impact of the deterioration in loan quality on the operating result. This decline in the coverage ratio may be partly justified by the good collateral cover for

new impaired claims. Nevertheless, it requires careful monitoring since a shortage of provisions could later have repercussions on the profit and loss account.

Assets constituted on Belgian counterparties in the form of both loans and bonds increased from 368.9 billion euro at the end of 2008 to 383.3 billion at the end of September 2009. Conversely, exposures on foreign coun-terparties declined over the same period from 707 to 623.7 billion euro, though they still represented 62 p.c. of total exposures. Regarding the latter, only exposures on Central and Eastern Europe increased, reaching 94.6 bil-lion at the end of September 2009.

It was mainly on positions vis-à-vis non-residents that loan losses materialised during the year under review, as the percentage of impaired loans on Belgian customers remained small. That deterioration in credit quality was particularly evident on the Central and Eastern European markets and also in Ireland, where Belgian banks held assets for an outstanding total of 30 billion euro at the end of September 2009.

Solvency

Credit risks are subject to capital requirements, deter-mined under the Basel II regulations. Those regulations cover not only credit risks but also other risks, particularly market risk and operational risk. The Basel II rules specify in particular the method of calculating the Tier I ratio, expressing the ratio between the Tier I capital and the risk-weighted assets.

The regulatory capital recognised as Tier I consists of the equity capital, reserves, profit or loss carried forward and certain hybrid products. Deductions are also applied, e.g. in respect of the booked goodwill and substantial partici-pations in other banks or financial institutions. The risk-weighted assets are obtained by applying to each expo-sure a weighting coefficient ranging between 0 p.c. for risk-free assets and 100 p.c., or even more, for the riskiest assets. The method of calculating the risk-weighted assets is described in boxes 4 and 5 of the Bank’s Financial Stability Review of June 2009.

The significant developments recorded in the balance sheet and profit and loss account of Belgian credit institutions, as described above, had a noticeable influence on the two components of the banking sector’s solvency ratio.

In the case of the Tier I capital, the impact on the reserves of the heavy losses suffered in 2008 had been offset not only by capital increases but also by a decrease in the

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at the end of 2008. Thus, over the period from the end of June 2008 to the end of September 2009, the Tier I capi-tal remained relatively stable. While the amount of the fully paid-up capital and issue premiums for Belgian credit institutions increased by 13.2 billion euro and the deduc-tions could be cut by 15.2 billion, the negative effect of the losses on the reserves came to 24.3 billion.

The risk-weighted assets declined from the second half of 2008, as a result of the restructurings and reductions in balance sheet totals by Belgian credit institutions, and the granting of government guarantees on certain portfolios. While they had totalled 548.2 billion euro at the end of June 2008, they were down to 480.4 and 418.9 bil-lion respectively at the end of 2008 and at the end of September 2009.

These fluctuations were directly reflected in the Tier I sol-vency ratio. That ratio contracted sharply in the first half of 2008, but recovered in the final quarter ; 2009 brought a further decline in the first quarter, which was more than offset by an increase in the second and third quarters. These variations in the solvency ratio due to changes in the risk-weighted assets can be attributed to two factors, namely the change in the total assets and the change in the average risk-weighting coefficient applied to those assets. The first of these two factors reflects recourse to the leverage effect, i.e. the volume of assets financed for a given amount of capital, while the second is meant to measure the impact of changes in the average degree of risk on the assets.

These two effects have had a very variable influence in the past seven quarters. The application of the new Basel II regulatory requirements, extended to all assets of Belgian credit institutions from the first quarter of 2008, enabled those institutions to use new weighting coefficients which were, on average, more favourable than those of the old system. True, the impact of that change was moderated by a transitional measure – known as the “floor” rule – under the Basel II regulations, whereby credit institutions using internal models for credit risk or operational risk had to have a minimum amount of capital equivalent to 80 p.c. of the requirements as calculated according to the Basel I regulations. Even taking account of this smooth-ing mechanism, the change in the regulations enabled banks to compensate in part for the reduction in the Tier I ratio resulting from increased use of the leverage effect, expressed in a strong increase in the balance sheet total in the first half of 2008. Conversely, the last quarter of 2008 saw a sizeable reduction in the balance sheet total, due partly to the removal of Fortis Bank Nederland from the consolidation scope of Fortis Bank. That develop-ment, which helped to lessen the leverage effect, was

chart 109 regulatory capital and SolVency ratio

(consolidated end-of-period data)

B B B B B B B

–40

–20

0

20

40

60

80

–40

–20

0

20

40

60

80

2008 2009

Q1 Q2 Q3 Q4 Q1 Q2 Q3

Paid-up capital and issue premiums

Reserves

Hybrid and other instruments

Deductions

Tier I capital

COMPOSITION OF TIER I CAPITAL(billions of euro)

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Leverage effect

Risk effect

Tier I ratio (right-hand scale)

TIER I RATIO AND CONTRIBUTION TO CHANGES IN THAT RATIO(percentages)

(left-hand scale)

0.0

2.5

5.0

7.5

10.0

12.5

15.0

BB

B B

B

B

BB

–3

–2

–1

0

1

2

3

2008 20092007


deductions, following the resale of Fortis Bank’s participa-tions in the RFS consortium, so that the Tier I capital could be stabilised. In 2009, the amount of the losses recognised by the sector in the first quarter and the deduction by Fortis Bank of 50 p.c. of its participation in AG Insurance were counterbalanced in the second quarter by the 3.25 billion increase in the capital of the banking arm of KBC group resulting from the Flemish Community’s interven-tion in the KBC group. This intervention followed an initial capital injection of 2.25 billion by the federal government

202

chart 110 net reSultS oF the inSurance Sector

(unconsolidated data, billions of euro)

200

0

2002

200

4

200

6

200

8

–5

–4

–3

–2

–1

0

1

2

3

4

5

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8

200

9

–5

–4

–3

–2

–1

0

1

2

3

4

5

Life insurance resultFirst nine months

(annualised figures)

Net result

Non-life insurance result

Non-technical result


accompanied by an increase in the average risk on the assets held by banks, which was accentuated in the first three months of 2009. During that period, the balance sheet reductions mainly concerned assets with relatively low weighting coefficients, particularly interbank claims, whereas the average weighting of the structured finance product portfolios held by KBC and Fortis was revised upwards. This last effect was reversed during the second and third quarters of 2009, partly as a result of the trans-fers of structured finance instruments from the balance sheet of Fortis Bank to RPI and the government guaran-tees received by KBC, which greatly reduced the average risk. At the same time, a further decline in the balance sheet total facilitated a reduction in the leverage effect.

Over the first nine months of 2009 as a whole, the combi-nation of a declining leverage effect and a stable average risk drove up the Tier I ratio from 11.5 p.c. at the end of 2008 to 13.2 p.c. at the end of September 2009.

8.4 Belgian insurance companies

While Belgian insurance companies had incurred substan-tial losses as a result of the severe tensions on the financial markets during the second half of 2008, the increase in financial asset prices during 2009 restored their profit-ability. Although the increase in the net result of non-life insurance activities contributed to that recovery, the con-version of a 3.9 billion euro loss in 2008 to a small profit, estimated at 0.8 billion for the full year on the basis of actual figures for the first three quarters, mainly reflects the return to profitability in the life insurance segment.

In life insurance, the technical result normally combines a negative result on actual insurance activities and a positive result on net investment income. The latter component traditionally makes up the major part of the technical result on life insurance, as demonstrated by the annual average data for the period from 2003 to 2007, when the average technical result of 0.9 bil-lion euro was largely attributable to financial investment income averaging 6.6 billion. That financial income was derived essentially from investments based on premiums collected by insurance companies, invested in financial assets in order to generate additional income for policy-holders until the contracts mature ; those liabilities of insurance companies are reflected in an increase in the technical reserves on the balance sheet. Together with the amount of premiums collected during the year, those variations in the technical reserves form the other compo-nent of the technical result, namely the result for actual insurance activities, which – during 2003 to 2007 – aver-aged a negative amount of 5.7 billion euro. This reserve

formation mechanism explains why the combination of high positive investment income and a slightly less nega-tive result for insurance activities is a traditional character-istic of the life insurance technical account.

Table 36 MaincoMponentsoftheprofitandlossaccountofinsurancecoMpanies

(unconsolidated data, billions of euro)

Annual average

2003-2007

2008

2009 (first nine

months)

Life insurance technical result 0.9 –3.7 0.6

Result of insurance activities –5.7 –0.3 –4.2

Net investment income . . . . 6.6 –3.4 4.7

Non-life insurance technical result . . . . . . . . . . . . . . . . . . . . . 1.1 0.2 0.6

Result of insurance activities –0.2 0.0 –0.1

Net investment income . . . . 1.3 0.2 0.7

Non-technical result (1) . . . . . . . 0.2 –0.4 –0.6

Net investment income . . . . 0.6 0.3 –0.6

Other results . . . . . . . . . . . . . –0.4 –0.7 –0.1

netresultforthefinancialyear . . . . . . . . . 2.1 –3.9 0.6

Sources : CBFA, NBB.(1) The non-technical result includes investment income not attributed to

life and non-life activities, and exceptional income and taxes.

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financial stability

In 2008, the technical result of life insurance activity was negative. That had also been the case in 2002, a year which ended with a loss of 0.2 billion euro on this item following the slump in stock market prices. The impact of the financial crisis was far more severe in 2008, since the deficit came to 3.7 billion, owing to the steep fall in prices of fixed-income financial instruments other than govern-ment securities, which far outweigh equities in their share of the investment portfolio allocated to the technical reserves of life insurance activities.

According to the figures for the first nine months, the asset price recovery during 2009 restored a more tradi-tional balance between the net income from financial investments in life insurance activities, or 4.7 billion euro, and the negative result on insurance activities totalling – 4.2 billion, so that life insurance activities once again produced a positive technical result.

Life insurance activities are generally much more sensitive to financial market developments than non-life insurance

chart 111 coMpoSition oF the coVering aSSetS per inSurance branch

(unconsolidated end-of-period data, billions of euro)

2007

200

8

200

9 (1)

2007

200

8

200

9 (1)

2007

200

8

200

9 (1)0

20

40

60

80

100

120

140

160

0

20

40

60

80

100

120

140

160

Corporate bonds

Government bonds

Equities

UCIs

Real estate

Loans

Other

Life insurance

Class 23 Otherclasses

Non-lifeinsurance

Sources : CBFA, NBB.(1) Data at the end of September 2009.

business. The main reason lies in the larger amounts of the technical reserves and the covering assets intended to honour future liabilities towards life insurance policy-holders. The fact that non-life activity is less dependent on financial investments explains why developments on the financial markets in 2008 and in the first nine months of 2009 had less impact on its technical result.

In terms of risks, it is important to distinguish between two types of contract in life insurance. Life insurance poli-cies with variable capital, better known as class 23 prod-ucts, are comparable to mutual investment funds, since the policyholders/investors bear all the investment risks. Although these contracts do not entail any market risk for companies, they may imply a reputational risk if the invest-ments perform badly. In terms of outstanding amounts, the assets corresponding to these contracts, which are recorded on the balance sheet of insurance companies, represent barely 10 p.c. of the total assets covering life insurance contracts. The breakdown of the assets covering class 23 contracts confirms that these are invested mainly in Undertakings for Collective Investment (UCIs).

Most other life insurance contracts – predominantly class 21 policies – entail a market risk for the companies, as they offer policyholders a guaranteed minimum rate of return. That is generally accompanied by a profit-sharing mechanism which, in principle, does not imply any market risk but does involve a commercial risk.

To cover the financial risks associated with this second category of contracts, insurance companies diversify their assets. In the case of life insurance policies other than variable capital contracts, those assets consist mainly of corporate and government bonds, which rep-resented 49.5 and 29.1 p.c. respectively of the portfolio at the end of September 2009. At the end of 2008, the proportion of government bonds was around 5 p.c. lower. The proportion of the portfolio represented by equities, including participations in associated or non-associated companies, was down from 8.1 p.c. of the covering assets at the end of 2008 to 6.8 p.c. at the end of September 2009.

The exposure of the Belgian insurance sector to market risk was therefore more concentrated on fixed-income instruments, making the sector more vulnerable to inter-est rate fluctuations and – in the case of corporate bonds – to changes in credit and liquidity risk premi-ums. Securities issued by enterprises include structured finance products. In that regard, analysis of a sample of large companies showed that the exposure to these products represents less than 10 p.c. of the total invest-ment portfolio. However, the turbulence which shook the

204

Table 37 ComparisonofthemarketvalueandbookvalueoftheinvestmentportfolioofbelgianinsuranCeCompanies

(unconsolidated end-of-period data, billions of euro)

Difference between market value and book value

p.m. Book value

at the end of the third quarter of

2009

2008

2009

Third quarter

Forth quarter

First quarter

Second quarter

Third quarter

Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 1.2 1.2 1.2 1.1 3.1

Participations in associated companies . . . . . . . . . 0.8 0.8 0.4 0.8 1.0 17.0

Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –1.5 –1.8 –1.6 –0.9 0.2 11.0

Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –5.8 –1.5 –2.5 –0.3 4.3 148.1

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.4 0.4 0.3 0.3 12.6

total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . –4.8 –0.9 –2.2 1.0 6.9 191.7


international financial markets exerted considerable pres-sure on prices of structured products, and more generally, on those of all securities except for the safest assets.

The great sensitivity of the insurance companies’ port-folio to fluctuations in fixed-income product prices is also illustrated by the wide variations recorded in the difference between the book value and the market value of the overall investment portfolio of these companies. At the end of the third quarter of 2008, two weeks after the collapse of Lehman Brothers, Belgian insur-ance companies announced unrealised losses on bonds totalling 5.8 billion euro. Twelve months later, the dif-ference between the market value and the book value of the bonds returned to a positive figure of 4.3 billion. That was due to a rise in prices of fixed-income assets following the decline in risk-free interest rates and risk premiums, and to a downward adjustment in the book value of certain fixed-income products. That adjustment had taken the form of writedowns on financial assets, thus making a major contribution to the heavy losses on investments in 2008. The net changes in the unrealised losses on equities were also substantial, despite the relatively small size of those investments compared to the bond portfolio. Overall, taking account of the write-downs, the sector recorded a sharp increase of 11.7 bil-lion euro in the difference between the market value and the book value of its investment portfolio between the end of September 2008 and the end of September 2009. That increase also helped to improve the implicit solvency margin of insurance companies.

chart 112 SolVency Margin oF belgian inSurance coMpanieS

(unconsolidated data, percentages of the minimum required margin)

2001

2003

2005

2007

–100

0

100

200

300

400

500

600

–100

0

100

200

300

400

500

600

Quarterlydata (1)

Regulatory solvency margin (2)

Explicit margin

Implicit margin

Hidden reserves

2007

Q4

200

8 Q

120

08

Q2

200

8 Q

320

08

Q4

200

9 Q

120

09

Q2

200

9 Q

3

Sources : CBFA, NBB.(1) The figures reported quarterly are not entirely comparable with the final figures

reported annually. In particular, they take no account of any redistribution of profits to shareholders and policyholders.

(2) This margin is composed of an explicit margin – including the own funds, subordinated debts and certain other balance sheet items – and an implicit margin which, subject to the approval of the CBFA, comprises certain other specific elements, the principal one being a part of the unrealised gains on investment portfolios.

205

financial stability

The required solvency margin comprises an explicit margin which includes own funds, subordinated debts and cer-tain other balance sheet items, and an implicit margin which, subject to CBFA approval, comprises certain spe-cific elements, the main one being a part of the unrealised gains on investment portfolios. As the explicit margin had to absorb – via a reduction in the reserves – the 3.9 bil-lion net loss incurred by the insurance sector in 2008, a number of companies strengthened their capital in 2008 and in the first half of 2009. The total subscribed capital and issue premiums therefore increased by 5.3 billion euro between the end of 2007 and the end of June 2009. That increase in the capital base enabled the sector to maintain an explicit solvency margin at least equal to 165 p.c. of the required minimum for each quarter from the end of 2007, with a level of 196 p.c. being attained at the end of September 2009.

In parallel with the decline in unrealised gains on the investment portfolio, the relative size of the implicit margin in the required solvency margin diminished throughout 2008, and in the first quarter of the year under review. If account is taken of all unrealised gains or losses – including those that are not accepted by the CBFA as part of the implicit margin, in which case they form a hidden reserve – it is evident that the additional solvency reserve due to the difference between the market value and the book value of the investment portfolio remained almost constantly negative from the second quarter of 2008 to the first quarter of 2009. The sum of the implicit margin and the hidden reserve then became positive again, thanks to the aforesaid increase in prices of finan-cial assets, especially fixed-income securities.

The decline in rates of return affected not only the insur-ance sector’s financial statements and solvency in the broad sense, but also the level of life insurance premium income. During the first nine months of 2009, the total of those premiums was 13 p.c. down against the same period in 2008. That was due to a waning risk appetite among investors, in view of the uncertainty prevailing on the markets in 2009. That environment probably also induced customers to prefer policies offering a guaran-teed minimum rate of return (class 21). The level of those guaranteed returns is a particularly important parameter for insurance companies when interest rates on risk-free products slump to very low levels, as they did in the year under review. In fact, such a development is liable to erode the profitability of some guaranteed yield con-tracts, as happened a few years ago when the returns promised on risk-free investments had fallen well below the statutory ceiling on the minimum guaranteed rate of return, namely 4.75 p.c. up to the end of June 1999 and 3.75 p.c. thereafter. Since then, the sector has gradually

chart 113 preMiuM incoMe and the coMbined ratio (1)

(unconsolidated data, billions of euro, unless otherwise stated)

2001

2003

2005

2007

200

9 (2)

0

5

10

15

20

25

30

0

5

10

15

20

25

30LIFE INSURANCE PREMIUMS

Class 23

Total

Group insurance

Other classes

NON-LIFE INSURANCE PREMIUMS AND COMBINED RATIO

Non-life insurance premiums (left-hand scale)

Combined ratio (percentages) (right-hand scale)

2001

2003

2005

2007

200

9 (2)

0

2

4

6

8

10

12

90

95

100

105

110

115

120

Sources : CBFA, NBB.(1) The combined ratio is the ratio between the sum of the insurance costs plus

operating expenses and the net premium income.(2) Projection based on data for the first nine months.

modified that adverse structure by marketing contracts offering guaranteed yields which are more in line with risk-free interest rates and containing clauses which pro-vide for revision on the basis of changing market condi-tions. These measures contributed to a reduction in the guaranteed average rate of return on class 21 contracts : it declined from 4.5 p.c. in 1999 to 3.4 p.c. in 2007 and 3.3 p.c. in 2008.

Although non-life insurance premiums are normally more stable, they were also affected by the financial crisis and its repercussions on economic activity in general. Thus, premium income was down by 6 p.c. in the first nine months of 2009 compared to the same period in 2008.

206

chart 114 long-terM intereSt rate and guaranteed rate oF return on claSS 21 contractS

199

9

2001

2003

2005

2007

200

9

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Average guaranteed rate of return on existing contracts

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Long-term interest rate (1)

Sources : Thomson Reuters Datastream, CBFA, NBB.(1) Yield on the secondary market in ten-year Belgian government loans (OLOs)

(weekly data).

While an economic slowdown is generally associated with a slight rise in the number of claims, the combined ratio – the ratio of total insurance costs plus operating expenses to net premium income – remained close to 100 p.c. in 2009, as it had practically throughout the period 2003-2009. This inverse measure of the profit-ability of the actual insurance activities, excluding invest-ment income, had exceeded 110 p.c. during the period 2000-2002, but then declined significantly thanks to an increase in premiums, better cost control and more strin-gent management of the risks covered by the loss-making insurance branches.

209

statistical annEx

Statistical annex

210

Tab

le I

G

DP

an

Dm

ain

ca

teG

or

ies

of

exPe

nD

itu

re,

by

vo

lum

e

(per

cent

age

chan

ges

com

pare

d to

the

pre

viou

s ye

ar,

cale

ndar

adj

uste

d da

ta)

2002

2003

2004

2005

2006

2007

2008

2009

e

Hou

seho

ld fi

nal

cons

umpt

ion

expe

nditu

re .

....

....

....

....

....

....

....

....

....

..0.

50.

71.

51.

21.

81.

61.

0–1

.5

Hou

sing

...

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.–5

.53.

48.

110

.93.

4–0

.8–1

.6–2

.8

Gro

ss fi

xed

capi

tal

form

atio

n by

ent

erpr

ises

..

....

....

....

....

....

....

....

....

...

–4.8

–1.2

8.2

5.5

4.5

8.7

6.1

–6.5

Expe

nditu

re o

f ge

nera

l go

vern

men

t .

....

....

....

....

....

....

....

....

....

....

...

3.0

1.4

1.7

2.2

0.0

2.7

3.3

2.1

Fina

l co

nsum

ptio

n .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

3.2

1.4

1.8

1.2

1.0

2.6

3.3

1.7

Gro

ss fi

xed

capi

tal

form

atio

n .

....

....

....

....

....

....

....

....

....

....

....

...

0.7

0.9

0.6

15.8

–12.

43.

63.

47.

4

p.m

.To

tal

gros

sfix

edc

apita

lfor

mat

ion

(1)

....

....

....

....

....

....

....

....

....

...

–4.5

0.1

7.5

7.7

2.7

5.7

3.8

–4.6

Cha

nge

in s

tock

s (2)

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..–0

.10.

10.

00.

50.

60.

1–0

.2–1

.6

Tota

l do

mes

tic e

xpen

ditu

re .

....

....

....

....

....

....

....

....

....

....

....

....

...

–0.1

0.8

2.8

3.1

2.4

2.8

1.9

–3.0

Expo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

2.7

0.8

6.4

4.8

5.0

4.4

1.4

–11.

0

Tota

l fin

al e

xpen

ditu

re .

....

....

....

....

....

....

....

....

....

....

....

....

....

...

1.2

0.8

4.4

3.9

3.6

3.5

1.7

–6.7

Impo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

0.9

0.8

6.2

6.5

4.7

4.4

2.7

–11.

1

p.m

.N

ete

xpor

tso

fgo

ods

and

serv

ices

(2)

....

....

....

....

....

....

....

....

....

...

1.4

0.0

0.4

–0.9

0.4

0.2

–1.0

0.0

GD

P .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..1.

40.

83.

12.

02.

82.

80.

8–3

.0

Sour

ces :

NA

I, N

BB.

(1)

Hou

sing

, gr

oss

fixed

cap

ital

form

atio

n by

ent

erpr

ises

and

gro

ss fi

xed

capi

tal

form

atio

n by

gen

eral

gov

ernm

ent.

(2)

Con

trib

utio

n to

the

cha

nge

in G

DP.

211

statistical annEx

Tab

le I

IG

NI

aN

dm

aIN

ca

teG

or

Ies

of

expe

Nd

Itu

re,

by

vo

lum

e

(per

cent

age

chan

ges

com

pare

d to

the

pre

viou

s ye

ar,

data

not

adj

uste

d fo

r ca

lend

ar e

ffec

ts)

2002

2003

2004

2005

2006

2007

2008

2009

e

Hou

seho

ld fi

nal

cons

umpt

ion

expe

nditu

re .

....

....

....

....

....

....

....

....

....

..0.

50.

71.

61.

01.

81.

71.

1–1

.6

Hou

sing

...

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.–5

.53.

48.

110

.93.

4–0

.8–1

.6–2

.9

Gro

ss fi

xed

capi

tal

form

atio

n by

ent

erpr

ises

..

....

....

....

....

....

....

....

....

...

–4.7

–1.2

8.9

4.6

4.4

9.0

6.8

–7.2

Expe

nditu

re o

f ge

nera

l go

vern

men

t .

....

....

....

....

....

....

....

....

....

....

...

3.0

1.4

1.7

2.2

0.0

2.7

3.3

2.1

Fina

l co

nsum

ptio

n .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

3.2

1.4

1.8

1.2

1.0

2.6

3.3

1.7

Gro

ss fi

xed

capi

tal

form

atio

n .

....

....

....

....

....

....

....

....

....

....

....

...

0.5

1.1

0.7

15.8

–12.

43.

63.

47.

0

p.m

.To

tal

gros

sfix

edc

apita

lfor

mat

ion

(1)

....

....

....

....

....

....

....

....

....

...

–4.5

0.1

8.0

7.1

2.7

5.9

4.3

–5.3

Cha

nge

in s

tock

s (2)

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..–0

.10.

10.

20.

30.

60.

30.

0–1

.6

Tota

l do

mes

tic e

xpen

ditu

re .

....

....

....

....

....

....

....

....

....

....

....

....

...

–0.1

0.8

3.1

2.6

2.4

3.1

2.3

–3.2

Expo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

2.7

0.8

6.6

4.6

5.0

4.5

1.5

–11.

1

Tota

l fin

al e

xpen

ditu

re .

....

....

....

....

....

....

....

....

....

....

....

....

....

...

1.2

0.8

4.6

3.5

3.6

3.7

1.9

–6.9

Impo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

0.9

0.8

6.6

5.9

4.7

4.7

3.1

–11.

3

p.m

.N

ete

xpor

tso

fgo

ods

and

serv

ices

(2)

....

....

....

....

....

....

....

....

....

...

1.5

0.0

0.3

–0.7

0.5

0.0

–1.2

0.0

GD

P .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..1.

40.

83.

21.

82.

82.

91.

0–3

.2

Trad

e su

rplu

s or

defi

cit

(–)

resu

lting

fro

m t

he c

hang

e in

the

ter

ms

of t

rade

(3)

....

....

0.8

–0.3

–0.7

–0.2

–0.6

0.2

–1.8

1.9

Net

prim

ary

inco

mes

rec

eive

d fr

om t

he r

est

of t

he w

orld

(3)

....

....

....

....

....

....

–0.2

0.2

–0.4

–0.4

0.2

0.1

–0.3

0.0

GN

I ..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..1.

90.

62.

11.

12.

43.

3–1

.1–1

.3

Sour

ces :

NA

I, N

BB.

(1)

Hou

sing

, gr

oss

fixed

cap

ital

form

atio

n by

ent

erpr

ises

and

gro

ss fi

xed

capi

tal

form

atio

n by

gen

eral

gov

ernm

ent.

(2)

Con

trib

utio

n to

the

cha

nge

in G

DP.

(3)

Con

trib

utio

n to

the

cha

nge

in G

NI.

212

Tab

le I

IID

efla

tor

so

fG

NI

aN

Dt

he

ma

INc

ate

Go

rIe

so

fex

peN

DIt

ur

e

(per

cent

age

chan

ges

com

pare

d to

the

pre

viou

s ye

ar,

data

not

adj

uste

d fo

r ca

lend

ar e

ffec

ts)

2002

2003

2004

2005

2006

2007

2008

2009

e

Hou

seho

ld fi

nal

cons

umpt

ion

expe

nditu

re .

....

....

....

....

....

....

....

....

....

..1.

21.

52.

42.

73.

02.

83.

80.

0

Hou

sing

...

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.2.

22.

65.

24.

85.

84.

65.

2–2

.6

Gro

ss fi

xed

capi

tal

form

atio

n by

ent

erpr

ises

..

....

....

....

....

....

....

....

....

...

–2.1

1.2

2.0

0.6

2.9

1.8

1.8

–3.6

Expe

nditu

re o

f ge

nera

l go

vern

men

t .

....

....

....

....

....

....

....

....

....

....

...

3.4

3.2

2.5

3.2

2.8

1.9

3.4

2.2

Fina

l co

nsum

ptio

n .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

3.7

3.3

2.5

3.4

2.6

1.8

3.5

2.6

Gro

ss fi

xed

capi

tal

form

atio

n .

....

....

....

....

....

....

....

....

....

....

....

...

0.5

1.2

2.2

0.8

5.6

2.9

2.7

–3.5

p.m

.To

tal

gros

sfix

edc

apita

lfor

mat

ion

(1)

....

....

....

....

....

....

....

....

....

...

–0.9

1.5

2.8

1.7

3.9

2.6

2.7

–3.1

Tota

l do

mes

tic e

xpen

ditu

re (2

) ..

....

....

....

....

....

....

....

....

....

....

....

....

1.4

1.9

2.5

2.7

3.1

2.5

3.5

0.0

Expo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

–0.6

–1.4

2.0

4.1

2.7

2.2

4.2

–4.8

Tota

l fin

al e

xpen

ditu

re (2

) ..

....

....

....

....

....

....

....

....

....

....

....

....

....

0.5

0.5

2.3

3.3

2.9

2.4

3.8

–2.1

Impo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

–1.8

–1.2

2.9

4.5

3.4

1.9

6.6

–7.2

p.m

.Te

rms

oft

rade

...

....

....

....

....

....

....

....

....

....

....

....

....

....

...

1.2

–0.2

–0.9

–0.4

–0.7

0.3

–2.2

2.7

GD

P .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..2.

02.

02.

22.

32.

22.

31.

81.

2

GN

I ..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..1.

22.

32.

92.

62.

82.

03.

7–0

.7

Sour

ces :

NA

I, N

BB.

(1)

Hou

sing

, gr

oss

fixed

cap

ital

form

atio

n by

ent

erpr

ises

and

gro

ss fi

xed

capi

tal

form

atio

n by

gen

eral

gov

ernm

ent.

(2)

Excl

udin

g ch

ange

s in

sto

cks.

213

statistical annEx

Tab

le I

V

GN

Ia

Nd

th

em

aIN

ca

teG

or

Ies

of

expe

Nd

Itu

re

at

cu

rr

eNt

prIc

es

(mill

ions

of

euro

, da

ta n

ot a

djus

ted

for

cale

ndar

eff

ects

)

2002

2003

2004

2005

2006

2007

2008

2009

e

Hou

seho

ld fi

nal

cons

umpt

ion

expe

nditu

re .

....

....

....

....

....

....

....

....

....

..14

1,34

614

4,38

315

0,11

015

5,75

116

3,33

017

0,78

417

9,13

017

6,33

9

Hou

sing

...

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.12

,110

12,8

4914

,605

16,9

7918

,566

19,2

7519

,941

18,8

60

Gro

ss fi

xed

capi

tal

form

atio

n by

ent

erpr

ises

..

....

....

....

....

....

....

....

....

...

34,5

6434

,528

38,3

5040

,341

43,3

3148

,094

52,3

2746

,827

Expe

nditu

re o

f ge

nera

l go

vern

men

t .

....

....

....

....

....

....

....

....

....

....

...

64,7

5267

,727

70,6

1974

,485

76,5

4680

,043

85,5

1689

,160

Fina

l co

nsum

ptio

n .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

60,3

0663

,179

65,9

4169

,024

71,4

9674

,659

79,7

9883

,256

Gro

ss fi

xed

capi

tal

form

atio

n .

....

....

....

....

....

....

....

....

....

....

....

...

4,44

64,

549

4,67

95,

461

5,05

15,

384

5,71

75,

904

p.m

.To

tal

gros

sfix

edc

apita

lfor

mat

ion

(1)

....

....

....

....

....

....

....

....

....

...

51,1

20 51

,926

57,6

34 62

,780

66,9

48 72

,753

77,9

85 71

,590

Cha

nge

in s

tock

s .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

...

611,

304

2,82

83,

355

4,50

73,

848

4,79

9–2

,747

Tota

l do

mes

tic e

xpen

ditu

re .

....

....

....

....

....

....

....

....

....

....

....

....

...

252,

833

260,

791

276,

512

290,

910

306,

280

322,

043

341,

713

328,

438

Expo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

206,

443

205,

192

223,

086

242,

846

261,

754

279,

437

295,

645

250,

225

Tota

l fin

al e

xpen

ditu

re .

....

....

....

....

....

....

....

....

....

....

....

....

....

...

459,

276

465,

983

499,

598

533,

757

568,

034

601,

480

637,

357

578,

663

Impo

rts

of g

oods

and

ser

vice

s .

....

....

....

....

....

....

....

....

....

....

....

....

191,

020

190,

267

208,

773

230,

911

249,

840

266,

532

292,

681

240,

917

p.m

.N

ete

xpor

tso

fgo

ods

and

serv

ices

...

....

....

....

....

....

....

....

....

....

.. 15

,423

14,9

25 14

,313

11,9

35 11

,913

12,9

05 2,

963

9,30

9

GD

P .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..26

8,25

627

5,71

629

0,82

530

2,84

531

8,19

333

4,94

834

4,67

633

7,74

6

Net

prim

ary

inco

mes

rec

eive

d fr

om t

he r

est

of t

he w

orld

...

....

....

....

....

....

...

3,60

84,

253

3,15

51,

970

2,77

83,

205

2,29

52,

419

GN

I ..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..27

1,86

427

9,96

929

3,98

030

4,81

632

0,97

133

8,15

334

6,97

134

0,16

5

Sour

ces :

NA

I, N

BB.

(1)

Hou

sing

, gr

oss

fixed

cap

ital

form

atio

n by

ent

erpr

ises

and

gro

ss fi

xed

capi

tal

form

atio

n by

gen

eral

gov

ernm

ent.

214

Tab

le V

V

alu

ea

dd

edo

fth

eV

ar

iou

sb

ra

nc

hes

of

ac

tiV

ity,

by

Vo

lum

e

(per

cent

age

chan

ges

com

pare

d to

the

pre

viou

s ye

ar,

data

not

adj

uste

d fo

r ca

lend

ar e

ffec

ts)

2002

2003

2004

2005

2006

2007

2008

p.m

.Pe

rcen

tage

s

of t

he 2

008

G

DP

Agr

icul

ture

, hu

ntin

g, f

ores

try

and

fishe

ries

...

....

....

....

....

....

....

....

....

...

4.3

–7.3

5.2

–12.

110

.0–1

.10.

10.

8

Indu

stry

..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..–0

.8–1

.03.

10.

31.

43.

3–0

.516

.5

Min

eral

-ext

ract

ing

indu

stry

...

....

....

....

....

....

....

....

....

....

....

....

...

–5.1

0.2

3.2

6.8

9.7

4.0

–1.5

0.1

Elec

tric

ity,

gas,

wat

er .

....

....

....

....

....

....

....

....

....

....

....

....

....

..–1

.90.

0–1

.9–3

.49.

10.

1–2

.11.

9

Man

ufac

turin

g in

dust

ry .

....

....

....

....

....

....

....

....

....

....

....

....

....

–0.6

–1.1

3.7

0.7

0.5

3.7

–0.3

14.4

of w

hich

:

Non

-met

allic

min

eral

s .

....

....

....

....

....

....

....

....

....

....

....

....

.–1

.3–3

.30.

2–2

.0–0

.30.

7–0

.60.

8

Iron,

ste

el a

nd n

on-f

erro

us m

etal

s .

....

....

....

....

....

....

....

....

....

..0.

5–2

.44.

5–7

.62.

19.

50.

42.

3

Met

al-w

orki

ng i

ndus

try

...

....

....

....

....

....

....

....

....

....

....

....

..–4

.4–2

.61.

24.

4–2

.9–3

.2–0

.33.

2

Pape

r, pr

intin

g, p

ublis

hing

..

....

....

....

....

....

....

....

....

....

....

....

–1.7

2.1

5.0

0.5

4.2

4.0

–1.4

1.1

Che

mic

als

and

rubb

er .

....

....

....

....

....

....

....

....

....

....

....

....

.2.

2–0

.46.

4–0

.3–0

.91.

90.

33.

4

Text

iles,

clo

thin

g an

d fo

otw

ear

...

....

....

....

....

....

....

....

....

....

...

–1.5

–8.5

0.2

–5.4

5.6

6.5

–1.8

0.6

Food

, be

vera

ges,

tob

acco

...

....

....

....

....

....

....

....

....

....

....

....

1.8

2.2

2.8

0.2

3.2

6.9

–0.1

1.8

Con

stru

ctio

n .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

...

–1.5

0.7

4.0

3.4

8.5

2.3

–0.1

4.7

Mar

ket

serv

ices

...

....

....

....

....

....

....

....

....

....

....

....

....

....

....

...

2.0

1.7

2.8

2.5

2.5

3.7

2.0

54.6

Trad

e an

d re

pairs

...

....

....

....

....

....

....

....

....

....

....

....

....

....

...

4.1

4.7

4.0

–3.1

1.2

7.1

–0.5

11.2

Fina

ncia

l se

rvic

es

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..10

.2–5

.78.

33.

18.

1–1

.2–1

.55.

2

Real

est

ate,

ren

ting

and

busi

ness

ser

vice

s .

....

....

....

....

....

....

....

....

....

1.0

2.3

2.4

5.8

3.8

4.5

4.1

20.7

Tran

spor

t an

d co

mm

unic

atio

ns

....

....

....

....

....

....

....

....

....

....

....

..0.

62.

4–0

.73.

50.

31.

02.

67.

5

Hea

lth a

nd s

ocia

l w

ork

...

....

....

....

....

....

....

....

....

....

....

....

....

..0.

60.

41.

70.

7–0

.63.

42.

56.

2

Hot

els

and

rest

aura

nts

and

mis

cella

neou

s se

rvic

es t

o ho

useh

olds

...

....

....

....

..–4

.71.

71.

92.

62.

01.

20.

63.

9

Non

-mar

ket

serv

ices

..

....

....

....

....

....

....

....

....

....

....

....

....

....

...

1.7

1.3

1.2

1.4

1.2

0.6

1.3

12.4

Valu

e ad

ded

of b

ranc

hes,

at

basi

c pr

ices

...

....

....

....

....

....

....

....

....

....

.1.

21.

02.

71.

82.

62.

91.

389

.0

Taxe

s ne

t of

sub

sidi

es o

n pr

oduc

ts (1

) ..

....

....

....

....

....

....

....

....

....

....

.0.

3–0

.10.

80.

20.

40.

4–0

.110

.9

GD

P .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..1.

40.

83.

21.

82.

82.

91.

010

0.0

Sour

ce :

NA

I.(1

) C

ontr

ibut

ion

to t

he c

hang

e in

GD

P.

215

statistical annEx

Tab

le V

ILa

bo

ur

ma

rk

et

(ann

ual

aver

ages

, th

ousa

nds

of u

nits

)

2002

2003

2004

2005

2006

2007

2008

2009

e

Popu

latio

n of

wor

king

age

(1)

....

....

....

....

....

....

....

....

....

....

....

....

..6,

774

6,80

56,

835

6,87

96,

942

7,01

27,

070

7,11

4

Labo

ur f

orce

...

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.4,

717

4,76

84,

843

4,91

64,

963

4,98

25,

039

5,06

5

Nat

iona

l em

ploy

men

t .

....

....

....

....

....

....

....

....

....

....

....

....

....

.4,

226

4,23

04,

270

4,33

14,

384

4,45

64,

538

4,51

4

Fron

tier

wor

kers

(ba

lanc

e)

....

....

....

....

....

....

....

....

....

....

....

....

6769

7273

7577

7777

Dom

estic

em

ploy

men

t ..

....

....

....

....

....

....

....

....

....

....

....

....

..4,

159

4,16

04,

199

4,25

84,

308

4,37

94,

461

4,43

7

Self-

empl

oyed

...

....

....

....

....

....

....

....

....

....

....

....

....

....

..68

968

969

269

569

970

671

772

0

Empl

oyee

s .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

...

3,47

03,

472

3,50

73,

563

3,60

93,

672

3,74

43,

717

Bran

ches

sen

sitiv

e to

the

bus

ines

s cy

cle

(2)

....

....

....

....

....

....

....

...

2,22

32,

199

2,20

92,

237

2,27

02,

319

2,36

72,

315

Publ

ic a

dmin

istr

atio

n an

d ed

ucat

ion

...

....

....

....

....

....

....

....

....

.72

173

074

275

776

477

178

078

7

Oth

er n

on-m

arke

t se

rvic

es (3

) ..

....

....

....

....

....

....

....

....

....

....

525

543

556

569

576

582

597

614

Une

mpl

oym

ent (4

) ..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

492

538

573

584

579

526

500

551

Sour

ces :

DG

SEI,

FPB,

NA

I, N

EMO

, N

BB.

(1)

Pers

ons

aged

15

to 6

4.(2

) Th

e br

anch

es “

agric

ultu

re,

hunt

ing,

for

estr

y an

d fis

herie

s”,

“ind

ustr

y”,

“con

stru

ctio

n”,

“tra

de,

tran

spor

t an

d co

mm

unic

atio

n” a

nd “

finan

cial

, re

al e

stat

e, r

entin

g an

d bu

sine

ss s

ervi

ces”

.(3

) Th

e br

anch

es “

heal

th a

nd s

ocia

l w

ork”

, “c

omm

unity

, so

cial

and

per

sona

l se

rvic

es”

and

“dom

estic

ser

vice

s”.

(4)

Une

mpl

oyed

job

see

kers

, co

nsis

ting

of w

holly

une

mpl

oyed

per

sons

rec

eivi

ng b

enefi

ts (

excl

udin

g ol

der

unem

ploy

ed p

erso

ns n

ot s

eeki

ng w

ork)

and

oth

er c

ompu

lsor

ily o

r vo

lunt

arily

reg

iste

red

job

seek

ers.

Job

see

kers

wor

king

via

the

Loc

al E

mpl

oym

ent

A

genc

ies

wer

e ex

clud

ed s

ince

the

y ar

e al

read

y in

clud

ed i

n em

ploy

men

t.

216

Tab

le V

IIEm

plo

ym

Ent

ra

tE

(per

cent

ages

of

the

corr

espo

ndin

g la

bour

for

ce a

ged

15 t

o 64

(1) ,

annu

al a

vera

ges)

Ave

rage

s of

the

fir

st t

hree

qua

rter

s

2002

2003

2004

2005

2006

2007

2008

2008

2009

Tota

l .

....

....

....

....

....

....

....

....

....

....

....

....

....

...

59.9

59.6

60.3

61.1

61.0

62.0

62.4

62.4

61.5

Acc

ordi

ng t

o se

x

Wom

en

....

....

....

....

....

....

....

....

....

....

....

....

.51

.451

.852

.653

.854

.055

.356

.256

.255

.9

Men

...

....

....

....

....

....

....

....

....

....

....

....

....

.68

.367

.367

.968

.367

.968

.768

.668

.567

.1

Acc

ordi

ng t

o ag

e

15 t

o 24

..

....

....

....

....

....

....

....

....

....

....

....

..29

.427

.427

.827

.327

.627

.527

.427

.225

.2

25 t

o 54

..

....

....

....

....

....

....

....

....

....

....

....

..76

.576

.577

.378

.378

.479

.780

.580

.579

.8

55 t

o 64

..

....

....

....

....

....

....

....

....

....

....

....

..26

.628

.130

.031

.932

.034

.434

.534

.334

.9

Acc

ordi

ng t

o re

gion

Brus

sels

..

....

....

....

....

....

....

....

....

....

....

....

...

54.5

53.2

54.1

54.8

53.4

54.8

55.6

55.9

55.2

Flan

ders

...

....

....

....

....

....

....

....

....

....

....

....

..63

.562

.964

.364

.965

.066

.166

.566

.665

.5

Wal

loni

a .

....

....

....

....

....

....

....

....

....

....

....

...

54.9

55.4

55.1

56.1

56.1

57.0

57.2

57.0

56.5

Acc

ordi

ng t

o ed

ucat

iona

l le

vel

Low

er s

econ

dary

edu

catio

n or

les

s .

....

....

....

....

....

....

.41

.741

.240

.540

.440

.140

.539

.739

.638

.5

Upp

er s

econ

dary

edu

catio

n .

....

....

....

....

....

....

....

...

64.9

63.9

64.7

65.5

65.1

65.9

67.0

67.4

65.3

Hig

her

educ

atio

n .

....

....

....

....

....

....

....

....

....

....

82.5

82.2

82.5

82.8

82.4

83.7

83.0

82.8

82.1

Sour

ce :

DG

SEI.

(1)

Thes

e em

ploy

men

t ra

tes

are

calc

ulat

ed o

n th

e ba

sis

of t

he h

arm

onis

ed d

ata

take

n fr

om t

he l

abou

r fo

rce

surv

ey.

217

statistical annEx

Tab

le V

III

Un

empl

oy

men

tr

ate

(per

cent

ages

of

the

corr

espo

ndin

g la

bour

for

ce a

ged

15 t

o 64

(1) ,

annu

al a

vera

ges)

Ave

rage

s of

the

fir

st t

hree

qua

rter

s

2002

2003

2004

2005

2006

2007

2008

2008

2009

Tota

l .

....

....

....

....

....

....

....

....

....

....

....

....

....

...

7.6

8.2

8.5

8.5

8.3

7.5

7.0

7.1

7.9

Acc

ordi

ng t

o se

x

Wom

en

....

....

....

....

....

....

....

....

....

....

....

....

.8.

78.

99.

69.

69.

48.

57.

67.

68.

2

Men

...

....

....

....

....

....

....

....

....

....

....

....

....

.6.

77.

77.

67.

77.

56.

76.

56.

77.

7

Acc

ordi

ng t

o ag

e

15 t

o 24

..

....

....

....

....

....

....

....

....

....

....

....

..17

.721

.821

.221

.520

.518

.818

.018

.021

.6

25 t

o 54

..

....

....

....

....

....

....

....

....

....

....

....

..6.

67.

17.

47.

47.

26.

66.

16.

26.

7

55 t

o 64

..

....

....

....

....

....

....

....

....

....

....

....

..4.

13.

03.

94.

44.

84.

24.

44.

55.

3

Acc

ordi

ng t

o re

gion

Brus

sels

..

....

....

....

....

....

....

....

....

....

....

....

...

14.7

15.8

15.9

16.5

17.7

17.2

16.0

16.2

15.6

Flan

ders

...

....

....

....

....

....

....

....

....

....

....

....

..4.

95.

75.

45.

55.

04.

43.

94.

05.

0

Wal

loni

a .

....

....

....

....

....

....

....

....

....

....

....

...

10.6

10.9

12.1

11.9

11.8

10.5

10.1

10.1

11.0

Acc

ordi

ng t

o ed

ucat

iona

l le

vel

Low

er s

econ

dary

edu

catio

n or

les

s .

....

....

....

....

....

....

.11

.712

.513

.314

.114

.013

.012

.512

.913

.7

Upp

er s

econ

dary

edu

catio

n .

....

....

....

....

....

....

....

...

7.4

8.4

8.5

8.5

8.2

7.6

7.0

6.7

8.0

Hig

her

educ

atio

n .

....

....

....

....

....

....

....

....

....

....

4.1

4.4

4.7

4.5

4.5

3.8

3.6

3.8

4.5

Sour

ce :

DG

SEI.

(1)

Thes

e un

empl

oym

ent

rate

s ar

e ca

lcul

ated

on

the

basi

s of

the

har

mon

ised

dat

a ta

ken

from

the

lab

our

forc

e su

rvey

..

218

Tab

le I

X

Ha

rm

on

ised

in

dex

of

co

nsu

mer

pr

ices

(per

cent

age

chan

ges

com

pare

d to

the

cor

resp

ondi

ng p

erio

d of

the

pre

viou

s ye

ar)

Tota

l

p.m

.N

atio

nal

cons

umer

pric

e in

dex

p.m

.H

ealth

inde

x (3)

Ener

gy

Unp

roce

ssed

fo

od (1

)

Proc

esse

d

food

Und

erly

ing

tren

d

in i

nflat

ion

(2)

Non

-ene

rgy

in

dust

rial

good

s

Serv

ices

2002

..

....

....

....

....

....

....

1.6

–3.6

3.2

1.5

2.2

1.7

2.6

1.6

1.8

2003

..

....

....

....

....

....

....

1.5

0.2

1.7

2.8

1.5

1.0

1.9

1.6

1.5

2004

..

....

....

....

....

....

....

1.9

6.6

0.9

2.2

1.3

0.3

2.1

2.1

1.6

2005

..

....

....

....

....

....

....

2.5

12.7

1.7

2.0

1.3

0.3

2.1

2.8

2.2

2006

..

....

....

....

....

....

....

2.3

7.3

3.3

2.1

1.5

0.9

2.1

1.8

1.8

2007

..

....

....

....

....

....

....

1.8

0.2

3.0

4.7

1.4

0.9

1.9

1.8

1.8

2008

..

....

....

....

....

....

....

4.5

19.8

2.8

7.8

1.8

1.3

2.3

4.5

4.2

2009

..

....

....

....

....

....

....

0.0

–14.

00.

41.

72.

11.

42.

6–0

.10.

6

2009

Ja

nuar

y .

....

....

....

....

.2.

1–0

.24.

13.

71.

90.

63.

02.

33.

3

Fe

brua

ry

....

....

....

....

.1.

9–4

.04.

33.

12.

41.

43.

31.

92.

8

M

arch

...

....

....

....

....

0.6

–12.

63.

52.

72.

21.

52.

70.

61.

6

A

pril

...

....

....

....

....

.0.

7–1

3.0

1.8

2.3

2.7

1.7

3.6

0.6

1.5

M

ay .

....

....

....

....

....

–0.2

–17.

60.

61.

82.

41.

63.

1–0

.40.

7

Ju

ne

....

....

....

....

....

–1.0

–21.

7–0

.41.

52.

31.

72.

7–1

.1–0

.1

Ju

ly

....

....

....

....

....

.–1

.7–2

3.2

–2.5

1.2

2.0

1.2

2.6

–1.7

–0.7

A

ugus

t .

....

....

....

....

.–0

.7–1

6.8

–1.6

1.0

2.0

1.7

2.2

–0.8

–0.2

Se

ptem

ber

...

....

....

....

–1.0

–19.

8–1

.90.

92.

01.

62.

7–1

.2–0

.6

O

ctob

er

....

....

....

....

.–0

.9–1

7.2

–1.6

0.6

1.8

1.4

2.1

–1.0

–0.6

N

ovem

ber

....

....

....

....

0.0

–10.

4–0

.70.

61.

71.

41.

8–0

.1–0

.3

D

ecem

ber

....

....

....

....

0.3

–6.8

–1.1

0.7

1.6

1.4

1.7

0.3

–0.3

Sour

ces :

EC

, D

GSE

I.(1

) Fr

uit,

veg

etab

les,

mea

t an

d fis

h.(2

) M

easu

red

by t

he H

ICP

excl

udin

g fo

od a

nd e

nerg

y.(3

) N

atio

nal

CPI

exc

ludi

ng t

he p

rices

of

prod

ucts

con

side

red

harm

ful

to h

ealth

, na

mel

y to

bacc

o, a

lcoh

olic

bev

erag

es,

petr

ol a

nd d

iese

l.

219

statistical annEx

Tab

le X

In

co

mes

of

the

va

rIo

us

sec

tor

sa

tc

ur

ren

tpr

Ices

(1)

(mill

ions

of

euro

)

2002

2003

2004

2005

2006

2007

2008

2009

e

Hou

seho

lds

Gro

ss p

rimar

y in

com

e .

....

....

....

....

....

....

....

....

....

....

....

....

....

.20

9,24

321

0,49

821

5,70

322

2,79

723

3,77

424

6,44

125

9,53

425

9,84

0

Wag

es a

nd s

alar

ies (2

) ..

....

....

....

....

....

....

....

....

....

....

....

....

...

144,

192

147,

239

151,

289

156,

421

163,

943

172,

618

181,

198

183,

410

Prop

erty

inc

omes

(3)

....

....

....

....

....

....

....

....

....

....

....

....

....

..27

,795

25,2

4025

,540

25,7

7126

,732

28,8

7631

,840

30,9

85

Gro

ss m

ixed

inc

ome

...

....

....

....

....

....

....

....

....

....

....

....

....

..23

,877

24,3

2724

,980

25,6

6727

,090

27,7

3028

,669

27,5

90

Gro

ss o

pera

ting

surp

lus

...

....

....

....

....

....

....

....

....

....

....

....

...

13,3

8013

,692

13,8

9414

,938

16,0

0817

,217

17,8

2817

,855

Cur

rent

tra

nsfe

rs (3

) ..

....

....

....

....

....

....

....

....

....

....

....

....

....

...

–39,

785

–38,

886

–40,

221

–41,

570

–41,

804

–45,

110

–47,

829

–42,

164

Tran

sfer

s re

ceiv

ed .

....

....

....

....

....

....

....

....

....

....

....

....

....

...

58,4

6760

,890

63,1

9065

,575

67,1

5269

,805

73,1

5576

,642

Tran

sfer

s pa

id .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..–9

8,25

2–9

9,77

6–1

03,4

11–1

07,1

45–1

08,9

55–1

14,9

14–1

20,9

84–1

18,8

06

Gro

ss d

ispo

sabl

e in

com

e ..

....

....

....

....

....

....

....

....

....

....

....

....

..16

9,45

817

1,61

217

5,48

218

1,22

719

1,97

020

1,33

121

1,70

521

7,67

6

p.m

.In

rea

lter

ms(4

) ..

....

....

....

....

....

....

....

....

....

....

....

....

....

.. 19

1,57

6 19

1,17

8 19

0,96

5 19

1,98

8 19

7,42

6 20

1,33

1 20

3,99

4 20

9,66

7

(per

cent

age

chan

ges

com

pare

dto

the

pre

viou

sye

ar)

...

....

....

....

....

...

(0.0

) (–

0.2)

(–0.

1) (0

.5)

(2.8

) (2

.0)

(1.3

) (2

.8)

Com

pani

es

Gro

ss p

rimar

y in

com

e .

....

....

....

....

....

....

....

....

....

....

....

....

....

.40

,563

46,1

7951

,827

53,6

4356

,456

60,6

3956

,038

50,0

24

Gro

ss o

pera

ting

surp

lus

...

....

....

....

....

....

....

....

....

....

....

....

...

54,2

9557

,755

65,1

9169

,611

73,0

1678

,917

78,6

1772

,219

Prop

erty

inc

omes

(3)

....

....

....

....

....

....

....

....

....

....

....

....

....

..–1

3,73

2–1

1,57

6–1

3,36

4–1

5,96

8–1

6,56

1–1

8,27

7–2

2,57

9–2

2,19

5

Cur

rent

tra

nsfe

rs (3

) ..

....

....

....

....

....

....

....

....

....

....

....

....

....

...

–6,5

62–6

,318

–7,4

09–8

,189

–9,4

53–8

,028

–7,9

75–4

,554

Gro

ss d

ispo

sabl

e in

com

e ..

....

....

....

....

....

....

....

....

....

....

....

....

..34

,001

39,8

6144

,417

45,4

5447

,003

52,6

1248

,063

45,4

70

Gen

eral

gov

ernm

ent

Gro

ss p

rimar

y in

com

e .

....

....

....

....

....

....

....

....

....

....

....

....

...

22,0

5823

,293

26,4

5128

,376

30,7

4231

,073

31,3

9930

,301

Cur

rent

tra

nsfe

rs (3

) ..

....

....

....

....

....

....

....

....

....

....

....

....

....

.43

,270

41,4

6543

,174

45,4

3047

,072

49,8

2251

,264

41,2

47

Gro

ss d

ispo

sabl

e in

com

e ..

....

....

....

....

....

....

....

....

....

....

....

....

65,3

2864

,757

69,6

2573

,807

77,8

1480

,895

82,6

6271

,548

Rest

of

the

wor

ld

Gro

ss d

ispo

sabl

e in

com

e ..

....

....

....

....

....

....

....

....

....

....

....

....

3,07

73,

740

4,45

64,

329

4,18

43,

315

4,54

05,

471

GN

I ..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..27

1,86

427

9,96

929

3,98

030

4,81

632

0,97

133

8,15

334

6,97

134

0,16

5

Sour

ces :

NA

I, N

BB.

(1)

The

data

in

this

tab

le a

re c

alcu

late

d in

gro

ss t

erm

s, i

.e.

befo

re d

educ

tion

of c

onsu

mpt

ion

of fi

xed

capi

tal.

(2)

Rem

uner

atio

n (e

xclu

ding

tha

t of

ow

ner

entr

epre

neur

s),

incl

udin

g so

cial

sec

urity

con

trib

utio

ns a

nd c

ivil

serv

ice

pens

ions

.(3

) Th

ese

are

net

amou

nts,

i.e

. th

e di

ffer

ence

bet

wee

n in

com

es o

r tr

ansf

ers

rece

ived

fro

m o

ther

sec

tors

and

tho

se p

aid

to o

ther

sec

tors

, ex

clud

ing

tran

sfer

s in

kin

d.(4

) D

ata

defla

ted

by m

eans

of

the

hous

ehol

d fin

al c

onsu

mpt

ion

expe

nditu

re d

eflat

or.

220

Tab

le X

ISu

mm

ar

yo

fth

etr

an

Sac

tio

nS

of

the

ma

inS

ecto

rS

of

the

eco

no

my

at

cu

rr

ent

pric

eS(1

)

(mill

ions

of

euro

)

1. H

ouse

hold

s1.

1 G

ross

dis

posa

ble

inco

me

...

....

....

....

....

....

....

....

....

....

....

....

2002

2003

2004

2005

2006

2007

2008

2009

e

169,

458

171,

612

175,

482

181,

227

191,

970

201,

331

211,

705

217,

676

p.m

.G

ross

adj

uste

ddi

spos

able

inco

me

...

....

....

....

....

....

....

....

...

205,

852

210,

197

216,

279

224,

044

236,

141

247,

615

261,

542

270,

310

1.2

Cha

nge

in h

ouse

hold

s’ c

laim

s on

inst

itutio

ns fo

r occ

upat

iona

l ret

irem

ent p

rovi

sion

1,54

11,

716

1,85

72,

009

1,95

92,

498

3,20

62,

997

1.3

Fina

l co

nsum

ptio

n ex

pend

iture

...

....

....

....

....

....

....

....

....

....

...

141,

346

144,

383

150,

110

155,

751

163,

330

170,

784

179,

130

176,

339

p.m

.A

ctua

lfina

lcon

sum

ptio

n .

....

....

....

....

....

....

....

....

....

....

. 17

7,73

9 18

2,96

8 19

0,90

7 19

8,56

9 20

7,50

1 21

7,06

7 22

8,96

7 22

8,97

31.

4 G

ross

sav

ings

(1.

1 +

1.2

– 1

.3)

....

....

....

....

....

....

....

....

....

....

..29

,654

28,9

4527

,230

27,4

8430

,599

33,0

4535

,781

44,3

35p.

m.

Perc

enta

ges

ofg

ross

dis

posa

ble

inco

me

(2)

....

....

....

....

....

....

....

17.3

16.7

15.4

15.0

15.8

16.2

16.6

20.1

p.m

.Pe

rcen

tage

sof

gro

ssa

djus

ted

disp

osab

lein

com

e(2

) ..

....

....

....

....

.. 14

.3 13

.7 12

.5 12

.2 12

.9 13

.2 13

.5 16

.21.

5 C

apita

l tr

ansf

ers (3

) ..

....

....

....

....

....

....

....

....

....

....

....

....

...

–296

–763

–850

–1,2

58–1

,250

–1,0

81–1

,396

–1,1

651.

6 G

ross

cap

ital

form

atio

n .

....

....

....

....

....

....

....

....

....

....

....

...

13,9

7114

,563

16,0

0418

,750

20,1

6321

,235

22,2

1420

,718

1.7

Ove

rall

bala

nce

(1.4

+ 1

.5 –

1.6

) .

....

....

....

....

....

....

....

....

....

...

15,3

8713

,619

10,3

767,

477

9,18

610

,729

12,1

7122

,452

2. C

ompa

nies

2.1

Gro

ss d

ispo

sabl

e in

com

e .

....

....

....

....

....

....

....

....

....

....

....

..34

,001

39,8

6144

,417

45,4

5447

,003

52,6

1248

,063

45,4

702.

2 C

hang

e in

hou

seho

lds’

cla

ims

on in

stitu

tions

for o

ccup

atio

nal r

etire

men

t pro

visi

on–1

,540

–1,7

21–1

,853

–2,0

08–1

,956

–2,4

99–3

,207

–2,9

972.

3 G

ross

sav

ings

(2.

1 +

2.2

) .

....

....

....

....

....

....

....

....

....

....

....

..32

,462

38,1

4042

,564

43,4

4645

,047

50,1

1244

,856

42,4

732.

4 C

apita

l tr

ansf

ers (3

) ..

....

....

....

....

....

....

....

....

....

....

....

....

...

817

–1,8

8886

58,

895

1,91

01,

596

1,25

62,

345

2.5

Gro

ss fi

xed

capi

tal

form

atio

n .

....

....

....

....

....

....

....

....

....

....

..32

,601

32,7

1536

,851

38,4

7141

,634

46,0

2949

,949

44,6

992.

6 C

hang

e in

sto

cks

...

....

....

....

....

....

....

....

....

....

....

....

....

..16

01,

399

2,93

33,

450

4,60

43,

947

4,90

0–2

,481

2.7

Ove

rall

bala

nce

(2.3

+ 2

.4 –

2.5

– 2

.6)

...

....

....

....

....

....

....

....

....

518

2,13

83,

645

10,4

2072

01,

732

–8,7

372,

601

3. G

ener

al g

over

nmen

t3.

1 G

ross

dis

posa

ble

inco

me

...

....

....

....

....

....

....

....

....

....

....

....

65,3

2864

,757

69,6

2573

,807

77,8

1480

,895

82,6

6271

,548

p.m

.G

ross

adj

uste

ddi

spos

able

inco

me

...

....

....

....

....

....

....

....

...

28,9

34 26

,172

28,8

28 30

,989

33,6

43 34

,611

32,8

26 18

,913

3.2

Cha

nge

in h

ouse

hold

s’ c

laim

s on

inst

itutio

ns fo

r occ

upat

iona

l ret

irem

ent p

rovi

sion

–15

–4–1

–31

10

3.3

Fina

l co

nsum

ptio

n ex

pend

iture

...

....

....

....

....

....

....

....

....

....

...

60,3

0663

,179

65,9

4169

,024

71,4

9674

,659

79,7

9883

,256

p.m

.A

ctua

lfina

lcon

sum

ptio

n .

....

....

....

....

....

....

....

....

....

....

. 23

,912

24,5

94 25

,143

26,2

07 27

,325

28,3

75 29

,962

30,6

223.

4 G

ross

sav

ings

(3.

1 +

3.2

– 3

.3)

....

....

....

....

....

....

....

....

....

....

..5,

021

1,58

33,

681

4,78

16,

315

6,23

72,

865

–11,

709

3.5

Cap

ital

tran

sfer

s (3)

....

....

....

....

....

....

....

....

....

....

....

....

....

.–9

802,

469

–172

–7,9

54–6

70–1

,660

–1,3

72–2

,807

3.6

Gro

ss fi

xed

capi

tal

form

atio

n .

....

....

....

....

....

....

....

....

....

....

..4,

446

4,54

94,

679

5,46

15,

051

5,38

45,

717

5,90

43.

7 C

hang

e in

sto

cks

...

....

....

....

....

....

....

....

....

....

....

....

....

..4

5–4

33

54

43.

8 O

vera

ll ba

lanc

e ac

cord

ing

to t

he E

SA 9

5 (3

.4 +

3.5

– 3

.6 –

3.7

) ..

....

....

...

–409

–501

–1,1

66–8

,636

592

–811

–4,2

29–2

0,42

4p.

m.

Ove

rall

bala

nce

acco

rdin

gto

the

ED

P(4

) ..

....

....

....

....

....

....

....

–232

–291

–843

–8,2

33 81

4 –6

61 –4

,061

–20,

254

4. T

otal

of

dom

estic

sec

tors

4.1

Ove

rall

bala

nce

(1.7

+ 2

.7 +

3.8

) .

....

....

....

....

....

....

....

....

....

...

15,4

9615

,256

12,8

569,

261

10,4

9711

,649

–795

4,62

9

Sour

ces :

NA

I, N

BB.

(1)

The

data

in

this

tab

le a

re c

alcu

late

d in

gro

ss t

erm

s, i

.e.

befo

re d

educ

tion

of c

onsu

mpt

ion

of fi

xed

capi

tal.

(2)

Dis

posa

ble

inco

me,

inc

ludi

ng c

hang

es i

n ho

useh

olds

’ cl

aim

s on

ins

titut

ions

for

occ

upat

iona

l re

tirem

ent

prov

isio

n.(3

) Th

ese

are

net

amou

nts,

i.e

. th

e di

ffer

ence

bet

wee

n tr

ansf

ers

rece

ived

fro

m o

ther

sec

tors

and

tho

se p

aid

to o

ther

sec

tors

, in

clud

ing

net

acqu

isiti

ons

of n

on-fi

nanc

ial

non-

prod

uced

ass

ets

and

net

acqu

isiti

ons

of v

alua

bles

.(4

) Th

e ES

A 9

5 m

etho

dolo

gy w

as a

dapt

ed i

n 20

01 t

o ex

clud

e fr

om t

he c

alcu

latio

n of

the

ove

rall

bala

nce

the

net

inte

rest

gai

ns o

n ce

rtai

n fin

anci

al t

rans

actio

ns,

such

as

swap

s an

d fo

rwar

d ra

te a

gree

men

ts (

FRA

s).

How

ever

, th

is a

djus

tmen

t is

not

tak

en i

nto

acco

unt

for

the

purp

ose

of t

he e

xces

sive

defi

cit

proc

edur

e (E

DP)

or

for

the

EC’s

asse

ssm

ent

of t

he s

tabi

lity

prog

ram

mes

.

221

statistical annEx

Tab

le X

IIR

even

ue,

ex

pen

dit

uR

ea

nd

ov

eRa

llb

ala

nc

eo

fg

eneR

al

go

veR

nm

ent

(mill

ions

of

euro

)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

e

Reve

nue

(1)

....

....

....

....

....

....

....

....

....

....

....

....

...

123,

746

128,

518

133,

295

140,

452

142,

568

149,

464

155,

108

161,

289

168,

198

161,

024

Fisc

al a

nd p

arafi

scal

rev

enue

..

....

....

....

....

....

....

....

...

111,

675

114,

988

119,

384

121,

325

128,

577

133,

824

139,

360

145,

027

150,

766

143,

349

Levi

es w

eigh

ing

chie

fly o

n ea

rned

inc

ome

...

....

....

....

....

66,7

4870

,026

72,5

6873

,670

76,2

6778

,380

80,1

0784

,069

89,0

0086

,803

Pers

onal

inc

ome

tax (2

) ..

....

....

....

....

....

....

....

....

.31

,131

32,7

1233

,440

33,6

7735

,014

36,1

8936

,270

37,5

8139

,938

37,3

39So

cial

sec

urity

con

trib

utio

ns (3

) ..

....

....

....

....

....

....

..35

,618

37,3

1539

,128

39,9

9341

,254

42,1

9143

,837

46,4

8949

,062

49,4

64Ta

xes

on p

rofit

s of

com

pani

es (4

) ..

....

....

....

....

....

....

..8,

089

8,09

18,

142

7,91

28,

991

9,81

611

,368

11,6

2711

,494

8,11

8Le

vies

on

othe

r in

com

e an

d in

res

pect

of

prop

erty

(5)

....

....

...

8,52

68,

700

9,03

89,

504

10,6

3111

,544

11,9

6812

,693

13,0

7511

,897

Taxe

s on

goo

ds a

nd s

ervi

ces

...

....

....

....

....

....

....

....

28,3

1228

,171

29,6

3730

,239

32,6

8834

,084

35,9

1836

,639

37,1

9636

,531

Non

-fisc

al a

nd n

on-p

arafi

scal

rev

enue

(6)

....

....

....

....

....

....

12,0

7113

,529

13,9

1119

,127

13,9

9015

,640

15,7

4916

,262

17,4

3217

,675

Expe

nditu

re e

xclu

ding

int

eres

t ch

arge

s ..

....

....

....

....

....

....

.10

7,23

511

0,75

411

8,25

012

6,24

012

9,81

814

5,01

714

1,76

414

9,12

115

9,25

616

8,82

4So

cial

ins

uran

ce b

enefi

ts .

....

....

....

....

....

....

....

....

....

53,8

9656

,652

59,7

9163

,276

66,7

4169

,279

71,2

1874

,797

80,2

4985

,386

Repl

acem

ent

inco

mes

..

....

....

....

....

....

....

....

....

...

30,7

4832

,120

34,2

9135

,813

37,3

0838

,678

39,9

1542

,010

44,6

9847

,892

Pens

ions

..

....

....

....

....

....

....

....

....

....

....

....

20,9

6821

,866

22,9

4223

,812

24,7

7725

,754

26,7

1128

,557

30,5

3632

,093

Priv

ate

sect

or p

ensi

ons

...

....

....

....

....

....

....

....

.14

,549

15,1

1015

,722

16,2

5316

,664

17,3

2117

,818

18,4

3819

,804

20,9

37G

ener

al g

over

nmen

t pe

nsio

ns .

....

....

....

....

....

....

.6,

418

6,75

77,

220

7,55

98,

113

8,43

38,

893

10,1

1910

,732

11,1

56O

ld p

erso

ns’

guar

ante

ed i

ncom

e ..

....

....

....

....

....

....

249

258

258

264

283

276

269

340

430

437

Early

ret

irem

ent

pens

ions

..

....

....

....

....

....

....

....

..1,

163

1,15

31,

144

1,18

41,

239

1,25

71,

301

1,35

91,

443

1,51

5U

nem

ploy

men

t be

nefit

s .

....

....

....

....

....

....

....

....

4,38

14,

637

5,35

65,

747

6,02

46,

121

6,09

75,

772

5,79

26,

871

Car

eer

brea

ks a

nd t

ime

cred

it .

....

....

....

....

....

....

...

236

274

352

432

488

556

590

647

700

743

Sick

ness

and

dis

abili

ty i

nsur

ance

ben

efits

..

....

....

....

....

2,84

03,

023

3,20

83,

366

3,48

53,

636

3,84

04,

146

4,55

04,

951

Indu

stria

l ac

cide

nts

and

occu

patio

nal

dise

ases

..

....

....

....

486

489

495

494

495

503

504

508

532

529

Inte

grat

ion

allo

wan

ce

....

....

....

....

....

....

....

....

...

426

420

536

514

517

575

604

683

717

753

Oth

er s

ocia

l in

sura

nce

bene

fits (7

) ..

....

....

....

....

....

....

..23

,148

24,5

3125

,501

27,4

6429

,432

30,6

0031

,303

32,7

8735

,551

37,4

94of

whi

ch :

Hea

lth c

are

...

....

....

....

....

....

....

....

....

....

...

14,0

2515

,052

15,3

7216

,745

18,0

5318

,896

19,2

5620

,286

22,2

4923

,849

Fam

ily a

llow

ance

s .

....

....

....

....

....

....

....

....

...

4,32

44,

433

4,56

44,

637

4,73

14,

850

5,02

35,

155

5,41

35,

663

Oth

er p

rimar

y ex

pend

iture

...

....

....

....

....

....

....

....

....

53,3

3954

,103

58,4

5962

,964

63,0

7775

,738

70,5

4674

,324

79,0

0783

,438

Com

pens

atio

n of

em

ploy

ees

...

....

....

....

....

....

....

....

29,0

3930

,326

32,5

3233

,833

34,6

6136

,422

37,8

5939

,336

41,5

5243

,512

Cur

rent

pur

chas

es o

f go

ods

and

serv

ices

...

....

....

....

....

..8,

319

8,82

210

,235

10,4

3010

,755

11,0

5811

,603

12,0

3612

,710

12,8

98Su

bsid

ies

to e

nter

pris

es .

....

....

....

....

....

....

....

....

...

3,07

33,

200

3,20

93,

680

3,39

74,

809

5,43

46,

399

7,13

17,

317

Cur

rent

tra

nsfe

rs t

o th

e re

st o

f th

e w

orld

...

....

....

....

....

.2,

006

2,16

72,

427

2,78

73,

099

3,24

93,

307

3,30

33,

629

4,10

6O

ther

cur

rent

tra

nsfe

rs

....

....

....

....

....

....

....

....

....

2,87

13,

044

3,17

73,

484

3,77

34,

029

4,20

53,

826

4,36

14,

532

Gro

ss fi

xed

capi

tal

form

atio

n .

....

....

....

....

....

....

....

..4,

934

4,39

94,

446

4,54

94,

679

5,46

15,

051

5,38

45,

717

5,90

4O

ther

cap

ital

expe

nditu

re .

....

....

....

....

....

....

....

....

.3,

097

2,14

42,

435

4,20

22,

715

10,7

113,

088

4,04

13,

907

5,17

0N

et a

mou

nt e

xclu

ding

int

eres

t ch

arge

s .

....

....

....

....

....

....

.16

,512

17,7

6315

,045

14,2

1212

,750

4,44

713

,345

12,1

688,

942

–7,8

00In

tere

st c

harg

es

....

....

....

....

....

....

....

....

....

....

....

..16

,709

16,8

4715

,454

14,7

1313

,916

13,0

8312

,753

12,9

7913

,171

12,6

24O

vera

ll ba

lanc

e ac

cord

ing

to t

he E

SA 9

5 ..

....

....

....

....

....

...

–197

917

–409

–501

–1,1

66–8

,636

592

–811

–4,2

29–2

0,42

4p.

m.

Ove

rall

bala

nce

acco

rdin

gto

the

ED

P(8

) ..

....

....

....

....

...

–92

1,05

6 –2

32 –2

91 –8

43 –8

,233

814

–661

–4,0

61 –2

0,25

4

Sour

ces :

EC

, N

AI,

NBB

.(1

) In

acc

orda

nce

with

the

ESA

95,

gen

eral

gov

ernm

ent

reve

nues

do

not

incl

ude

the

tax

reve

nues

tra

nsfe

rred

to

the

EU.

(2)

Mai

nly

with

hold

ing

tax

on e

arne

d in

com

e, a

dvan

ce p

aym

ents

, as

sess

men

ts a

nd p

roce

eds

of a

dditi

onal

per

cent

ages

on

pers

onal

inc

ome

tax.

(3)

Tota

l so

cial

con

trib

utio

ns,

incl

udin

g th

e sp

ecia

l so

cial

sec

urity

con

trib

utio

n an

d th

e co

ntrib

utio

ns o

f no

n-ac

tive

pers

ons.

(4)

Mai

nly

adva

nce

paym

ents

, as

sess

men

ts a

nd t

he w

ithho

ldin

g ta

x on

inc

ome

from

mov

able

pro

pert

y pa

yabl

e by

com

pani

es.

(5)

Mai

nly

the

with

hold

ing

tax

on i

ncom

e fr

om m

ovab

le p

rope

rty

paya

ble

by h

ouse

hold

s, t

he w

ithho

ldin

g ta

x on

inc

ome

from

im

mov

able

pro

pert

y (in

clud

ing

proc

eeds

of

addi

tiona

l pe

rcen

tage

s),

inhe

ritan

ce t

axes

and

reg

istr

atio

n fe

es.

(6)

Prop

erty

inc

omes

, im

pute

d so

cial

sec

urity

con

trib

utio

ns,

curr

ent

and

capi

tal

tran

sfer

s fr

om o

ther

sec

tors

and

sal

es o

f pr

oduc

ed g

oods

and

ser

vice

s.(7

) A

part

fro

m t

he t

wo

mai

n su

b-ca

tego

ries

men

tione

d in

the

tab

le,

this

ite

m a

lso

incl

udes

mai

nly

allo

wan

ces

to h

andi

capp

ed p

erso

ns a

nd t

rans

fers

to

the

inst

itutio

ns a

ccom

mod

atin

g th

em,

paym

ents

by

subs

iste

nce

fund

s an

d pe

nsio

ns t

o w

ar v

ictim

s.(8

) Th

e ES

A 9

5 m

etho

dolo

gy w

as a

dapt

ed i

n 20

01 t

o ex

clud

e fr

om t

he c

alcu

latio

n of

the

ove

rall

bala

nce

the

net

inte

rest

gai

ns o

n ce

rtai

n fin

anci

al t

rans

actio

ns,

such

as

swap

s an

d fo

rwar

d ra

te a

gree

men

ts (

FRA

s).

How

ever

, th

is a

djus

tmen

t is

not

tak

en i

nto

acco

unt

for

the

purp

ose

of t

he e

xces

sive

defi

cit

proc

edur

e (E

DP)

or

for

the

EC’s

asse

ssm

ent

of t

he s

tabi

lity

prog

ram

mes

.

222

Tab

le X

III

Ov

era

llb

ala

nc

eO

fg

ener

al

gO

ver

nm

ent,

by

su

b-s

ectO

rs

(mill

ions

of

euro

)

Entit

y I

En

tity

II

Gen

eral

gov

ernm

ent

Fede

ral

go

vern

men

t

Soci

al

secu

rity

Tota

l

Com

mun

ities

an

d Re

gion

s

Loca

l

auth

oriti

es

Tota

l

Acc

ordi

ng t

o th

e

ESA

95

p.m

.A

ccor

ding

to

the

EDP

(1)

2000

..

....

....

....

....

....

....

–1,1

651,

213

4861

0–8

55–2

45–1

97–9

2

2001

..

....

....

....

....

....

....

–2,3

851,

678

–707

1,95

3–3

291,

624

917

1,05

6

2002

..

....

....

....

....

....

....

–691

1,25

856

7–3

82–5

94–9

76–4

09–2

32

2003

..

....

....

....

....

....

....

767

–870

–103

26–4

24–3

98–5

01–2

91

2004

..

....

....

....

....

....

....

–664

35–6

29–4

1–4

96–5

37–1

,166

–843

2005

..

....

....

....

....

....

....

–7,9

98–1

38–8

,136

354

–854

–500

–8,6

36–8

,233

2006

..

....

....

....

....

....

....

–165

1,00

884

350

4–7

55–2

5159

281

4

2007

..

....

....

....

....

....

....

–3,7

061,

805

–1,9

011,

235

–146

1,09

0–8

11–6

61

2008

..

....

....

....

....

....

....

–5,5

921,

848

–3,7

44–2

05–2

79–4

84–4

,229

–4,0

61

2009

e .

....

....

....

....

....

....

–14,

845

–2,6

26–1

7,47

1–2

,273

–680

–2,9

52–2

0,42

4–2

0,25

4

Sour

ces :

EC

, N

AI,

NBB

.(1

) Th

e ES

A 9

5 m

etho

dolo

gy w

as a

dapt

ed i

n 20

01 t

o ex

clud

e fr

om t

he c

alcu

latio

n of

the

ove

rall

bala

nce

the

net

inte

rest

gai

ns o

n ce

rtai

n fin

anci

al t

rans

actio

ns,

such

as

swap

s an

d fo

rwar

d ra

te a

gree

men

ts (

FRA

s).

How

ever

, th

is a

djus

tmen

t is

not

tak

en i

nto

acco

unt

for

the

purp

ose

of t

he e

xces

sive

defi

cit

proc

edur

e (E

DP)

or

for

the

EC’s

asse

ssm

ent

of t

he s

tabi

lity

prog

ram

mes

.

223

statistical annEx

Tab

le X

IV

Co

nso

lid

ate

dg

ro

ssd

ebt

of

gen

era

lg

ov

ern

men

t(1

)

(end

-of-

perio

d ou

tsta

ndin

g am

ount

s, m

illio

ns o

f eu

ro)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

1.

Offi

cial

deb

t of

the

Tre

asur

y .

....

....

....

....

....

....

....

...

251,

061

257,

163

262,

752

263,

018

265,

518

269,

160

270,

601

285,

226

310,

215

321,

389

In e

uro

...

....

....

....

....

....

....

....

....

....

....

....

...

242,

455

250,

085

257,

288

259,

295

263,

074

267,

420

269,

145

284,

288

305,

700

320,

826

At

up t

o on

e ye

ar

....

....

....

....

....

....

....

....

....

..33

,310

34,8

5131

,115

30,2

2230

,355

31,0

3632

,243

37,8

9154

,162

47,2

32

At

over

one

yea

r .

....

....

....

....

....

....

....

....

....

..20

9,14

421

5,23

422

6,17

322

9,07

323

2,71

923

6,38

423

6,90

224

6,39

725

1,53

927

3,59

3

In f

orei

gn c

urre

ncie

s .

....

....

....

....

....

....

....

....

....

.8,

606

7,07

95,

464

3,72

42,

444

1,74

01,

456

937

4,51

556

3

2.

Com

pone

nts

of t

he o

ffici

al d

ebt

of t

he T

reas

ury

no

t in

clud

ed i

n th

e co

nsol

idat

ed g

ross

deb

t (2) .

....

....

....

....

5,42

94,

572

3,99

63,

459

00

00

00

3.

Valu

atio

n di

ffer

ence

(3)

....

....

....

....

....

....

....

....

....

.94

289

471

248

956

152

578

61,

072

1,01

228

3

4.

Oth

er f

eder

al g

over

nmen

t lia

bilit

ies (4

) ..

....

....

....

....

....

..11

,533

14,0

3414

,286

8,88

68,

039

12,7

8112

,086

9,49

69,

151

4,73

7 e

5.

Con

solid

atio

n be

twee

n fe

dera

l go

vern

men

t un

its (5

) ..

....

....

..4,

198

7,79

613

,084

17,4

1621

,291

22,6

8721

,454

30,8

1429

,792

27,2

10 e

of w

hich

: A

gein

g Fu

nd a

sset

s (6) .

....

....

....

....

....

....

....

–37

41,

087

4,26

612

,492

13,5

0414

,661

15,4

9416

,183

16,9

01

6.

Con

solid

ated

gro

ss d

ebt

of f

eder

al g

over

nmen

t

(1 –

2 +

3 +

4 –

5)

....

....

....

....

....

....

....

....

....

....

253,

909

259,

724

260,

669

251,

519

252,

827

259,

779

262,

018

264,

979

290,

586

299,

199

e

7.

Con

solid

ated

gro

ss d

ebt

of C

omm

uniti

es a

nd R

egio

ns

....

....

.17

,165

16,8

0016

,776

15,3

0515

,082

13,3

0712

,855

12,3

8913

,964

n.

8.

Con

solid

ated

gro

ss d

ebt

of lo

cal a

utho

ritie

s .

....

....

....

....

.13

,213

14,1

7914

,446

14,8

6015

,677

15,7

4716

,410

16,8

6116

,445

n.

9.

Con

solid

ated

gro

ss d

ebt

of s

ocia

l sec

urity

..

....

....

....

....

..1,

237

010

390

5242

80

00

n.

10.

Con

solid

atio

n be

twee

n th

e ge

nera

l go

vern

men

t su

b-se

ctor

s (7) .

..13

,338

14,0

5614

,280

10,1

389,

754

10,1

9910

,858

12,0

8011

,363

n.

11.

Con

solid

ated

gro

ss d

ebt

of g

ener

al g

over

nmen

t (1)

(6 +

7 +

8 +

9 –

10)

...

....

....

....

....

....

....

....

....

...

272,

186

276,

647

277,

716

271,

637

273,

884

279,

062

280,

425

282,

149

309,

631

330,

265

e

Sour

ces :

FPS

Fin

ance

, N

BB.

(1)

Con

cept

of

debt

as

defin

ed i

n C

ounc

il Re

gula

tion

(EC

) N

o 36

05/9

3 of

22

Nov

embe

r 19

93 o

n th

e ap

plic

atio

n of

the

Pro

toco

l on

the

exc

essi

ve d

efici

t pr

oced

ure

anne

xed

to t

he T

reat

y es

tabl

ishi

ng t

he E

urop

ean

Com

mun

ity.

(2)

Mai

nly

trea

sury

cer

tifica

tes

pres

ente

d to

the

IM

F.(3

) A

djus

tmen

t to

the

val

uatio

n of

tre

asur

y ce

rtifi

cate

s an

d tr

easu

ry b

ills

to c

onve

rt t

he d

isco

unte

d va

lue

to t

he f

ace

valu

e.(4

) M

ainl

y th

e de

budg

eted

Tre

asur

y de

bt,

the

debt

s of

the

“C

aiss

e de

s dé

pôts

et

Con

sign

atio

ns –

Dep

osito

- en

con

sign

atie

kas”

, SH

LAF

(up

to 2

006)

, C

RED

IBE

(unt

il 20

02),

and

the

RIF

(fro

m 2

005

to 2

008)

, an

d co

ins

in c

ircul

atio

n.(5

) Fe

dera

l go

vern

men

t de

bt,

the

coun

terp

art

of w

hich

is

an a

sset

of

a fe

dera

l go

vern

men

t un

it.(6

) In

clud

ing

the

capi

talis

ed i

nter

est

on “

Age

ing

Fund

Tre

asur

y Bo

nds”

.(7

) D

ebt

of a

gen

eral

gov

ernm

ent

subs

ecto

r, th

e co

unte

rpar

t of

whi

ch i

s an

ass

et o

f an

othe

r ge

nera

l go

vern

men

t su

b-se

ctor

.

224

Tab

le X

V

Cu

rr

ent

an

dC

api

tal

tra

nsa

Cti

on

sa

CC

or

din

gt

ot

he

ba

lan

Ce

of

pay

men

ts

(mill

ions

of

euro

)

Firs

t ni

ne m

onth

s

2007

2008

2009

Cre

dits

D

ebits

Ba

lanc

es

Cre

dits

D

ebits

Ba

lanc

es

Cre

dits

D

ebits

Ba

lanc

es

1. C

urre

nt a

ccou

nt

....

....

....

....

....

....

....

....

....

....

....

....

....

....

..35

3,02

634

7,69

95,

327

370,

119

379,

342

–9,2

2322

7,07

322

5,18

21,

891

Goo

ds a

nd s

ervi

ces

...

....

....

....

....

....

....

....

....

....

....

....

....

....

272,

765

268,

040

4,72

528

4,40

929

2,31

9–7

,910

174,

153

171,

795

2,35

8G

oods

..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

...

218,

382

217,

755

627

224,

602

235,

838

–11,

236

132,

698

133,

120

–422

Gen

eral

mer

chan

dise

..

....

....

....

....

....

....

....

....

....

....

....

....

.20

3,74

720

6,91

0–3

,163

210,

333

225,

263

–14,

930

124,

369

127,

743

–3,3

74G

oods

for

pro

cess

ing

...

....

....

....

....

....

....

....

....

....

....

....

....

12,5

909,

527

3,06

311

,841

8,84

52,

996

6,50

84,

391

2,11

7Re

pairs

to

good

s ..

....

....

....

....

....

....

....

....

....

....

....

....

....

.45

823

921

941

126

314

834

110

024

1Pu

rcha

ses

of g

oods

in

port

s .

....

....

....

....

....

....

....

....

....

....

....

1,19

193

325

81,

560

1,14

841

21,

082

593

489

Non

-mon

etar

y go

ld

....

....

....

....

....

....

....

....

....

....

....

....

....

396

146

250

457

319

138

398

293

105

Serv

ices

...

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.54

,383

50,2

854,

098

59,8

0756

,481

3,32

641

,455

38,6

752,

780

Tran

spor

t .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

17,0

2714

,011

3,01

618

,855

15,8

333,

022

10,5

789,

601

977

Trav

el

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

8,01

812

,908

–4,8

907,

993

13,0

75–5

,082

4,99

89,

612

–4,6

14C

omm

unic

atio

n .

....

....

....

....

....

....

....

....

....

....

....

....

....

..2,

659

2,11

554

42,

647

2,05

858

92,

022

1,67

135

1C

onst

ruct

ion

...

....

....

....

....

....

....

....

....

....

....

....

....

....

...

791

579

212

881

664

217

760

509

251

Insu

ranc

e .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

801

588

213

851

752

9950

346

637

Fina

ncia

l se

rvic

es .

....

....

....

....

....

....

....

....

....

....

....

....

....

..2,

688

1,93

075

82,

783

2,41

436

91,

618

1,09

852

0D

ata-

proc

essi

ng a

nd i

nfor

mat

ion

serv

ices

...

....

....

....

....

....

....

....

...

2,17

31,

602

571

2,46

81,

811

657

2,13

11,

394

737

Roya

lties

and

lic

ence

fee

s .

....

....

....

....

....

....

....

....

....

....

....

..1,

224

1,46

0–2

3680

81,

461

–653

796

1,07

4–2

78O

ther

ser

vice

s to

ent

erpr

ises

...

....

....

....

....

....

....

....

....

....

....

..15

,012

12,1

372,

875

19,0

4915

,656

3,39

315

,657

11,6

663,

991

of w

hich

: m

erch

antin

g (n

et)

...

....

....

....

....

....

....

....

....

....

....

4,57

9–

4,57

94,

250

–4,

250

2,75

7–

2,75

7Pe

rson

al,

cultu

ral

and

recr

eatio

nal

serv

ices

...

....

....

....

....

....

....

....

..35

341

3–6

040

350

9–1

0631

230

75

Serv

ices

pro

vide

d or

rec

eive

d by

gen

eral

gov

ernm

ent,

not

incl

uded

els

ewhe

re .

..1,

633

145

1,48

81,

654

202

1,45

21,

172

122

1,05

0Se

rvic

es n

ot a

lloca

ted

...

....

....

....

....

....

....

....

....

....

....

....

...

2,00

42,

397

–393

1,41

52,

046

–631

908

1,15

5–2

47In

com

e .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.73

,040

67,7

785,

262

78,3

9673

,834

4,56

248

,152

43,8

304,

322

Earn

ed i

ncom

e .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.6,

545

1,98

84,

557

7,00

72,

495

4,51

25,

167

1,71

93,

448

Inco

me

from

dire

ct a

nd p

ortf

olio

inv

estm

ent

...

....

....

....

....

....

....

....

.66

,495

65,7

9070

571

,389

71,3

3950

42,9

8542

,111

874

Cur

rent

tra

nsfe

rs .

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.7,

221

11,8

81–4

,660

7,31

413

,189

–5,8

754,

768

9,55

7–4

,789

Gen

eral

gov

ernm

ent

...

....

....

....

....

....

....

....

....

....

....

....

....

..1,

568

6,15

3–4

,585

1,67

46,

725

–5,0

511,

471

5,32

1–3

,850

Oth

er s

ecto

rs

....

....

....

....

....

....

....

....

....

....

....

....

....

....

...

5,65

35,

728

–75

5,64

06,

464

–824

3,29

74,

236

–939

2. C

apita

l ac

coun

t ..

....

....

....

....

....

....

....

....

....

....

....

....

....

....

.21

21,

563

–1,3

5140

42,

257

–1,8

5338

764

5–2

58C

apita

l tr

ansf

ers

...

....

....

....

....

....

....

....

....

....

....

....

....

....

...

3460

3–5

6926

649

–623

190

196

–6A

cqui

sitio

ns a

nd s

ales

of

non-

prod

uced

non

-fina

ncia

l as

sets

..

....

....

....

....

..17

896

0–7

8237

81,

608

–1,2

3019

744

9–2

52

3. N

et l

endi

ng t

o th

e re

st o

f th

e w

orld

(1

+ 2

) .

....

....

....

....

....

....

....

....

.35

3,23

834

9,26

23,

976

370,

523

381,

599

–11,

076

227,

460

225,

827

1,63

3

Sour

ce :

NBB

.

225

statistical annEx

Tab

le X

VI

For

ma

tio

no

FFi

na

nc

ial

ass

ets

an

dn

ewF

ina

nc

ial

lia

bil

itie

so

Fh

ou

seh

old

s

(mill

ions

of

euro

)

Firs

t ni

ne m

onth

s

p.m

.O

utst

andi

ng a

mou

nt

at t

he e

nd o

f

Sept

embe

r 20

09

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008

2009

Form

atio

n of

fina

ncia

l as

sets

..

....

....

....

....

....

18,6

6921

,897

17,9

6418

,956

16,2

4724

,598

23,4

3121

,849

22,8

6210

,013

24,6

9887

2,00

3

At

up t

o on

e ye

ar

....

....

....

....

....

....

....

.–2

257,

460

10,3

2315

,605

21,6

8314

,904

13,5

7310

,435

7,39

789

37,

757

270,

645

Not

es,

coin

s an

d si

ght

depo

sits

...

....

....

....

.2,

117

–3,6

064,

383

3,53

76,

752

6,05

01,

208

–258

–116

–212

6,07

358

,836

Savi

ngs

depo

sits

...

....

....

....

....

....

....

..–5

,129

5,55

411

,543

17,9

3414

,180

8,33

51,

740

–8,7

741,

792

–5,3

3824

,626

168,

068

Tim

e de

posi

ts .

....

....

....

....

....

....

....

..3,

247

4,24

7–5

,299

–4,9

0993

304

11,1

8518

,108

2,89

05,

039

–18,

653

41,7

38

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

252

575

–1,2

58–3

57–2

44–1

1323

873

91,

364

856

–1,3

201,

338

Uni

ts o

f m

onet

ary

UC

Is .

....

....

....

....

....

..–7

1269

195

4–5

9990

232

8–7

9862

01,

468

548

–2,9

7066

5

At

over

one

yea

r .

....

....

....

....

....

....

....

.19

,051

16,1

537,

515

3,69

45,

682

9,27

59,

497

10,0

7716

,091

9,61

117

,847

592,

248

Tim

e de

posi

ts .

....

....

....

....

....

....

....

..–4

6722

3–5

03–6

27–3

71–6

3735

1,32

93,

431

3,18

63,

559

11,3

75

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

977

–4,1

21–8

,360

–15,

712

–17,

070

–13,

832

–10,

090

–7,7

6811

,502

5,44

09,

964

83,1

57

Shar

es a

nd o

ther

equ

ity

....

....

....

....

....

..–1

,336

162,

929

–4,1

24–2

15–8

,297

–708

3,69

610

,041

10,6

37–5

8818

9,27

8

Uni

ts o

f no

n-m

onet

ary

UC

Is .

....

....

....

....

..8,

313

9,39

23,

085

8,64

55,

732

9,56

26,

891

–1,7

67–1

7,13

9–1

7,25

8–1

,619

96,5

74

Net

cla

ims

on i

nsur

ance

tec

hnic

al r

eser

ves (1

) ..

...

11,5

6410

,643

10,3

6315

,513

17,6

0722

,479

13,3

7014

,586

8,25

77,

606

6,53

121

1,86

3

Oth

er a

sset

s (2)

....

....

....

....

....

....

....

....

.–1

57–1

,716

127

–344

–11,

118

419

361

1,33

7–6

26–4

91–9

069,

110

New

fina

ncia

l lia

bilit

ies

...

....

....

....

....

....

....

1,89

6–4

884,

153

5,40

36,

074

11,8

7612

,130

14,2

4313

,755

9,67

47,

136

180,

609

Loan

s at

up

to o

ne y

ear

...

....

....

....

....

....

.–6

59–1

,203

280

–998

–167

811

–54

154

424

608

–344

6,15

9

Loan

s at

ove

r on

e ye

ar .

....

....

....

....

....

....

3,19

12,

557

4,33

16,

505

5,86

411

,419

11,8

6713

,260

13,5

749,

627

7,26

117

1,18

6

Mor

tgag

e lo

ans

...

....

....

....

....

....

....

..2,

360

2,39

44,

947

6,16

56,

333

10,0

3710

,748

11,9

4911

,780

7,87

46,

525

140,

979

Inst

alm

ent

loan

s .

....

....

....

....

....

....

....

588

354

325

–208

–481

648

278

1,38

81,

259

1,30

654

216

,182

Oth

er .

....

....

....

....

....

....

....

....

....

.24

3–1

91–9

4154

812

735

841

–77

535

446

193

14,0

24

Oth

er l

iabi

litie

s (3)

....

....

....

....

....

....

....

..–6

35–1

,842

–458

–103

377

–354

317

830

–243

–561

219

3,26

3

Fina

ncia

l ba

lanc

e (4

) ..

....

....

....

....

....

....

....

.16

,773

22,3

8513

,812

13,5

5310

,172

12,7

2211

,301

7,60

69,

108

339

17,5

6269

1,39

4

Sour

ce :

NBB

.(1

) Es

sent

ially

life

ins

uran

ce a

nd i

nstit

utio

ns f

or o

ccup

atio

nal

retir

emen

t pr

ovis

ion.

(2)

This

ite

m c

ompr

ises

oth

er a

ccou

nts

rece

ivab

le w

ithin

the

mea

ning

of

the

ESA

95,

nam

ely

trad

e cr

edit

and

mis

cella

neou

s as

sets

on

gene

ral

gove

rnm

ent

and

finan

cial

ins

titut

ions

, in

clud

ing

in p

artic

ular

int

eres

t ac

crue

d an

d no

t du

e.(3

) Th

is i

tem

com

pris

es o

ther

acc

ount

s pa

yabl

e w

ithin

the

mea

ning

of

the

ESA

95,

suc

h as

tax

es o

r co

ntrib

utio

ns d

ue b

ut n

ot y

et p

aid,

or

inte

rest

acc

rued

and

not

due

.(4

) Th

e ba

lanc

es o

f th

e fin

anci

al a

ccou

nts

of t

he d

omes

tic s

ecto

rs d

o no

t co

rres

pond

to

the

net

finan

cing

cap

aciti

es o

r re

quire

men

ts a

s re

cord

ed in

the

rea

l acc

ount

s, o

win

g to

the

diff

eren

ces

betw

een

the

date

s of

rec

ordi

ng o

f th

e tr

ansa

ctio

ns in

the

se t

wo

acco

unts

, st

atis

tical

adj

ustm

ents

or

erro

rs a

nd o

mis

sion

s. T

hus,

for

exa

mpl

e, t

he fi

nanc

ial

acco

unts

can

not,

for

lac

k of

dat

a, r

ecor

d m

ost

of t

he t

rade

cre

dits

and

adv

ance

s.

226

Tab

le X

VII

For

ma

tio

no

FFi

na

nc

ial

ass

ets

an

dn

ewF

ina

nc

ial

lia

bil

itie

so

Fn

on

-Fin

an

cia

lc

or

por

ati

on

s

(mill

ions

of

euro

)

Firs

t ni

ne m

onth

s

p.m

.O

utst

andi

ng a

mou

nt

at t

he e

nd o

f

Sept

embe

r 20

09

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008

2009

Form

atio

n of

fina

ncia

l as

sets

..

....

....

....

....

....

79,2

7257

,142

29,5

3560

,257

30,0

5812

,388

77,9

5815

4,08

114

0,08

510

7,47

544

,655

1,42

8,09

2

At

up t

o on

e ye

ar

....

....

....

....

....

....

....

.49

,787

46,1

17–3

,627

36,1

48–1

0,52

412

,559

37,7

9926

,419

67,9

5759

,968

17,0

5642

7,35

3

Not

es,

coin

s an

d si

ght

depo

sits

...

....

....

....

.15

650

280

51,

916

1,34

62,

128

5,01

22,

985

–2,9

74–1

,127

8,30

044

,749

Oth

er d

epos

its

....

....

....

....

....

....

....

..–2

,369

3,46

232

7–3

,784

1,53

2–4

,282

16,4

6513

,411

–2,3

425,

485

–1,5

3455

,225

Oth

er (1

) ..

....

....

....

....

....

....

....

....

..52

,000

42,1

54–4

,760

38,0

16–1

3,40

214

,714

16,3

2110

,023

73,2

7255

,610

10,2

9032

7,37

9

At

over

one

yea

r .

....

....

....

....

....

....

....

.34

,062

12,3

0017

,627

25,4

0930

,899

12,8

2635

,019

89,9

9758

,381

32,1

7218

,779

905,

427

Shar

es a

nd o

ther

equ

ity (2

) ...

....

....

....

....

..19

,406

5,05

3–2

,951

2,42

918

,765

9,53

4–1

,018

60,6

7539

,721

8,92

218

,172

671,

381

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

–945

–137

2,04

2–1

,543

–1,2

281,

469

–2,0

696,

608

–1,6

08–1

,964

5,76

516

,220

Oth

er (1

) ..

....

....

....

....

....

....

....

....

..15

,600

7,38

418

,535

24,5

2313

,361

1,82

338

,105

22,7

1520

,268

25,2

15–5

,158

217,

826

Oth

er a

sset

s an

d st

atis

tical

adj

ustm

ents

(3)

....

....

.–4

,577

–1,2

7515

,535

–1,3

009,

684

–12,

997

5,14

137

,665

13,7

4715

,335

8,82

095

,312

New

fina

ncia

l lia

bilit

ies

...

....

....

....

....

....

....

82,1

4368

,027

27,1

1557

,140

26,9

637,

777

78,5

6815

2,70

914

0,67

599

,287

34,4

671,

684,

667

At

up t

o on

e ye

ar

....

....

....

....

....

....

....

.39

,417

25,6

63–4

,665

22,5

22–1

1,80

62,

966

20,8

8331

,962

–4,5

312,

546

2,11

325

3,94

4

Loan

s gr

ante

d by

cre

dit

inst

itutio

ns

....

....

....

590

–1,2

76–4

49–2

,100

2,51

3–6

,436

2,66

015

,800

–578

1,72

030

463

,154

Oth

er l

oans

(1)

....

....

....

....

....

....

....

...

35,6

8225

,433

–5,0

2123

,509

–13,

442

11,3

7719

,097

12,1

89–4

,633

–542

1,42

418

2,29

5

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

3,14

61,

506

805

1,11

2–8

77–1

,975

–875

3,97

468

01,

368

385

8,49

6

At

over

one

yea

r .

....

....

....

....

....

....

....

.42

,168

41,4

7133

,136

33,6

8338

,308

5,07

056

,210

120,

988

140,

823

93,9

8533

,256

1,41

9,28

5

Loan

s gr

ante

d by

cre

dit

inst

itutio

ns

....

....

....

4,57

21,

531

1,86

3–4

,562

1,81

82,

990

2,87

67,

024

19,4

445,

565

1,50

589

,942

Oth

er l

oans

(1)

....

....

....

....

....

....

....

...

12,4

426,

536

20,3

5424

,850

7,61

1–1

,048

19,4

7616

,454

–7,6

009,

418

–4,4

4015

9,09

0

Shar

es a

nd o

ther

equ

ity (2

) ...

....

....

....

....

..25

,747

27,7

738,

657

5,32

322

,485

9,09

531

,375

92,8

9112

6,62

273

,771

25,5

221,

133,

624

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

–594

5,63

12,

261

8,07

26,

393

–5,9

662,

483

4,62

02,

357

5,23

110

,669

36,6

28

Oth

er l

iabi

litie

s (4)

....

....

....

....

....

....

....

..55

889

3–1

,355

935

462

–259

1,47

5–2

414,

383

2,75

6–9

0111

,438

Fina

ncia

l ba

lanc

e (5

) ..

....

....

....

....

....

....

....

.–2

,871

–10,

884

2,42

03,

118

3,09

54,

610

–610

1,37

2–5

908,

188

10,1

88–2

56,5

75

Sour

ce :

NBB

.(1

) In

clud

ing

intr

asec

tora

l lo

ans

of n

on-fi

nanc

ial

corp

orat

ions

.(2

) In

clud

ing

rein

vest

ed p

rofit

s m

ade

on f

orei

gn d

irect

inv

estm

ents

.(3

) Th

is i

tem

com

pris

es m

isce

llane

ous

asse

ts o

n fin

anci

al i

nstit

utio

ns,

incl

udin

g in

par

ticul

ar i

nter

est

accr

ued

and

not

due.

In

addi

tion,

it

cove

rs e

rror

s an

d om

issi

ons

on B

elgi

um’s

finan

cial

acc

ount

vis

-à-v

is t

he r

est

of t

he w

orld

whi

ch,

fo

r co

nsis

tenc

y be

twee

n th

e ac

coun

ts,

are

rega

rded

as

unre

cord

ed c

apita

l m

ovem

ents

.(4

) Th

is i

tem

com

pris

es t

he t

echn

ical

res

erve

s of

non

-aut

onom

ous

inst

itutio

ns f

or o

ccup

atio

nal

retir

emen

t pr

ovis

ion

and

othe

r ac

coun

ts p

ayab

le w

ithin

the

mea

ning

of

the

ESA

95,

suc

h as

tax

es o

r co

ntrib

utio

ns d

ue b

ut n

ot y

et p

aid,

or

inte

rest

acc

rued

and

not

due

.(5

) Se

e no

te 4

to

tabl

e X

VI.

227

statistical annEx

Tab

le X

VIII

Fo

rm

ati

on

oF

Fin

an

cia

la

sset

sa

nd

new

Fin

an

cia

lli

ab

ilit

ies

oF

gen

era

lg

ov

ern

men

t

(mill

ions

of

euro

)

Firs

t ni

ne m

onth

s

p.m

.O

utst

andi

ng a

mou

nt

at t

he e

nd o

f

Sept

embe

r 20

09

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008

2009

Form

atio

n of

fina

ncia

l as

sets

..

....

....

....

....

....

966

4,76

64,

071

–4,6

953,

382

392

804

12,5

8921

,812

–679

–10,

360

102,

348

Dep

osits

, lo

ans

and

secu

ritie

s ot

her

than

sha

res

...

1,53

73,

318

5,28

0–4

,024

4,06

81,

349

–948

11,5

738,

177

–5,9

92–7

,149

52,3

26

With

gen

eral

gov

ernm

ent

...

....

....

....

....

.1,

194

4,42

85,

608

1,62

33,

615

1,82

0–5

3210

,587

–1,7

36–8

,200

–8,6

2032

,827

With

oth

er s

ecto

rs .

....

....

....

....

....

....

..34

2–1

,111

–328

–5,6

4845

3–4

71–4

1698

79,

913

2,20

81,

470

19,4

99

Oth

er a

sset

s (1)

....

....

....

....

....

....

....

....

.–5

701,

448

–1,2

09–6

71–6

85–9

571,

752

1,01

613

,635

5,31

3–3

,211

50,0

22

New

fina

ncia

l lia

bilit

ies

...

....

....

....

....

....

....

2,28

55,

272

6,17

3–4

,289

4,47

48,

706

540

13,3

5825

,863

4,69

510

,370

375,

888

In e

uro

....

....

....

....

....

....

....

....

....

...

4,12

36,

594

7,46

3–3

,008

5,77

49,

457

668

13,8

5022

,127

4,32

413

,309

374,

290

At

up t

o on

e ye

ar

....

....

....

....

....

....

...

–4,2

13–3

3810

–691

–1,7

9498

21,

085

7,50

018

,119

8,35

7–1

,938

72,8

13

of w

hich

:Tr

easu

ry c

ertifi

cate

s .

....

....

....

....

....

.–3

,260

1,31

8–2

96–1

,063

–133

869

334

3,73

811

,132

3,84

24,

049

46,6

33

Oth

er s

ecur

ities

..

....

....

....

....

....

...

–689

–1,7

9917

547

2–4

57–1

8410

71,

013

3,55

03,

597

–2,3

384,

417

At

over

one

yea

r .

....

....

....

....

....

....

...

8,33

56,

931

7,45

4–2

,317

7,56

88,

475

–417

6,35

04,

007

–4,0

3315

,247

301,

477

of w

hich

:Li

near

bon

ds .

....

....

....

....

....

....

...

15,0

7312

,570

11,6

287,

790

4,96

84,

125

–14

6,67

94,

512

–2,6

4510

,620

236,

035

Oth

er s

ecur

ities

..

....

....

....

....

....

...

–6,6

24–6

,756

–5,4

40–8

,948

–5,5

2766

4–1

,531

–1,1

28–5

60–8

567,

174

21,4

06

In f

orei

gn c

urre

ncie

s .

....

....

....

....

....

....

..–1

,838

–1,3

22–1

,291

–1,2

81–1

,300

–751

–128

–492

3,73

637

1–2

,939

1,59

8

At

up t

o on

e ye

ar

....

....

....

....

....

....

...

–386

427

–240

–761

11–3

81–5

5–4

924,

228

863

–2,9

391,

025

At

over

one

yea

r .

....

....

....

....

....

....

...

–1,4

52–1

,748

–1,0

50–5

20–1

,310

–370

–73

0–4

92–4

920

572

Fina

ncia

l ba

lanc

e (2

) ..

....

....

....

....

....

....

....

.–1

,319

–506

–2,1

02–4

06–1

,092

–8,3

1426

4–7

69–4

,050

–5,3

74–2

0,73

1–2

73,5

40

Sour

ce :

NBB

.(1

) Sh

ares

and

oth

er e

quity

, U

CI

units

, fin

anci

al d

eriv

ativ

es a

nd o

ther

acc

ount

s re

ceiv

able

with

in t

he m

eani

ng o

f th

e ES

A 9

5.(2

) Se

e no

te 4

to

tabl

e X

VI.

228

Tab

le X

IX

For

ma

tio

no

FFi

na

nc

ial

ass

ets

an

dn

ewF

ina

nc

ial

lia

bil

itie

so

Fm

on

eta

ry

Fin

an

cia

lin

stit

uti

on

s(1

)

(dat

a on

a t

errit

oria

l ba

sis,

mill

ions

of

euro

)

Form

atio

n of

fina

ncia

l as

sets

Inte

rban

k cl

aim

s .

....

....

....

....

....

....

....

..

Firs

t ni

ne m

onth

s

p.m

.O

utst

andi

ng a

mou

nt

at t

he e

nd o

f

Sept

embe

r 20

09

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008

2009

–47,

874

317

15,6

8059

,190

48,1

1558

,245

47,9

0312

9,71

9–5

2,46

412

5,57

2–7

4,55

339

7,70

8Be

lgia

n M

FIs

...

....

....

....

....

....

....

....

.–2

6,50

9–5

,436

–6,9

038,

112

7,09

315

,998

2,90

132

,006

27,6

7575

,253

–30,

886

94,3

44Fo

reig

n M

FIs

...

....

....

....

....

....

....

....

.–2

1,36

65,

753

22,5

8351

,078

41,0

2242

,248

45,0

0397

,713

–80,

139

50,3

19–4

3,66

730

3,36

4Lo

ans (2

) ..

....

....

....

....

....

....

....

....

....

12,4

8414

,280

21,0

9114

,943

19,4

6551

,718

31,1

7040

,886

–11,

298

22,8

87–1

3,00

938

8,21

9of

whi

ch :

Hou

seho

lds

...

....

....

....

....

....

....

....

2,05

12,

076

3,28

45,

625

6,73

413

,367

12,1

297,

634

–23,

835

–5,7

30–7

,146

101,

927

Non

-fina

ncia

l co

rpor

atio

ns

....

....

....

....

..2,

293

–749

–1,6

95–7

,373

–1,4

711,

190

499

18,1

172,

190

3,26

165

096

,409

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

..–1

2,42

928

,110

–11,

453

2,17

89,

195

10,5

86–8

,135

7,22

540

,726

17,5

22–1

5,70

626

1,44

1of

whi

ch :

Gen

eral

gov

ernm

ent

...

....

....

....

....

....

–18,

660

–9,4

97–7

,908

–7,9

37–5

,465

–137

–4,7

11–1

3,46

868

11,

250

4,50

354

,382

Rest

of

the

wor

ld .

....

....

....

....

....

....

.5,

917

38,2

09–2

,423

9,75

314

,409

11,4

87–3

,677

19,0

024,

190

303

–29,

734

154,

705

Oth

er a

sset

s .

....

....

....

....

....

....

....

....

.9,

240

4,38

0–1

,524

8,39

129

,472

7,85

021

,742

44,8

5535

,508

12,4

06–5

1,73

118

4,19

9To

tal

...

....

....

....

....

....

....

....

....

....

..–3

8,58

047

,088

23,7

9584

,701

106,

247

128,

400

92,6

8122

2,68

612

,472

178,

387

–154

,999

1,23

1,56

8H

ouse

hold

s .

....

....

....

....

....

....

....

....

1,80

322

33,

082

5,66

56,

718

13,3

4512

,274

8,01

6–2

3,88

4–5

,765

–7,6

0310

3,38

9N

on-fi

nanc

ial

corp

orat

ions

..

....

....

....

....

..3,

445

–908

–4,5

49–6

,109

–2,2

041,

110

2,14

721

,178

5,87

98,

063

–880

108,

372

Gen

eral

gov

ernm

ent

...

....

....

....

....

....

..–1

9,35

7–1

0,94

9–8

,969

–7,8

56–5

,999

–558

–4,3

07–1

3,83

81,

932

1,06

63,

628

81,7

72Fi

nanc

ial

inst

itutio

ns

....

....

....

....

....

....

.–2

2,89

8–4

,508

–5,4

5422

,961

27,9

7513

,831

34,0

9863

,402

116,

708

111,

311

–54,

336

313,

044

Rest

of

the

wor

ld .

....

....

....

....

....

....

...

–1,5

7263

,230

39,6

8470

,040

79,7

5710

0,67

248

,470

143,

929

–88,

163

63,7

13–9

5,80

962

4,99

1N

ew fi

nanc

ial

liabi

litie

sIn

terb

ank

liabi

litie

s .

....

....

....

....

....

....

....

–57,

890

17,5

8378

657

,646

48,2

3189

,244

74,5

7111

0,73

2–9

8,29

110

3,03

6–1

15,5

3137

7,04

9Be

lgia

n M

FIs

...

....

....

....

....

....

....

....

.–2

6,50

9–5

,436

–6,9

038,

112

7,09

315

,998

2,90

132

,006

27,6

7575

,253

–30,

886

94,3

44Fo

reig

n M

FIs

...

....

....

....

....

....

....

....

.–3

1,38

123

,019

7,68

949

,534

41,1

3873

,246

71,6

7078

,726

–125

,966

27,7

83–8

4,64

528

2,70

5C

ash

and

depo

sits

(2)

....

....

....

....

....

....

...

4,80

828

,182

22,6

7621

,775

40,0

3047

,655

7,11

549

,265

34,1

8440

,561

–5,3

2452

6,73

7of

whi

ch :

Hou

seho

lds

...

....

....

....

....

....

....

....

303

5,82

07,

219

10,6

2215

,513

13,7

399,

828

7,68

16,

605

2,09

516

,839

240,

381

Non

-fina

ncia

l co

rpor

atio

ns

....

....

....

....

..–3

981,

973

4,02

41,

423

–613

1,85

19,

295

9,22

5–1

,828

1,99

55,

023

77,2

38Fi

xed-

inco

me

secu

ritie

s .

....

....

....

....

....

....

4,79

2–5

,777

–4,1

19–8

,900

–5,4

99–9

,558

–400

13,9

816,

745

11,4

3424

,644

96,4

16Sa

ving

s no

tes

...

....

....

....

....

....

....

....

–3,0

51–4

,790

–4,0

33–6

,976

–7,3

57–7

,280

–2,8

631,

358

2,40

538

36,

923

38,8

65O

ther

fixe

d-in

com

e se

curit

ies

...

....

....

....

...

7,84

3–9

87–8

6–1

,924

1,85

8–2

,278

2,46

312

,623

4,34

011

,051

17,7

2157

,551

Oth

er l

iabi

litie

s an

d st

atis

tical

adj

ustm

ents

(3)

....

...

9,71

07,

099

4,45

114

,180

23,4

851,

059

11,3

9648

,707

69,8

3423

,356

–58,

788

231,

365

Tota

l .

....

....

....

....

....

....

....

....

....

....

–38,

580

47,0

8823

,794

84,7

0110

6,24

712

8,40

092

,681

222,

686

12,4

7217

8,38

7–1

54,9

991,

231,

568

Hou

seho

lds

...

....

....

....

....

....

....

....

..–2

,491

396

3,97

12,

185

8,97

25,

526

7,07

811

,832

9,85

66,

511

24,3

9329

4,02

0N

on-fi

nanc

ial

corp

orat

ions

..

....

....

....

....

..–2

,012

3,29

47,

678

2,53

2–5

,855

1,57

612

,841

6,34

8–2

3,57

0–8

,273

18,2

4392

,713

Gen

eral

gov

ernm

ent

...

....

....

....

....

....

..21

2–3

6–1

,187

–214

–6–6

7–4

801,

021

15,8

976,

867

–10,

418

21,2

84Fi

nanc

ial

inst

itutio

ns

....

....

....

....

....

....

.–1

8,92

1–1

,348

–6,7

1022

,089

37,0

0219

,884

11,7

6665

,770

87,1

6287

,920

–76,

322

256,

104

Rest

of

the

wor

ld .

....

....

....

....

....

....

...

–15,

368

44,7

8120

,043

58,1

0866

,135

101,

480

61,4

7713

7,71

5–7

6,87

385

,361

–110

,895

567,

447

Sour

ce :

NBB

.(1

) C

redi

t in

stitu

tions

, m

onet

ary

UC

Is a

nd m

onet

ary

auth

oriti

es.

(2)

Oth

er t

han

thos

e in

clud

ed i

n in

terb

ank

tran

sact

ions

.(3

) St

atis

tical

adj

ustm

ents

are

due

to

the

equa

lisat

ion

of t

he t

otal

of

finan

cial

ass

ets

and

liabi

litie

s, B

elgi

an M

FIs

bein

g tr

eate

d as

pur

e fin

anci

al i

nter

med

iarie

s.

229

statistical annEx

Tab

le X

X

For

ma

tio

no

Fa

sset

sa

nd

new

lia

bil

itie

so

FFi

na

nc

ial

inte

rm

edia

rie

so

ther

th

an

mo

net

ar

yi

nst

itu

tio

ns

(mill

ions

of

euro

)

Non

-mon

etar

y U

CIs

Form

atio

n of

fina

ncia

l as

sets

..

....

....

....

....

..

Firs

t ni

ne m

onth

s

p.m

.O

utst

andi

ng a

mou

nt

at t

he e

nd o

f

Sept

embe

r 20

09

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008

2009

18,5

2412

,110

3,88

64,

029

6,24

06,

492

7,93

5–1

,851

–12,

879

–6,2

164,

638

94,5

81D

epos

its .

....

....

....

....

....

....

....

....

...

1,26

42,

041

2,95

72,

390

1,99

41,

861

–655

–6,9

96–2

,961

–3,5

19–2

,803

15,7

79Fi

xed-

inco

me

secu

ritie

s .

....

....

....

....

....

..4,

281

1,52

920

3–4

894,

728

–1,1

233,

130

7,45

0–8

6126

582

130

,442

Shar

es a

nd o

ther

equ

ity (1

) ...

....

....

....

....

..9,

630

5,44

41,

753

338

–2,4

6541

4–1

,222

–4,2

50–4

3915

95,

211

27,1

33U

CI

units

...

....

....

....

....

....

....

....

....

3,33

41,

962

–2,6

5320

5–5

5,85

55,

058

–141

–5,2

43–3

,385

1,27

214

,411

Oth

er a

sset

s .

....

....

....

....

....

....

....

...

151,

134

1,62

71,

583

1,98

8–5

151,

624

2,08

6–3

,376

264

135

6,81

6N

ew fi

nanc

ial

liabi

litie

s .

....

....

....

....

....

....

18,5

2412

,110

3,88

64,

029

6,24

06,

492

7,93

5–1

,851

–12,

879

–6,2

164,

638

94,5

81U

CI

units

hel

d by

Bel

gian

hou

seho

lds

...

....

...

11,1

758,

993

4,99

85,

335

4,22

21,

471

5,09

3–3

,613

–5,7

25–7

,630

–245

68,6

20U

CI

units

hel

d by

oth

er i

nves

tors

..

....

....

....

7,34

93,

117

–1,1

11–1

,307

2,01

95,

021

2,84

234

3–5

,040

1,32

83,

640

23,0

47O

ther

ass

ets

...

....

....

....

....

....

....

....

.0

00

00

00

1,41

9–2

,114

851,

243

2,91

3Fi

nanc

ial

bala

nce

(2)

....

....

....

....

....

....

....

.0

00

00

00

00

00

0In

sura

nce

com

pani

es a

nd i

nstit

utio

ns f

or o

ccup

atio

nal

retir

emen

t pr

ovis

ion

Form

atio

n of

fina

ncia

l as

sets

..

....

....

....

....

..8,

996

9,98

310

,520

16,4

0520

,422

22,4

7815

,522

17,6

108,

655

10,2

559,

507

241,

713

Dep

osits

...

....

....

....

....

....

....

....

....

.36

743

01,

784

3,32

02,

587

75–8

96–8

793,

213

–933

–1,9

1211

,981

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

363

3,11

51,

733

11,7

2914

,867

16,0

0214

,896

12,1

091,

441

6,21

718

,307

148,

570

Loan

s .

....

....

....

....

....

....

....

....

....

.85

546

343

–104

–107

–672

241

126

1,43

31,

587

1,13

913

,313

Shar

es a

nd o

ther

equ

ity

....

....

....

....

....

..51

451

83,

470

–1,2

5076

2,12

7–1

,314

4,34

86,

162

3,17

8–7

,221

24,0

85U

CI

units

...

....

....

....

....

....

....

....

....

7,16

84,

431

2,97

82,

206

2,53

84,

250

2,33

01,

875

–5,4

96–1

,475

–1,2

1732

,369

Oth

er a

sset

s .

....

....

....

....

....

....

....

...

499

943

212

503

461

697

264

301,

902

1,68

141

211

,395

New

fina

ncia

l lia

bilit

ies

...

....

....

....

....

....

..11

,069

10,6

8910

,758

16,3

9020

,380

23,9

2516

,709

15,4

3312

,025

10,4

568,

918

241,

067

Net

cla

ims

of h

ouse

hold

s on

life

insu

ranc

e re

serv

es

and

inst

itutio

ns fo

r occ

upat

iona

l ret

irem

ent p

rovi

sion

9,38

99,

328

8,56

913

,035

15,1

0420

,170

11,4

0313

,646

8,18

57,

205

6,15

717

7,32

7O

ther

ins

uran

ce t

echn

ical

res

erve

s .

....

....

....

557

637

1,06

91,

580

2,19

71,

838

1,75

734

173

074

51,

140

28,2

86O

ther

lia

bilit

ies

...

....

....

....

....

....

....

...

1,12

372

51,

119

1,77

53,

078

1,91

73,

549

1,44

73,

110

2,50

61,

621

35,4

54Fi

nanc

ial

bala

nce

...

....

....

....

....

....

....

...

–2,0

73–7

06–2

3815

42–1

,447

–1,1

872,

177

–3,3

70–2

0158

964

6O

ther

(3)

Form

atio

n of

fina

ncia

l as

sets

..

....

....

....

....

..6,

211

5,02

67,

612

5,77

8–4

,036

7,78

030

,230

47,3

9056

,273

26,9

6314

,085

205,

712

Dep

osits

...

....

....

....

....

....

....

....

....

.15

071

1–2

993,

587

951,

768

299

–109

7,09

1–1

,189

–6,1

136,

507

Loan

s .

....

....

....

....

....

....

....

....

....

.2,

156

1,25

03,

200

1,59

526

780

514

,575

10,4

9939

,646

23,9

106,

621

103,

767

Shar

es a

nd o

ther

equ

ity

....

....

....

....

....

..3,

131

2,09

93,

671

–1,6

19–2

,461

4,91

34,

145

29,3

755,

808

115

4,18

957

,805

Oth

er a

sset

s .

....

....

....

....

....

....

....

...

775

965

1,04

02,

215

–1,9

3629

311

,212

7,62

43,

728

4,12

69,

388

37,6

33N

ew fi

nanc

ial

liabi

litie

s .

....

....

....

....

....

....

6,49

44,

578

6,00

86,

801

–4,6

756,

090

29,5

0146

,126

58,1

6429

,133

16,7

3621

2,30

2Lo

ans

...

....

....

....

....

....

....

....

....

...

2,25

33,

450

799

8,31

3–3

,880

1,49

79,

157

9,74

811

,794

10,3

102,

587

56,4

35Sh

ares

and

oth

er e

quity

..

....

....

....

....

....

4,62

41,

177

2,90

1–6

8–6

34,

165

18,9

7731

,715

2,03

62,

064

964

79,2

60O

ther

lia

bilit

ies

...

....

....

....

....

....

....

...

–383

–49

2,30

8–1

,444

–732

429

1,36

74,

664

44,3

3516

,760

13,1

8576

,607

Fina

ncia

l ba

lanc

e .

....

....

....

....

....

....

....

.–2

8344

71,

604

–1,0

2363

81,

689

729

1,26

4–1

,892

–2,1

70–2

,652

–6,5

90

Sour

ces :

Bel

gian

Ass

ocia

tion

of P

ensi

on I

nstit

utio

ns,

BEA

MA

, C

BFA

, N

BB.

(1)

Incl

udin

g re

al e

stat

e ce

rtifi

cate

s.(2

) N

on-m

onet

ary

UC

Is a

re t

reat

ed a

s pu

re fi

nanc

ial

inte

rmed

iarie

s, w

ith n

o fin

anci

al b

alan

ce.

(3)

Fina

ncia

l ho

ldin

g co

mpa

nies

, re

al e

stat

e in

vest

men

t fu

nds

with

fixe

d ca

pita

l (S

icafi

), pr

ivat

e cl

osed

-end

equ

ity f

unds

(Pr

icaf

), un

dert

akin

gs f

or i

nves

tmen

t in

cla

ims,

mor

tgag

e co

mpa

nies

, re

gion

al s

ocia

l ho

usin

g co

mpa

nies

, fin

ance

com

pani

es,

inve

stm

ent

firm

s

and

UC

I m

anag

emen

t co

mpa

nies

.

230

Tab

le X

XI

Net

iss

ues

of

sec

ur

itie

s(1

) by

fiN

aN

cia

l(2

) aN

dN

oN

-fiN

aN

cia

lc

or

por

ati

oN

sa

Nd

geN

era

lg

ov

erN

meN

t

(mill

ions

of

euro

)

Firs

t ni

ne m

onth

s

p.m

.O

utst

andi

ng a

mou

nt

at t

he e

nd o

f

Sept

embe

r 20

09

2000

2001

2002

2003

2004

2005

2006

2007

2008

2008

2009

Fixe

d-in

com

e se

curit

ies

...

....

....

....

....

....

....

9,54

26,

053

5,76

5–3

,806

–1,8

36–1

2,00

31,

878

35,8

4273

,706

39,3

0470

,121

526,

694

Fina

ncia

l an

d no

n-fin

anci

al c

orpo

ratio

ns

....

....

..6,

856

1,33

598

8–7

7360

8–1

6,72

63,

111

26,0

3251

,335

34,9

9553

,553

216,

605

Secu

ritie

s at

up

to o

ne y

ear

...

....

....

....

....

7,75

9–1

,212

1,04

8–2

6666

7–3

,181

–1,5

104,

262

2,08

48,

018

14,5

3134

,794

Secu

ritie

s at

ove

r on

e ye

ar .

....

....

....

....

...

–903

2,54

7–6

0–5

07–5

9–1

3,54

54,

621

21,7

7049

,252

26,9

7739

,023

181,

811

Gen

eral

gov

ernm

ent

...

....

....

....

....

....

....

2,68

64,

717

4,77

7–3

,033

–2,4

444,

723

–1,2

339,

810

22,3

704,

310

16,5

6731

0,08

9

Secu

ritie

s at

up

to o

ne y

ear

...

....

....

....

....

–4,3

1165

1–3

61–1

,355

–574

304

385

4,25

818

,910

8,30

3–1

,226

52,0

76

Secu

ritie

s at

ove

r on

e ye

ar .

....

....

....

....

...

6,99

74,

066

5,13

8–1

,678

–1,8

704,

419

–1,6

185,

551

3,46

0–3

,993

17,7

9325

8,01

3

Shar

es

....

....

....

....

....

....

....

....

....

....

.30

,824

29,2

3212

,132

4,02

222

,699

13,2

6253

,507

144,

571

141,

525

81,7

8331

,718

1,27

2,95

7

List

ed s

hare

s .

....

....

....

....

....

....

....

....

.7,

939

5,71

11,

048

818

4,18

25,

407

5,64

611

,371

13,9

251,

413

472

164,

800

Unl

iste

d sh

ares

and

oth

er e

quity

(3)

....

....

....

...

22,8

8523

,522

11,0

843,

205

18,5

187,

855

47,8

6113

3,20

012

7,60

080

,369

31,2

461,

108,

157

p.m

. Re

cour

se b

y fin

anci

al a

nd n

on-fi

nanc

ial

co

rpor

atio

ns t

o th

e se

curit

ies

mar

ket

...

....

...

37,6

80 30

,568

13,1

20 3,

250

23,3

07 –3

,464

56,6

18 17

0,60

3 19

2,86

1 11

6,77

8 85

,271

1,48

9,56

2

Sour

ces :

CBF

A,

Euro

next

Bru

ssel

s, N

BB.

(1)

Excl

udin

g de

rivat

ives

and

uni

ts o

f U

CIs

.(2

) Ex

clud

ing

the

Euro

syst

em.

(3)

Incl

udin

g re

inve

sted

pro

fits

on d

irect

inv

estm

ents

eff

ecte

d in

Bel

gium

by

fore

ign

com

pani

es.

231

statistical annEx

Tab

le X

XII

Inte

res

tr

ate

s

(end

of

quar

ter,

annu

al p

erce

ntag

es)

Yie

ld o

n th

e in

terb

ank

mar

ket

Y

ield

on

the

Belg

ian

seco

ndar

y m

arke

t in

sec

uriti

es i

ssue

d by

Bel

gian

gen

eral

gov

ernm

ent

Ove

rnig

ht (1

)

Thre

e-m

onth

(2)

Thre

e-m

onth

Tr

easu

ry c

ertifi

cate

s

Line

ar b

onds

Ra

tes

of t

he t

en-y

ear

be

nchm

ark

linea

r bo

nd

A

t on

e ye

ar

At

two

year

s

At

five

year

s

2005

I

..

....

....

....

....

....

2.12

2.15

2.03

2.24

2.48

3.09

3.73

II

..

....

....

....

....

....

2.17

2.11

2.00

1.98

2.08

2.53

3.22

III

.

....

....

....

....

....

.2.

152.

182.

032.

202.

352.

723.

19

IV

..

....

....

....

....

....

2.42

2.49

2.27

2.68

2.80

3.04

3.32

2006

I

..

....

....

....

....

....

2.62

2.82

2.62

3.04

3.25

3.59

3.82

II

..

....

....

....

....

....

2.89

3.06

2.82

3.33

3.55

3.87

4.09

III

.

....

....

....

....

....

.3.

103.

423.

173.

553.

563.

593.

69

IV

..

....

....

....

....

....

3.69

3.73

3.49

3.82

3.87

3.92

3.99

2007

I

..

....

....

....

....

....

3.90

3.92

3.78

4.01

4.02

4.02

4.11

II

..

....

....

....

....

....

4.14

4.18

4.01

4.35

4.50

4.54

4.63

III

.

....

....

....

....

....

.4.

164.

793.

934.

044.

184.

264.

49

IV

..

....

....

....

....

....

3.92

4.68

3.79

4.13

4.11

4.22

4.47

2008

I

..

....

....

....

....

....

4.16

4.73

3.81

3.82

3.78

3.92

4.31

II

..

....

....

....

....

....

4.27

4.95

4.22

4.64

4.79

4.87

4.87

III

.

....

....

....

....

....

.4.

175.

283.

783.

713.

824.

224.

61

IV

..

....

....

....

....

....

2.35

2.89

1.76

1.99

2.51

3.32

3.77

2009

I

..

....

....

....

....

....

1.64

1.51

0.77

1.01

1.70

3.21

3.94

II

..

....

....

....

....

....

0.40

1.10

0.56

0.84

1.52

2.96

3.95

III

.

....

....

....

....

....

.0.

530.

750.

380.

701.

402.

683.

65

IV

..

....

....

....

....

....

0.41

0.70

0.33

0.84

1.43

2.74

3.72

Sour

ces :

EC

B, N

BB.

(1)

The

wei

ghte

d av

erag

e in

tere

st r

ate

on t

he i

nter

bank

mar

ket

of t

he e

uro

area

for

uns

ecur

ed o

vern

ight

tra

nsac

tions

(i.e

. tr

ansa

ctio

ns n

ot b

acke

d by

sec

uriti

es)

in e

uro

(Eon

ia).

(2)

Ave

rage

int

eres

t ra

te o

ffer

ed o

n th

e in

terb

ank

mar

ket

of t

he e

uro

area

for

uns

ecur

ed t

hree

-mon

th t

rans

actio

ns i

n eu

ro (

Eurib

or).

232

Tab

le X

XIII

M

ain

in

ter

est

ra

tes

of

the

eur

osy

steM

(ann

ual

perc

enta

ges)

Dat

es o

f an

noun

cem

ent

of c

hang

es

Rate

on

the

mai

n re

finan

cing

ope

ratio

ns (1

)

Ra

te o

n th

e m

argi

nal

lend

ing

faci

lity

Ra

te o

n th

e de

posi

t fa

cilit

y

1998

22

Dec

embe

r .

....

....

....

....

....

....

....

....

....

....

.3.

004.

50 (2

)2.

00 (2

)

1999

8

Apr

il .

....

....

....

....

....

....

....

....

....

....

....

.2.

503.

501.

50

4 N

ovem

ber

....

....

....

....

....

....

....

....

....

....

..3.

004.

002.

0020

00

3 Fe

brua

ry

....

....

....

....

....

....

....

....

....

....

...

3.25

4.25

2.25

16

Mar

ch

....

....

....

....

....

....

....

....

....

....

....

.3.

504.

502.

50

27 A

pril

...

....

....

....

....

....

....

....

....

....

....

...

3.75

4.75

2.75

8

June

...

....

....

....

....

....

....

....

....

....

....

....

4.25

5.25

3.25

31

Aug

ust

...

....

....

....

....

....

....

....

....

....

....

.4.

505.

503.

50

5 O

ctob

er .

....

....

....

....

....

....

....

....

....

....

...

4.75

5.75

3.75

2001

10

May

...

....

....

....

....

....

....

....

....

....

....

....

4.50

5.50

3.50

30

Aug

ust

...

....

....

....

....

....

....

....

....

....

....

.4.

255.

253.

25

17 S

epte

mbe

r .

....

....

....

....

....

....

....

....

....

....

3.75

4.75

2.75

8

Nov

embe

r ..

....

....

....

....

....

....

....

....

....

....

3.25

4.25

2.25

2002

5

Dec

embe

r .

....

....

....

....

....

....

....

....

....

....

.2.

753.

751.

7520

03

6 M

arch

..

....

....

....

....

....

....

....

....

....

....

...

2.50

3.50

1.50

5

June

...

....

....

....

....

....

....

....

....

....

....

....

2.00

3.00

1.00

2004

–

..

....

....

....

....

....

....

....

....

....

....

....

....

2005

1

Dec

embe

r .

....

....

....

....

....

....

....

....

....

....

.2.

253.

251.

2520

06

2 M

arch

..

....

....

....

....

....

....

....

....

....

....

...

2.50

3.50

1.50

8

June

...

....

....

....

....

....

....

....

....

....

....

....

2.75

3.75

1.75

3

Aug

ust

...

....

....

....

....

....

....

....

....

....

....

.3.

004.

002.

00

5 O

ctob

er .

....

....

....

....

....

....

....

....

....

....

...

3.25

4.25

2.25

7

Dec

embe

r .

....

....

....

....

....

....

....

....

....

....

.3.

504.

502.

5020

07

8 M

arch

..

....

....

....

....

....

....

....

....

....

....

...

3.75

4.75

2.75

6

June

...

....

....

....

....

....

....

....

....

....

....

....

4.00

5.00

3.00

2008

3

July

..

....

....

....

....

....

....

....

....

....

....

....

.4.

255.

253.

25

8 O

ctob

er .

....

....

....

....

....

....

....

....

....

....

...

3.75

4.25

3.25

6

Nov

embe

r ..

....

....

....

....

....

....

....

....

....

....

3.25

3.75

2.75

4

Dec

embe

r .

....

....

....

....

....

....

....

....

....

....

.2.

503.

002.

0020

09

15 J

anua

ry .

....

....

....

....

....

....

....

....

....

....

...

2.00

3.00

1.00

5

Mar

ch

....

....

....

....

....

....

....

....

....

....

....

.1.

502.

500.

50

2 A

pril

...

....

....

....

....

....

....

....

....

....

....

...

1.25

2.25

0.25

7

May

...

....

....

....

....

....

....

....

....

....

....

....

1.00

1.75

0.25

Sour

ce :

ECB.

(1)

Unt

il th

e op

erat

ion

sett

led

on 2

1 Ju

ne 2

000,

fixe

d ra

te o

f th

e w

eekl

y al

lotm

ents

of

two-

wee

k cr

edits

. Fo

r th

e tr

ansa

ctio

ns s

ettle

d fr

om 2

8 Ju

ne 2

000

to 1

4 O

ctob

er 2

008,

min

imum

bid

rat

e at

the

ten

ders

for

the

cre

dit

allo

tmen

ts.

For

tran

sact

ions

set

tled

fr

om 1

5 O

ctob

er 2

008,

fixe

d ra

te o

f th

e w

eekl

y on

e-w

eek

cred

it al

lotm

ents

.(2

) Ex

cept

for

the

per

iod

from

4 t

o 21

Jan

uary

199

9, d

urin

g w

hich

the

rat

e fo

r th

e m

argi

nal l

endi

ng f

acili

ty w

as 3

.25

p.c.

and

tha

t fo

r th

e de

posi

t fa

cilit

y 2.

75 p

.c. T

he p

urpo

se o

f th

is n

arro

wer

“co

rrid

or”

(50

basi

s po

ints

) was

to

faci

litat

e th

e tr

ansi

tion

of m

arke

t op

erat

ors

to t

he n

ew s

yste

m.

233

statistical annEx

Tab

le X

XIV

Ex

ch

an

gE

ra

tEs

(nat

iona

l m

onet

ary

units

per

eur

o, a

nnua

l av

erag

es)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

US

dolla

r .

....

....

....

....

....

....

....

....

....

....

....

....

...

0.92

40.

896

0.94

61.

131

1.24

41.

244

1.25

61.

370

1.47

11.

395

Japa

nese

yen

..

....

....

....

....

....

....

....

....

....

....

....

..99

.510

8.7

118.

113

1.0

134.

413

6.9

146.

016

1.3

152.

513

0.3

Swis

s fr

anc

...

....

....

....

....

....

....

....

....

....

....

....

...

1.55

81.

511

1.46

71.

521

1.54

41.

548

1.57

31.

643

1.58

71.

510

Kor

ean

won

(1)

....

....

....

....

....

....

....

....

....

....

....

....

1,04

3.5

1,15

4.8

1,17

5.5

1,34

6.9

1,42

2.6

1,27

3.6

1,19

8.6

1,27

3.0

1,60

6.1

1,77

2.9

Hon

g K

ong

dolla

r (1)

....

....

....

....

....

....

....

....

....

....

...

7.19

86.

986

7.37

58.

808

9.68

89.

677

9.75

510

.691

11.4

5410

.811

Sing

apor

e do

llar (1

) ..

....

....

....

....

....

....

....

....

....

....

..1.

592

1.60

41.

691

1.97

02.

102

2.07

01.

994

2.06

42.

076

2.02

4

Can

adia

n do

llar

...

....

....

....

....

....

....

....

....

....

....

...

1.37

11.

386

1.48

41.

582

1.61

71.

509

1.42

41.

468

1.55

91.

585

Nor

weg

ian

kron

e .

....

....

....

....

....

....

....

....

....

....

....

8.11

38.

048

7.50

98.

003

8.37

08.

009

8.04

78.

017

8.22

48.

728

Aus

tral

ian

dolla

r .

....

....

....

....

....

....

....

....

....

....

....

.1.

589

1.73

21.

738

1.73

81.

691

1.63

21.

667

1.63

51.

742

1.77

3

Poun

d st

erlin

g .

....

....

....

....

....

....

....

....

....

....

....

..0.

610

0.62

20.

629

0.69

20.

679

0.68

40.

682

0.68

40.

796

0.89

1

Swed

ish

kron

a .

....

....

....

....

....

....

....

....

....

....

....

..8.

445

9.25

59.

161

9.12

49.

124

9.28

29.

254

9.25

09.

615

10.6

19

Dan

ish

kron

e .

....

....

....

....

....

....

....

....

....

....

....

...

7.45

47.

452

7.43

17.

431

7.44

07.

452

7.45

97.

451

7.45

67.

446

Cze

ch k

orun

a .

....

....

....

....

....

....

....

....

....

....

....

...

35.6

034

.07

30.8

031

.85

31.8

929

.78

28.3

427

.77

24.9

526

.44

Esto

nian

kro

on .

....

....

....

....

....

....

....

....

....

....

....

..15

.65

15.6

515

.65

15.6

515

.65

15.6

515

.65

15.6

515

.65

15.6

5

Hun

garia

n fo

rint

....

....

....

....

....

....

....

....

....

....

....

..26

0.0

256.

624

3.0

253.

625

1.7

248.

126

4.3

251.

425

1.5

280.

3

Bulg

aria

n le

v .

....

....

....

....

....

....

....

....

....

....

....

....

1.94

821.

9492

1.94

901.

9533

1.95

581.

9558

1.95

581.

9558

1.95

58

Rom

ania

n le

u (2

) ..

....

....

....

....

....

....

....

....

....

....

....

19,9

2226

,004

31,2

7037

,551

40,5

103.

6209

3.52

583.

3353

3.68

264.

2399

Lith

uani

an l

itas (1

) ..

....

....

....

....

....

....

....

....

....

....

...

3.69

53.

582

3.45

93.

453

3.45

33.

453

3.45

33.

453

3.45

33.

453

Latv

ian

lats

(1)

....

....

....

....

....

....

....

....

....

....

....

....

.0.

559

0.56

00.

581

0.64

10.

665

0.69

60.

696

0.70

00.

703

0.70

6

Polis

h zl

oty

...

....

....

....

....

....

....

....

....

....

....

....

...

4.00

83.

672

3.85

74.

400

4.52

74.

023

3.89

63.

784

3.51

24.

328

p.m

.Ef

fect

ive

euro

exc

hang

era

te(3

) (in

dex

1st

quar

ter

1999

=1

00)

...

....

....

....

....

....

....

. 86

.8 87

.3 89

.7 10

0.3

104.

2 10

2.7

102.

6 10

6.3

110.

5 11

1.7

Sour

ce :

ECB.

(1)

As

the

ECB

has

only

pro

vide

d of

ficia

l re

fere

nce

rate

s si

nce

2001

, th

e ra

tes

show

n in

the

tab

le f

or t

he y

ear

2000

are

ind

icat

ive.

(2)

From

200

5, n

ew R

oman

ian

leu.

(3)

Dat

a co

mpi

led

on t

he b

asis

of

the

wei

ghte

d av

erag

es o

f th

e bi

late

ral

euro

exc

hang

e ra

tes.

The

wei

ghtin

gs a

re c

alcu

late

d fr

om t

he t

rade

in

man

ufac

ture

d pr

oduc

ts d

urin

g 19

95-1

997

and

1999

-200

1 w

ith t

he t

radi

ng p

artn

ers

(incl

udin

g C

hina

) w

hose

cur

renc

ies

ap

pear

in

the

tabl

e, a

nd t

ake

acco

unt

of t

he e

ffec

ts o

f th

ird m

arke

ts.

235

mEthodological notE

Methodological note

Unless otherwise indicated, when data are compared from year to year, they all relate to the same period of the years in question. In the tables, the totals shown may differ from the sum of the items owing to rounding.

In order to provide an update on various key economic data relating to Belgium in the year 2009 as a whole, it was necessary to make estimates, as the statistical material for that year is inevitably sometimes still very fragmentary. In the tables and charts, these estimates, which were finalised at the end of January 2010, are marked “e”. They represent mere orders of magnitude intended to demonstrate the trends which already seemed to be emerging. For the periods for which data are published, the sources used are mainly the NAI, the DGSEI and the Bank. The comments on the international environment and the international comparisons are usually based on the data or estimates originating from international institutions, published respectively in October 2009 and January 2010 by the IMF, and in November 2009 by the EC and the OECD.

The monetary unit used in the Report for the data concerning the euro area member countries is the euro. On 1 January 1999, it became the currency of Belgium and of most of those economies, while countries such as Greece, Slovenia, Cyprus, Malta and – finally – Slovakia joined later, at the beginning of 2009 in the case of the last country mentioned. The amounts relating to the periods prior to its introduction are converted at the irrevocable euro conversion rates. Except in the chapters on monetary policy and prices, where the definition coincides with the historical reality, the euro area is defined wherever possible in this Report as consisting of all the EU countries which adopted the single currency. Apart from Belgium, the area therefore consists of Austria, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Spain, Slovakia and Slovenia. For convenience, the term “euro area” is also used to designate this group of countries for periods prior to the start of Stage 3 of EMU. For some analyses, the preferred source was the OECD which includes in the euro area only the countries which are members of that international institution, i.e. excluding Cyprus, Malta and Slovenia. In view of the small size of those three economies, the OECD data present a picture which is perfectly representative of the euro area as a whole.

Since 1999, the NAI, in accordance with the obligation imposed by Eurostat, has applied the ESA 95 methodology for compiling the national accounts (1). As far as possible, the Report incorporates the definitions and methods resulting from ESA 95. However, it still expresses the data in gross terms, although this system presents the main aggregates derived from the national accounts in the form of net results for consumption of fixed capital. Gross data have the advantage of reducing the

(1) For fuller information concerning the ESA 95, see the NAI publication entitled Comptes nationaux 1998 – Partie 1 : Estimation des agrégats annuels. The changes caused by the switch to the ESA 95 for the account of general government are specified in more detail in another publication from the same source, entitled Comptes nationaux 1998 – Partie 3 : Comptes des administrations publiques.

236

problem connected with the valuation of depreciation, which is based on the assumption of perfect knowledge of the stock of fixed capital. Furthermore, gross data make it easier to interpret certain movements such as those of the gross operating surplus. For simplicity, the sectoral breakdown groups together, under the heading “individuals”, households and non-profit institutions serving households, which constitute separate sectors according to the ESA 95 methodology. Nevertheless, the terms “individuals” and “households” are used as synonyms. The terms “corporations” and “enterprises” are also most frequently used as synonyms, whereas in the commentary from the GDP expenditure angle, “enterprises” also covers self-employed persons, who are included under households in the real and financial sectoral accounts.

The Belgian national accounts, like those of other European countries, underwent a series of important methodological revisions in recent years, affecting in particular the breakdown of price and volume effects. A more detailed explanation of the changes thus made was supplied by the NAI in the publications entitled Comptes nationaux – Partie 2 : Comptes détaillés et tableaux 1995-2004 and Comptes nationaux – Partie 2 Comptes détaillés et tableaux 1995-2005, issued in December 2005 and November 2006 respectively. Thus, since 2006, the volume series have been expressed in prices of the year preceding the one for which they were first published, while according to the previous practice they were expressed at prices of a fixed base year (2000, in the 2005 edition of the national accounts). This modification makes it possible to “chain” the volume change in the aggregates or sub-aggregates. According to this method, their volume growth between two consecutive periods is calculated systematically by reference to the previous year’s prices and weights. The changes between consecutive periods are linked together (cumulated) to give a chained index. When the chained index of an aggregate or sub-aggregate is applied to the amount (level) of a reference year, such as 2007, as in the official national accounts published in October 2009, that provides a measure of the volume change in “chained euros (reference year 2007)”. The choice of the reference year has no effect on the growth profile of the series. The introduction of chained indices improves the accuracy of the measure of economic growth and increases the international comparability of the data. However, in using chained level series, it is necessary to allow for the fact that this chaining leads to a loss of additivity in regard to the volume levels (except for the figures relating to the reference year and the year immediately following it). Non-additivity implies, for example, that in the case of chained level series, GDP is not equal to the sum of its components (final consumption, investment, change in stocks and net exports).

On the occasion of the publication of Comptes nationaux – Partie 2 Comptes détaillés et tableaux 1999-2008, significant changes were made to the methods of estimating a number of aggregates. Thus, the estimates of final consumption expenditure of households, in particular vehicle purchases and the associated running costs, and expenditure on tour operators and air travel, were totally revised, leading to a sizeable downward revision of private consumption, and hence a marked increase in the household savings ratio. Exports and imports were revised downwards substantially owing to a reclassification between resident and non-resident units of certain export and /or import firms in order to facilitate more effective elimination of trade unconnected with any economic activity in Belgium. However, that gave rise to a more favourable surplus on net exports and imports of goods during the recent period. Moreover, significant modifications were made to the calculation of the export and import deflators, as the unit value indices calculated by the NAI were abandoned in favour of those calculated for Belgium by Eurostat, and an adjustment was introduced to take greater account of changes in the quality of the products traded. One consequence of the latter changes is a downward revision of the volume losses of market share recorded for Belgium in regard to exports of goods.

When this Report went to press, the revised official national accounts were available only for the period 1995-2008, so that, to gain a longer historical perspective, it was necessary to make estimates by retropolation, e.g. for the calculation of the ratio of the consolidated public debt to GDP.

237

mEthodological notE

In the chapter devoted to the international environment, the presentation is also consistent with the ESA 95 or its equivalent, the System of National Accounts published jointly by the United Nations, the World Bank, the EC, the IMF and the OECD (SNA 1993). Nevertheless, the statistics from the sources to which reference is made in the Report, principally the EC and the OECD, are not always uniform, because the period for which the methodological revision or the conversions from one ESA system to the other have been carried out still varies greatly from one country to another.

The breakdown of the financial accounts between individuals and corporations is largely based on data from Belgian credit institutions. The information making it possible to break down the other financial transactions of the private sector, especially transactions with foreign countries or purchases of securities, is much more fragmentary. The main statistics which can be used for this purpose, namely the globalisation of the annual accounts of enterprises compiled by the Bank’s Central Balance Sheet Office, are in fact partial, are produced only annually and are available only after a time lag of several months. It has therefore been necessary to introduce some assumptions and make various estimates.

239

convEntional signs

Conventional signs

– the datum does not exist or is meaninglessn. not availablep.c. per centp.m. pro memoriae estimate by the Bank

241

list of abbrEviations

List of abbreviations

Region or country

BE BelgiumDE GermanyIE IrelandEL GreeceES SpainFR FranceIT ItalyCY CyprusLU LuxembourgMT MaltaNL NetherlandsAT AustriaPT PortugalSI SloveniaSK SlovakiaFI Finland

EA Euro area

DK DenmarkSE SwedenUK United Kingdom

EU15 European Union excluding the countries which joined after 2003

BG BulgariaCZ Czech RepublicEE EstoniaLV LatviaLT LithuaniaHU HungaryPL PolandRO Romania

JP JapanUS United States

242

Other

ABEX Belgian Association of SurveyorsABS Asset-backed securityActiris Regional public employment office, formerly ORBEMASEAN Association of Southeast Asian Nations

BEA Bureau of Economic AnalysisBEAMA Belgian Asset Managers AssociationBeCeFi Belgian Knowledge Centre for SME FinancingBIS Bank for International SettlementsBLEU Belgian-Luxembourg Economic UnionBLS Bank lending surveyBNRC Belgian National Railway Company

CAP Common agricultural policyCBFA Banking, Finance and Insurance CommissionCBS Centraal Bureau voor de Statistiek (the Netherlands)CDO Collateralised debt obligationCDS Credit default swapCEC Central Economic CouncilCPB Centraal Planbureau (the Netherlands)CPI Consumer Price IndexCREDIBE former Central Office for Mortgage LoansCREG Commission for Electricity and Gas RegulationCSO Central Statistics Office Ireland

DESTATIS Statistiches Bundesamt DeutschlandDGE Directorate General for Energy (FPS Economy, SMEs, Self-employed and Energy)DGSEI Directorate General Statistics and Economic Information (FPS Economy, SMEs,

Self-employed and Energy)

EBRD European Bank for Reconstruction and DevelopmentEC European CommissionECB European Central BankECOFIN European Council of Ministers of Economic Affairs and FinanceEDP Excessive deficit procedureEESA Emergency Economic Stabilization Act EIB European Investment BankELA Emergency Liquidity AssistanceEMBI Emerging Markets Bond IndexEMTN Euro Medium Term NotesEMU Economic and Monetary UnionEonia Euro overnight index averageESA European Supervisory AuthoritiesESCB European System of Central BanksESFS European System of Financial SupervisorsESRB European Systemic Risk BoardESRI Economic and Social Research Institute (Japan)EU European UnionEurepo Euro repurchase agreementEuribor Euro interbank offered rate

243

list of abbrEviations

FASB Financial Accounting Standards BoardFedergon Federation of HR PartnersFedis Belgian federation of distributorsFHIC Federal Holding and Investment CompanyFISIM Financial intermediation services indirectly measuredFOREM Community and regional training and employment officeFPB Federal Planning BureauFPS Federal Public ServiceFRA Forward Rate AgreementFSA Financial Security AssuranceFTE Full-time equivalent

G7 Group of SevenG10 Group of TenG20 Group of TwentyGAAP Generally Accepted Accounting PrinciplesGDP Gross domestic productGj GigajouleGNI Gross national incomeGSE Government-Sponsored Enterprise

HICP Harmonised Index of Consumer PricesHWWI Hamburgisches Welt-Wirtschafts-Institut

IAS International Accounting StandardsIASB International Accounting Standards BoardICAP Garban - Intercapital plcICT Information and Communication Technologies IEA International Energy AgencyIFRS International Financial Reporting StandardsILO International Labour OfficeIMF International Monetary FundINAMI/RIZIV National Institute for Health and Disability InsuranceINE Instituto Nacional de Estadística de EspañaINSEE Institut national de la statistique et des études économiques (France)IOSCO International Organisation of Securities CommissionsIPN Inflation Persistence NetworkISTAT Istituto Nazionale di Statistica (Italy)

KLEMS Capital (K), labour (L), energy (E), materials (M) and service inputs (S)kWh Kilowatt hour

Libor London interbank offered rate

MBIA Municipal Bond Investors AssuranceMBS Mortgage-backed securityMFI Monetary financial institutionMIR Monetary financial institutions interest ratesMSCI Morgan Stanley Capital International

NAI National Accounts InstituteNAIRU Non-accelerating inflation rate of unemploymentNBB National Bank of BelgiumNCB National Central Bank

244

NCPI National consumer price indexNEO National Employment OfficeNPI Non-profit institutionNPO National Pensions OfficeNSSO National Social Security ServiceNV Naamloze vennootschap (plc)

OECD Organisation for Economic Cooperation and DevelopmentOIS Overnight index swapOLO Linear bondOPEC Organisation of Petroleum Exporting CountriesOTC Over the counter

PLU Professional Lenders’ UnionPPIP Public-Private Investment ProgramPPP Purchasing power parityPricaf Private equity sicaf (private closed-end equity fund)

R&D Research and developmentRBS Royal Bank of ScotlandRFS Fortis RBS SantanderRIF Railway Infrastructure FundRIR Retail interest ratesRPI Royal Park Investments

SA Société anonyme (plc)SHLAF Social Housing Loan Amortisation FundSICAFI Société d’investissement à capital fixe immobilier (real estate investment fund

with fixed capital)SITC Standard International Trade ClassificationSME Small and medium-sized enterpriseSNA System of National Accounts

TALF Term Asset-Backed Securities Loan FacilityTFP Total factor productivity

UCI Undertaking for collective investmentUNCTAD United Nations Conference on Trade and Development

VAT Value Added TaxVDAB Vlaamse Dienst voor Arbeidsbemiddeling en Beroepsopleiding (Flemish employ-

ment exchange and vocational training service)

WDN Wage Dynamics Network

245

list of boxEs, tablEs and charts

List of boxes, tables and charts

Boxes

Chapter 1 : International environment

Box 1 : Rebalancing global demand 7Box 2 : The sustainability of public finances 27

Chapter 2 : The monetary policy of the Eurosystem

Box 3 : “Negative inflation” or “deflation” : not just a question of semantics 38

Box 4 : Reduction in debt leverage by euro area monetary financial institutions 42

Box 5 : Unconventional monetary policy of the Eurosystem and the US Federal Reserve 53

Chapter 3 : Output, expenditure and current transactions in Belgium

Box 6 : Comparison of recent recessions in Belgium 65Box 7 : Transmission of the decline in global demand to

branches of activity in Belgium 72Box 8 : The saving behaviour of individuals 80

Chapter 4 : Labour market and labour costs

Box 9 : Working time adjustment measures supported by the NEO 98Box 10 : A new in-company training indicator 104

246

Chapter 5 : Prices

Box 11 : Prices and costs in the dairy sector 128

Chapter 6 : Public finances

Box 12 : Pattern of primary expenditure of general government in Belgium 148

Box 13 : Return of the snowball effect in public finances 155

Chapter 7 : Financial accounts of households, enterprises and general government

Box 14 : Reasons for the success of savings deposits in 2009 164Box 15 : Corporate loan supply and demand : lessons drawn from

the surveys of banks and businesses 171

Chapter 8 : Financial stability

Box 16 : Reclassifications of assets between IAS / IFRS categories following the amendments to IAS 39 195

Tables


1 GDP growth in the main economies 32 Economic developments in the United States 153 Economic developments in Japan 174 Economic developments in the euro area 195 GDP growth in the euro area countries 226 General government budget balance in the euro area countries 267 Macroeconomic indicators for emerging Asia 308 Economic situation in 2009 of the new EU Member States

in Central and Eastern Europe 33


9 Value added in the branches of activity 7110 GDP and main expenditure categories 7611 Main components and determinants of the gross operating

surplus of companies, at current prices 7812 Determinants of the gross disposable income of individuals, at current prices 8013 Net lending to the rest of the world 85

247



14 Labour supply and demand 10015 Early departure from the labour market 10716 Harmonised employment rates in 2009 10817 Impact of the crisis on turnover 10918 Freezing of basic wages in times of crisis 11019 Hourly labour costs in the private sector 11120 Labour costs and labour productivity in the private sector 114

Chapter 5 : Prices

21 Harmonised index of consumer prices for Belgium 119


22 Targets for the financing requirement (–) or capacity of Belgian general government 139

23 Revenue of general government 14124 Main fiscal and parafiscal measures 14325 Public revenues per general government sub-sector 14426 Primary expenditure of general government 14527 Adjusted primary expenditure by general government sub-sector 14628 Overall balance of general government, and per sub-sector 15229 Movement in the structural budgetary policy 15330 Consolidated gross debt of general government 155


31 Financial assets and liabilities of general government 17832 Financing requirements and resources of the Federal State 179


33 Movements in financial asset prices and risk premiums 18834 Profit and loss account of Belgian credit institutions 19735 Indicators of the quality of loans granted by Belgian credit institutions 19936 Main components of the profit and loss account of insurance companies 20237 Comparison of the market value and book value of the investment

portfolio of Belgian insurance companies 204

248

Charts


1 Balance sheet total of the central banks of the main advanced economies 42 Scale of the fiscal recovery measures and the automatic stabilisers in the G20

during the period 2009-2010 53 International trade in goods 64 Market conditions 105 Commodity prices 116 Bilateral exchange rates of the leading currencies against the US dollar 137 Quarterly profile of GDP and the main expenditure categories in the United States 138 Activity and prices in the residential property market in the United States 159 Quarterly profile of GDP and the main expenditure categories in Japan 1610 GDP, private consumption and business investment in the euro area 1811 Quarterly profile of GDP and the main expenditure categories in the euro area 1912 Consumer confidence, retail sales and registration of new private cars in

the euro area 2013 Business investment and business confidence in the euro area 2114 Exports of goods from the euro area 2215 Labour market in the euro area 2316 Inflation, underlying inflation rate and energy prices in the euro area 2417 Quarterly profile of GDP, exports and imports in China 30

Chapter 2 : The monetary policy of the Eurosystem

18 Real GDP and confidence indicator in the euro area 3619 Projections of real GDP growth and headline inflation in the euro area 3720 Loans to the private sector in the euro area 4121 M3 and its components 4222 Uncertainty over the next calendar year in the individual forecasts

collected by Consensus Economics for the euro area 4523 Determinants of the tightening of conditions for lending to non-financial

corporations in the euro area, 2003 to 2009 4724 Consolidated liquidity need and Eurosystem open market operations 4925 Use of the deposit facility and money market interest rates in the euro area 5026 Short-term interest rate expectations in the euro area 5127 Spreads between Euribor and the Overnight Index Swap (OIS) 5228 Long-term interest rates and inflation expectations 5329 Money market interest rates in the euro area 5830 Monetary conditions in the euro area 5831 Financing conditions for monetary financial institutions in the euro area 5932 Financing conditions of monetary financial institutions in the euro area : debit

interest rates 6033 Bond market yields in the euro area 60


34 GDP growth in Belgium from a historical perspective 6335 GDP in Belgium and in the euro area 6436 Indicators of the effects of the crisis on macroeconomic balances 65

249


37 GDP and value added in the main branches of activity 6938 Business survey indicators in the main branches of activity 7039 GDP and main expenditure categories in Belgium 7540 Investment by enterprises 7741 Consumption, disposable income and savings ratio of individuals 7942 Exports, in volume 8343 Prices of exports and imports of goods 8444 Balance of transactions in goods 8645 Financing requirement (–) or capacity of all domestic sectors and balance

of payments current account 8746 Potential GDP in Belgium 8947 R&D expenditure, innovation and total factor productivity 9048 Entrepreneurship 9149 Education and training of the labour force and total factor productivity 9250 Product market regulation 93


51 Activity and employment 9552 Reaction of domestic employment during periods of recession 9653 Adjustment of employment and of the volume of hours worked

to economic activity 9654 Temporary lay-offs and agency work 9855 Unemployment since the May 2008 low 10156 Harmonised unemployment rate in Belgium and in the regions 10257 Unemployment rate and impediments to activity due to a shortage

of skilled labour 10358 Harmonised unemployment rate in Belgium and in the other EU Member States 10359 Harmonised employment rate in Belgium and in the EU 10460 Cost-cutting strategies in response to a decline in turnover 10961 Index of collectively agreed wages 11262 Unit labour costs and unemployment gap 11463 Labour cost handicap of Belgian firms 115

Chapter 5 : Prices

64 Negative inflation, without a generalised fall in prices 12065 Inflation gap between Belgium and the euro area 12266 Consumer prices of petroleum products 12467 Consumer prices of gas and electricity 12568 International comparison of the level of gas and electricity prices

on the residential market 12669 Consumer prices of food 12770 Asymmetries in the setting of consumer prices 13271 Underlying inflation trend and labour costs in Belgium and in the euro area 13472 Inflation of non-energy industrial goods and services and unit labour costs 13573 Price indexation practices in the services branch 135

250


74 Personal income tax assessments 14275 Implicit rate of levies on earned incomes 14276 Corporate tax revenues 14477 Public health care expenditure 14678 Private sector pensioners 14779 Subsidies granted to enterprises : service vouchers and reductions

in withholding tax on earned incomes 14780 Influence of the electoral cycle on gross fixed capital formation

of local authorities 14781 Breakdown of the change in interest charges 15182 Revenues of the Communities and Regions 15283 Public debt in Belgium and in the euro area 154


84 Breakdown of the change in the outstanding total of financial assets held by households 161

85 Household wealth 16286 External financing costs of non-financial corporations in Belgium 16387 Formation of financial assets by households 16388 Fixed-income securities held by households and long-term yield rates 16689 Results of the Eurosystem’s bank lending survey : mortgage loan supply

and demand in Belgium 16790 Rate differential and breakdown of new mortgage contracts by type

of interest rate 16791 Non-regularised defaulting loans 16892 New financial liabilities of non-financial corporations: breakdown by instrument 16993 Loans granted by Belgian banks to resident non-financial corporations,

breakdown by loan term 16994 Credit volume and utilisation rate according to the Central Corporate Credit Register:

breakdown of firms by size 17095 Credit utilisation rate according to the Central Corporate Credit Register :

breakdown of firms by sector of activity 17196 Stock market prices and price-earnings ratio in Belgium and in the euro area 17797 Yield on ten-year government bonds 17998 Proportion of foreign-held OLOs and treasury certificates issued

by the Belgian State 180


99 Asset writedowns and recapitalisations of the world’s large financial institutions 184

100 Premiums on five-year credit default swaps 184101 Ratio between the market value and the book value of listed banks 185102 Premiums on five-year sovereign credit default swaps 187103 Premiums on five-year credit default swaps for Belgian and

European financial institutions 192104 Balance sheet structure of Belgian credit institutions 193105 Main income and cost categories of the Belgian banking sector 198106 Determinants of the net interest income of Belgian credit institutions 198

251


107 Loan loss provisions of Belgian credit institutions 199108 Geographical breakdown of assets held by Belgian credit institutions

in the form of loans and debt securities 200109 Regulatory capital and solvency ratio 201110 Net results of the insurance sector 202111 Composition of the covering assets per insurance branch 203112 Solvency margin of Belgian insurance companies 204113 Premium income and the combined ratio 205114 Long-term interest rate and guaranteed rate of return on class 21 contracts 206

252

Statistical annex

Tables relating to economic activity and prices

I GDP and main categories of expenditure, by volume 210II GNI and main categories of expenditure, by volume 211III Deflators of GNI and the main categories of expenditure 212IV GNI and the main categories of expenditure at current prices 213V Value added of the various branches of activity, by volume 214VI Labour market 215VII Employment rate 216VIII Unemployment rate 217IX Harmonised index of consumer prices 218X Incomes of the various sectors at current prices 219XI Summary of the transactions of the main sectors of the economy at current prices 220

Tables relating to general government transactions

XII Revenue, expenditure and overall balance of general government 221XIII Overall balance of general government, by sub-sectors 222XIV Consolidated gross debt of general government 223

Tables relating to transactions with foreign countries

XV Current and capital transactions according to the balance of payments 224

Tables relating to monetary and financial transactions

XVI Formation of financial assets and new financial liabilities of households 225XVII Formation of financial assets and new financial liabilities of non-financial

corporations 226XVIII Formation of financial assets and new financial liabilities of general government

227XIX Formation of financial assets and new financial liabilities of monetary financial

institutions 228XX Formation of assets and new liabilities of financial intermediaries other than

monetary institutions 229XXI Net issues of securities by financial and non-financial corporations and general

government 230XXII Interest rates 231XXIII Main interest rates of the Eurosystem 232XXIV Exchange rates 233

© Illustrations : National Bank of Belgium

Cover and layout : NBB TS – Prepress & Image

Published in March 2010

Publisher

Guy QuadenGovernor

Contacts for the Review

Philippe QuintinHead of the Communication and Secretariat Department

Tel. +32 2 221 22 41 – Fax +32 2 221 30 91 [email protected]

National Bank of Belgium Limited liability company RLP Brussels – Company number : 0203.201.340 Registered office : boulevard de Berlaimont 14 – BE -1000 Brussels www.nbb.be

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