Coinciding with the publication in the ECB Monthly Bulletin of new Eurosystem projections for the euro area, this article presents the figures expected for the Belgian economy for 2009 and 2010. Since the previous forecasts were published in February 2009, the downturn in activity and international trade in late 2008 and early 2009 has proved to be even sharper than initially expected. An unprecedentedly deep recession has spread across the various economic regions of the world, requiring resolute action in the monetary and fiscal sphere. There are signs which suggest some stabilisation of both financial market conditions and business and consumer confidence. Nonetheless, the adjustments to be made to employment, investment and the position of financial institutions are likely to hamper the economic recovery.

The Eurosystem projections are based on assumptions drawn up in mid May 2009. They allow for a very gradual foreign trade revival at the end of 2009 and in 2010, following the recent slump. Having fallen very rapidly from a peak of 145.7 dollars per barrel in July 2008 to around 40 dollars in December, oil prices are expected, on the basis of the forward markets, to average 54.5 dollars per barrel in 2009 and 65.5 dollars in 2010. Interest rates are also assumed to move in line with market expectations. As an annual average, three-month interbank deposit rates in euro are predicted to fall from 4.6 p.c. in 2008 to 1.4 p.c. in 2009 before settling at 1.6 p.c. in 2010. Long-term rates on Belgian government bonds are projected at 4.1 p.c. in 2009 and 4.5 p.c. in 2010. Exchange rates are held constant at 1.34 dollar per euro. In that context, after having reached 0.6 p.c. in 2008, GDP growth in the euro area is forecast at between -5.1 and -4.1 p.c. in 2009 and between -1 and 0.4 p.c. in 2010. Inflation is projected at between 0.1 and 0.5 p.c. in 2009, as a result of falling commodity prices. It is likely to remain low in 2010, at between 0.6 and 1.4 p.c., owing to the weakness of demand and the deterioration of the labour market.

The sharp cyclical downturn in the euro area at the end of 2008 and the beginning of 2009 had a major impact on economic activity in Belgium. In particular, both industrial production and foreign trade in goods plummeted from October 2008. According to the national accounts data, real GDP was down by 1.7 p.c. in the fourth quarter of 2008, falling to a similar extent in the first quarter of 2009, the deepest recession since the Second World War. The decline in activity should decelerate sharply from the second quarter of 2009, and give way to a modest recovery in 2010. Thus, having grown by 1 p.c. in 2008, GDP is set to contract by 3.5 p.c. on average in 2009 and by 0.2 p.c. in 2010.

In the face of the abrupt contraction in activity, firms reacted for example by reducing agency work and greatly increasing their use of temporary lay-offs. A temporary system of suspending the execution of employment contracts was also introduced for white-collar workers. Such systems offer a provisional buffer against the effect on employment of fluctuations in production. However, taking account of the deep and sustained decline in activity, the number of persons employed is likely to decline progressively. As an annual average, net job losses are forecast at 36,000 and 80,000 persons respectively in 2009 and 2010. The unemployment rate is set to rise from 7 p.c. in 2008 to 9.2 p.c. in 2010, reaching 9.7 p.c. by the end of 2010.