How the 'Great Lockdown' will impact Belgium's economy

This is an opinion article by an external contributor. The views belong to the writer.
How the 'Great Lockdown' will impact Belgium's economy

The lockdowns, isolations and the high-scale closures to cope with the Covid-19 pandemic have been deteriorating the global economy.

The International Monetary Fund (IMF) reported that the precautions undertook globally after the Covid-19 pandemic, dubbed as “The Great Lockdown”, would lead to the biggest recession after the Great Depression.

Under the obscure grim reality, the fund estimates that the global economy would shrink about 3% in 2020. Following the global financial crisis, the global economy contracted by 0.1% in 2009.

The public health measures for diminishing the spread of the virus have just brought along economic fallout and pressures on financial and commodity markets. The longer the pandemic measures last, the more the global economy will be hit. The cumulative loss of global production is estimated to be over 9 trillion dollars for 2020 and 2021.

Belgium, for the time being, is second after San Marino regarding death per capita caused by Covid-19. Besides the human costs, the economic costs in Belgium is also expected to be colossal. The IMF forecasts that the Belgian economy will contract by 6.9% this year, whereas the economy contracted 2% in 2009 after the global financial crisis.

The travel, tourism, entertainment, and hospitality industries will be those hardest hit, due to the strict mobility restrictions.

Far-reaching disruptions are also expected for agriculture since mobility measures will restrict seasonal workers from reaching the farms, as the harvest season has just started for many crops.

Currently, 10% of pickers are working on the ground according to the estimation of the farmers’ union ABS. It is not hard to forecast looming inflation in the food industry, in case the lack of pickers will not be adressed.

Following the spread of the disruptions in economic activities starting from China and then stretching worldwide, sharp shifts towards safe assets and liquidity has repriced the stock markets. A coronacrash has also hit the BEL20 market index, which covers the 20 largest companies at the Brussels Stock Exchange. The index plunged about 60% between 17 February and 16 March reaching its lowest point in 7 years.

Even under cozy measurements in the United States, the retail sales in March plummeted by 8.7% compared with the previous month, the biggest fall in the last three decades. The disruptions in retail sales will be worse in the economies with strict lockdown measurements. The Brussels chamber of commerce estimated the costs of the measures to be 5 billion euros per month.

Lockdown extensions will increase these costs leading to possible business closures. Consumption expenditures made up about 75% of the Belgian GDP on average between 2014 and 2018. The decline in the growth of the economy will be mainly determined by the fall in final consumption.

The dramatic drop in oil demand and its decrease in price will reduce consumer prices. Although the lockdown started in the second half of the month, the inflation rate in Belgium fell from 1.10% to 0.62% in March.

A drop in inflation is expected to continue for the forthcoming months. However, as soon as the virus-related measures will be loosened, the supply of products will be insufficient to satisfy the recovery in demand. The disruptions in the supply chains and the stock management will need time to readjust. In addition to lack of supply, an increase in oil prices due to unsustainable oil prices below 50$ will pressure consumer prices up.

Revenue losses due to the lockdown have triggered layoffs and business closures. A series of unprecedented economic measures have been announced in March and April up to €57,5 billion to prop up the Belgian economy, including deferrals of tax and mortgage payments, exemptions for tax on earnings in specific sectors, financial loan guarantees, protection against bankruptcy and financial incentives to subsidize firms forced to shutdown.

In addition to a decrease in tax revenues due to the sluggish economic activities, the financial burden of the aforementioned economic measures will lead to higher budget deficits.

The Governments’ stimulus measures to support economic activities are expected to increase their borrowing. Belgium’s budget deficit was 8.7 billion euros in 2019, reaching 1.8% of the GDP. The government’s compensatory spending is expected to lead a budget deficit exceeding 30 billion euros this year.

Following the alleviation of the lockdown and the amelioration of the economic activities, the increased budget deficit will be subject to increment in the taxes.

The final impact of the 'Great Lockdown' on the Belgian economy depends on a multilevel of factors interacting, such as the length of the lockdown, success of the containment measures, the magnitude of the deterioration in global and local supply chains, alteration in consumption patterns, adaptation to social distancing, disruptions in financial markets and the capacity of the health services.

Özgür Polat

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