STU 02-09 : Special Topic : The current account, market shares and competitiveness [ Short Term Update 02-09 - 10/06/2009]

The new medium-term economic outlook for Belgium has been drawn up in an international context that is heavily influenced by the financial crisis and the deep economic recession this has brought about. Belgian GDP should fall by nearly 4% in 2009, followed by zero growth in 2010 as the crisis subsides. In the wake of a worldwide recovery, Belgian GDP growth should start accelerating from 2011 onwards, resulting in average growth for the period 2011-2014 (2.3%) that is similar to the average of the past twenty years. Note that the global economic situation is beset with many uncertainties and, therefore, the outlook is surrounded with considerable risks, especially for the short term.

Households are expected to raise their precautionary savings dramatically in 2009, thus lowering their consumption compared to last year (-0.6%). Strongly unfavourable demand prospects, combined with a sharp drop in profitability and deteriorated external financing conditions will lead to a sharp contraction in business investment (-7.5%). Domestic demand should recover slightly in 2010 and more markedly from 2011 onwards. The volume of Belgian exports is expected to go down for two years in a row (-8.9% in 2009 and -0.6% in 2010) and the contribution of net exports to GDP growth should be largely negative. From 2011, Belgian export growth should be close to its historical growth rate (4.8%). After a peak in 2008 (4.5%), the inflation rate should fall to 0.3% on average in 2009. In the medium term, inflation is expected to pick up again, but to remain below 2%.

The effects on employment of the sudden fall in activity should materialise progressively: domestic employment should drop on average by 37 000 jobs this year and by 53 000 jobs next year. The recovery in 2011 should not be labour-intensive and employment is only expected to increase significantly from 2012 onwards (by a little more than 43 000 jobs a year on average). This evolution of employment, combined with an increase in the labour supply, should lead to a rise in unemployment of 194 000 units from 2009 to 2011. In the next three years, the unemployment rate (broad administrative definition) should go up from 11.8% to 15.2%. As from 2012, the unemployment rate should gradually decrease to reach 14.5% in 2014.

Under the assumption of constant policy, public sector accounts are expected to deteriorate markedly, with a net public financing requirement of 4.3% of GDP in 2009, widening to 5.6% of GDP in 2010. The end of the recession will not lead to a reduction in the deficit, which should peak at 6.1% of GDP in 2012 before slightly improving afterwards. As a result, Belgian public debt should again experience a snowball effect, going up from 89.3% of GDP in 2008 to 106% of GDP in 2014.

STU 2-09 was finalised on 27 May 2009

Special Topic : The current account, market shares and competitiveness

Over the last few years, the Belgian current account surplus has turned into a deficit: it evolved from a sizeable surplus of 5.0% of GDP on average from 1994-2002 to -1.3% in 2008. Given the high degree of Belgian openness, it is particularly important to understand the reasons for these evolutions, which is the aim of this special topic.

As shown in the table below, over half of this reversal is attributable to the deterioration in the terms of trade (i.e. import prices increasing faster than export prices, mainly because of the surge in oil and other commodity prices). The outpacing of export volume growth (in part due to the deterioration of competitiveness) by import volume growth (driven by dynamic domestic demand) counts for a third of the deterioration of the current account.  The decline in net factor income from abroad was of lesser importance.

Graph 1 - Evolution of market share (concept export markets & world trade) and the REER, four-year averages

Source: European Commission, FPB

The relative weakness of Belgian export growth is of particular concern and is also noticeable in the evolution of Belgium’s export market share, defined as the difference between export growth and the weighted growth in imports by our main trading partners (see Graph 1, concept export markets). Although the loss in market share is also a structural phenomenon, shared with many western countries, the Belgian market share loss became significantly larger in the period 2004-2007.

This evolution was in line with the worsening of competitiveness, measured by means of the unit labour cost (ULC)-based real effective exchange rate, or REER. Belgian ULCs, which consist of nominal wage costs and labour productivity, are thus related to a weighted average of our competitors’ ULCs, expressed in a common currency. To a large extent, the deterioration of competitiveness was due to the appreciation of the euro against most other currencies, since unit labour costs increased scarcely any faster than those of our trading partners. However, the stabilisation of relative ULCs over 2000-2007 conceals a substantial increase in the latter three years, which is likely to continue in 2008 and 2009.

The increase over 2005-2009 is mainly attributable to the pronounced wage moderation seen in Germany. From the graph below, however, it is clear that evolutions in competitiveness alone are insufficient for explaining market shares. Especially from 1995 onwards, competitiveness seems to lose in importance as an explanatory variable. In spite of a sizeable gain in competitiveness in the period 1996-1999, the loss in market share remained as large as in the previous period.

Other non-competitiveness-related or structural factors have hence also played a role in the evolution of our exports. One such structural factor is the geographical specialisation of exports, as can be seen in the difference between the two market share concepts in the graph above. A breakdown of Belgian exports by region shows that exports to emerging economies in Eastern Europe and Asia are too weak to reap the full benefits of those regions’ sustained import growth and that the larger share of exports that still goes to the old EU Member States, which have slow import growth, acts as a drag on the market share. Another structural factor is the product mix of Belgian exports. Since the early 90s Belgium has been losing market share because of the fairly small share of ICT products in its exports, which are among the most dynamic components of world import growth. Until recently, this was also true for business services exports, in which Belgium underperforms its neighbours. The relatively weak global demand for motor vehicles has also led to market share losses as they are one of Belgium’s main export products. However, these unfavourable developments were to some extent compensated for by chemical and pharmaceutical products, which are the country’s most important export products and for which global demand has been strong.

Graph 2 - Relative position of Belgian manufacturing in the EU15, average annual growth rate (%), 2000-2005

Source: EU Klems March 2008 release.

Belgian competitiveness could also be analysed by looking at the evolution of the share of Belgian industries in the total value added of the European Union (EU15). This sheds a different but complementary light to that given by the traditional approach, which is based on export market share. Indeed, the aim is not to gain export market shares if their content in local value added decreases when exporters make greater calls on foreign suppliers. The analysis based on value added takes this aspect into account.

Between 2000 and 2005, the relative position of Belgian manufacturing slightly deteriorated. This deterioration was due to the large number of industries recording weaker value added growth than the value added growth of the same industries in the EU15. This relative weakness of value added growth was concomitant with a faster increase in prices (of value added) in Belgian industries in comparison with their European counterparts, as illustrated by Graph 2, which links the average annual growth rate of the relative value added with that of relative prices. For most sectors, when the price increase is faster than the European one, the value added growth rate is lower than that of Europe.

Prices increase when the unit cost of labour or of capital increases, all things being equal elsewhere. The unit cost increases when the hourly wage increases faster than labour productivity growth or when the compensation for one unit of capital increases faster than capital productivity growth.

The faster price increases in Belgian manufacturing are explained for almost two thirds of the change by a faster increase in the unit capital cost and for a little more than one third by a faster increase in the unit labour cost. These faster increases in unit costs are mainly due to weaker growth in labour productivity as well as in that of capital, resulting from a negative evolution of Total Factor Productivity (TFP). This TFP gathers a set of elements influencing productive efficiency such as innovation capacity, return on scales, degree of competition, the regulatory framework, etc. The manufacturing industries that have recorded a deterioration in their relative position have not been as successful as their European competitors in using technological progress to improve their productive efficiency or to develop new products. This was particularly the case for chemicals and electrical and electronic equipment, as illustrated by Graph 3, which shows the positive relation between the average annual growth rate of the relative value added and the annual average growth rate of the relative TFP.

Graph 3 - Relative growth of value added and TFP of Belgian manufacturing, average annual growth rate (%), 2000-2005

Source: EU Klems, March 2008 release.

However, some industries - food and beverages, textiles, wood, paper, rubber and plastics and paper and publishing - were successful in recording an improvement in both their relative position and their relative TFP.

Between 2000 and 2005, the relative position of Belgian market services in the EU15 value added improved slightly despite the unfavourable price evolution. The faster price increase recorded by Belgian market services is due only to a faster increase in unit capital cost. Indeed, the other determinant of price evolution, unit labour cost, increased much more slowly in Belgium than in the EU15. This good relative performance of unit labour cost in Belgian market services is only explained by a faster increase in hourly productivity, with all Belgian market services increasing their capital intensity much more rapidly than their European counterparts.

In conclusion, the deterioration in the current account was due to the surge in commodity prices, the appreciation of the euro, the adverse geographical orientation of our exports and the unfavourable export product mix, even though unit labour costs remained in line with those of our main trading partners. The alternative competitiveness measurement tool sheds light on the deterioration of the relative productivity growth of Belgian manufacturing, which was mainly due to the weakness of TFP growth.