STU 01-05 : Special Topic - Why is Belgian productivity growth declining? [ Short Term Update 01-05 - 25/03/2005]

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In 2004, economic growth in Belgium amounted to 2.7% (GDP at constant prices), which is higher than the euro area average due to the strength of Belgian domestic demand. The economic recovery, triggered by an improvement in the international business climate from mid-2003 onwards, resulted in quarter-on-quarter growth rates between 0.7% and 0.8%, but weakened to 0.4% in the last quarter of 2004.

Economic growth should gain momentum during the course of this year, which is mainly due to the quarterly profile of exports. In fact, export growth should temporarily weaken during the first half of this year due to lower foreign demand growth and the appreciation of the euro during the last two quarters of 2004, which hampers competitiveness with respect to the other currency areas. Private con-sumption (+1.8%) should increase at a faster pace than purchasing power (+1.4%) for the third con-secutive year. Stimulated by the ongoing recovery of business profitability, low interest rates and gradually improving demand prospects, real business investment growth should strengthen to 3.3% this year. All in all, GDP growth at constant prices should reach 2.2% in 2005. Inflation should re-main rather stable at 2.0%.

Employment should increase by 34,400 units this year, as compared to 28,600 in 2004. As the labour force should increase at about the same pace in 2005, the unemployment rate should stabilise this year. The employment rate should rise slightly from 61.8% in 2004 to 62.1% in 2005.

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Authors

Collective publication, Bart De Ketelbutter (C), Ludovic Dobbelaere (C), Chantal Kegels (C), Igor Lebrun (C), Jan van der Linden (C), Filip Vanhorebeek (C)

A : Author, C : Contributor

Publication type

Closed series

Planning papers presented completed studies on topics of wider interest. The series has been closed since 2022.
The Short Term Update was a quarterly newsletter providing an up-to-date overview of the Belgian economy and the FPB's ongoing studies. The series has been closed since 2015.

In its annual review of the EU Economy, the European Commission expressed its concern about the deterioration in the EU’s productivity performance. It has been hotly debated in academic and policy-oriented circles whether this phenomenon is temporary or permanent and what its causes are. In this special topic we take rather a different approach by analysing long-term productivity growth in Belgium in terms of its main macro-economic determinants. Using a theoretical model based on a production function, we are able to isolate the contributions of real wages, working time and labour efficiency. In this framework we show that the structural employment shift from manufacturing to the service industry plays a key role in explaining declining labour efficiency gains.

Belgian and euro area productivity trends

We will begin by putting recent productivity trends in perspective. The graph below shows productivity growth per worker for the private sector since the early seventies. Trends are computed using a Hodrick-Prescott filter. First of all, it is noteworthy that declining productivity growth is nothing new, either in Belgium or in the euro area. A second feature that catches the eye is the higher growth rates recorded in Belgium up to the mid-eighties.

Trend productivity growth rates decreased by an average of some 0.11 percentage points annually in Belgium, while euro area rates declined by 0.08 points per year. The other side of the coin is that, while employment failed to contribute to value added growth in the seventies, it was able to do so thereafter, especially during the last decade.

Indeed, the declining productivity growth has been partly compensated by additional jobs, both in Belgium and in the euro area as a whole. To some observers - although this is still a controversial issue - this increase in the employment content of growth indicates that labour market reforms have been successful in effectively encouraging the hiring of low-skilled workers. [More in the publication ...]

STU 1-05 was finalised on 7 March 2005