STU 03-05 : Special Topic - Impacts of tax shifting operations [ Short Term Update 03-05 - 05/10/2005]

HEADLINES BELGIAN ECONOMY - OCTOBER 2005

Due to a deceleration in the worldwide business cycle, Belgian economic growth weakened from the fourth quarter of 2004 onwards. Although the high level of oil prices remains an important factor of uncertainty, economic activity should gain momentum during the second half of this year. As a result, GDP growth should fall from 2.6% last year to 1.4% in 2005 and to 2.2% in 2006.

This year, net exports as well as domestic demand should contribute less to economic growth than in 2004. While Belgian exports suffer from the slowdown in European economic growth, domestic demand is hampered by the poor performance of private and public consumption that is only partially compensated for by an acceleration in investment growth.

Economic growth in 2006 will mainly depend on domestic demand. Private consumption growth should increase as disposable income is boosted by the personal income tax reform and investment growth should remain strong. Combined with robust export growth, this implies an acceleration of imports, resulting in a zero contribution of net exports to economic growth.

After a net gain of 23,600 persons last year, employment is expected to record an average annual rise of 28,800 and 30,300 persons in 2005 and 2006 respectively. The unemployment rate should remain stable this year and next year.

The rise in oil prices has pushed up underlying inflation since the beginning of this year. Together with price increases in oil-related products, this should raise headline inflation from 2.1% in 2004 to 3% in 2005 and 2.9% in 2006.