“A remote world”, this is what awaits us in the coming months, according to the director general of the WTO, the World Trade Organization. According to the expectations of the National Bank, this fall could arrive in Belgium as early as the next quarter, with a fall of 0.2% in GDP from October to December. Worse than the recession, Belgium is plunging into ‘stagflation’, ie an economic slowdown (= decline) combined with rising prices (= inflation).
But what are the causes of this regression? For Oscar Bernal, professor of finance in the management department of the University of Namur, it is the situation we are currently facing that is “quite special”. He explains to me:On the one hand, a supply shock, that is to say companies that slow down their activity because they are faced with a very significant increase in their cost of production due to the price of energy. And on the other hand, on a demand shock, that is to say that households consume less because they are faced with a reduction in their purchasing power due to the decline. It is the combination of these two shocks that leads to a slowdown in economic activity and therefore to a period of decline.”
The short-term consequences of this regression are that companies will initially postpone non-urgent investments in order to increase their production. They will also consider continuing to limit their production, to reduce energy costs. Under current conditions, the risk of bankruptcies is also increasing.
In the medium term, if activity continues to shrink, production is slowed and energy costs are still rising, companies could consider reducing labor costs, which means a hiring freeze even licensees. If there are job losses, households, already affected by a loss of purchasing power, could then be tempted to further reduce their consumption, in anticipation of bad weather. Their consumption would then decrease, which would lead to a drop in demand… It’s a vicious circle for companies.
The Belgian State also affected
Companies and households are not the only ones affected by this decline. The state loses on two counts: on the one hand, it loses tax revenue since economic activity and consumption also slow down. But it must also face an increase in its social expenditure since there are more families to help.
While usually, during a pullback, prices tend to decrease, this is not the case here. Why ? “Pbecause much of the inflation we face is imported inflation through our energy spending. The difficulty here is precisely having to deal with a slowdown in economic activity combined with a sharp increase in prices. This is obviously the inflationary phenomenon that we have been facing for several months now, and which leaves the authorities in a lot of difficulty as to how they must react in order to be able to deal with it”develops Oscar Bernal.
All this causes the situation to be considered worse than the decline, it is “stagflation”.