Over the last three years, Belgium's public debt has fallen by more than 4 percentage points of GDP, after having risen sharply during the financial crisis. This reversal is good news and was mainly due to stronger economic growth and fiscal consolidation. However, at 103.4% of GDP, the debt ratio remained among the highest in the euro area in 2017. To further reduce the debt to a sufficient extent, the primary budget surplus should continue to build up in the short term to above 2% of GDP, in line with the target set in the Stability Programme. In the longer term, new savings should -preferably be made at the same time to offset the costs of an ageing population. Otherwise, a declining primary surplus threatens to ultimately increase the debt without it having sufficiently fallen towards the 60% level. To reduce the debt ratio structurally in the context of a normalisation of the current historically low interest rate, the growth potential of the economy will also have to be increased. Despite the still high debt, Belgium is maintaining market confidence. This is related to the relatively healthy position of the private sector, as a result of which the Belgian economy as a whole is in a very positive net asset position vis-à-vis the rest of the world.
In recent years, there was a broad-based recovery in Europe’s housing markets. Since the second half of 2016, a majority of EU countries are again recording annual house price increases of above 5%. The price rally has prompted public debate as to whether EU property markets are overvalued. In general, fundamental factors, such as disposable income, interest rates and demographics, can explain much of the recent rally seen in the EU28. The upturn can, in particular, be linked to the prevailing low interest-rate environment and to the economic recovery that started early 2013. Looking forward, the sustained positive growth environment will likely provide sufficient counterweight to rising interest rates. Therefore, further house price increases, albeit at a notably more modest pace than of late, are the most likely scenario for the coming years. The main risks facing Europe’s housing markets are to emerge in circumstances where there is: (1) a severe growth slowdown combined with rising unemployment, (2) an unexpectedly strong and sudden increase in interest rates, and (3) a decline in popularity of real estate as an investment. Based on our assessment of valuation metrics and household indebtedness indicators, vulnerabilities to such shocks seem the largest in Sweden, Luxembourg and Austria.