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Our industry is under severe pressure. And yet that industry is crucial for innovation and productivity in our economy, for the sustainable transition and for our future wealth creation. We urgently need a real industrial policy.

While the previously feared recession scenarios in both the U.S. and Europe are largely absent (for now), there are major differences within the recent economic dynamics. Industry, for example, is under pressure in just about the entire Western world. This is troubling given the crucial role of industry in our economy.

Industry under pressure

In large parts of the global economy, manufacturing is faltering. After the earlier strong recovery from the corona crisis, this is probably largely a cyclical respite. The latest figures show that the worst on that front is not immediately behind us. For example, confidence in German industry, usually a frontrunner for European industry as a whole, has in recent months. This suggests that there is still some bad news to come in the sector.

In Belgium, however, there seems to be more going on than a mere cyclical hiccup. In Belgium, the industry is being hit harder than in the rest of Europe. In the first months of this year, industrial activity in our country was 6% lower than just before the corona crisis. This is the worst figure in Europe; on average, industrial activity in the European Union increased by almost 5% during that period. And according to initial estimates by the National Bank, activity in Belgian industry declined another 1% in the second quarter.

Structural handicaps

In addition to cyclical headwinds, Belgian industry faces significant structural problems. Despite the clear fall in energy prices, these remain higher than in other parts of the world, and this could well remain the case for a long time. This is obviously a problem for our energy-intensive industry. In addition, Belgian companies are faced with a wage handicap that has again been sharply increased by the recent wage indexation. With the correct application of the wage norm, this handicap should gradually be eliminated in the coming years, as neighboring countries catch up in terms of wage costs. But it will still take years before the wage handicap is normalized again. Meanwhile, Belgian companies will have to deal with these higher costs than their foreign competitors.

And then, of course, there are the classic difficulties of doing business in this country: heavy tax burden, high administrative burden, difficult labor market... The problems regarding permits and the resulting uncertainty for investments were highlighted in the past few days in .

Bleak picture of the future

All together, this paints a bleak picture for the future of industry in our country. The share of industry (the manufacturing sector) in our economy has been declining for some time, due in part to the increasing importance of the service sector, but over the past decade that trend seemed to have more or less stabilized. There is a real risk that the previous downward trend will resume in the coming years.

While this may be greeted with cheers in some quarters, the importance of industry to our prosperity is being remarkably smoothly ignored. The sector today 'accounts' for 14% of economic activity in our country, but is responsible for half of business spending on research and development and for more than half of our exports. Moreover, on average, industrial companies are clearly more productive than the rest of the economy and also have a positive impact on productivity in related businesses. Through that major impact on innovation and productivity, industry is a crucial driver of our wealth creation. In theory, other high-technology activities can take over that role of industry within the economy, but in practice this is not evident (painfully illustrated in the UK, among others). It is unlikely that we could achieve such a (theoretical) transition.

Industry also plays an important role in the sustainable transition. Our industry is ahead of large parts of the rest of the world in that regard. Closing down industrial activities here and de facto replacing their production with more polluting production from, say, Asia, is also a bad idea in terms of sustainability. With such a strategy, we would also be clearly worse off in terms of the climate challenge.

Industrial policy

Following China and the US, more and more countries are setting up a real industrial policy again. Belgium urgently needs to do the same. Rather than reacting to individual dossiers, we need to develop a vision of the kind of industry we want to move towards (the path to a sustainable industry is obvious), and above all a strategy to get there. If not, we risk seeing our industry crumble further, with dire consequences for our long-term prosperity.

Bart Van Craeynest is Chief Economist at Voka and author of the book Back to the Facts.

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