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The EU autumn forecast states that private investment in Luxembourg was mainly driven by the satellite and aircraft industry.Picture credit: Roman Boed 

Published on Thursday 9 November, it paints an optimistic picture of the euro area economy, which is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%). The EU economy as a whole is also set to beat expectations with robust growth of 2.3% this year (up from 1.9% in spring).

The report states that growth was pushed by “resilient private consumption, increasing support from a global upswing, loose financing conditions and healthy improvements in the labour market. Investment, which had been lagging, also shows signs of a broad-based pick-up.”

Consumer and business sentiments are also high.

Incomplete recovery

While recovery has taken place for 18 uninterrupted quarters, it remains incomplete and atypical, because of its dependence on policy support, the continuing presence of fiscal and financial fragilities stemming from the crisis, and the subdued strength of domestic demand compared to previous recoveries. Wage dynamics are still constrained and inflation dampened because of slow productivity growth and a slack in the labour market.

After climbing to 2.2% this year, euro area GDP growth is forecast to grow by 2.1% in 2018 and 1.9% in 2019.

Luxembourg

Luxembourg’s economic growth is projected at 3.4% in 2017, growing below expectations in the first half of 2017.

But conditions remain favourable and the latest indicators point to an increasing momentum in the second half of the year, according to the report.

Tax reforms offset by higher consumer prices in 2017

Private consumption is expected to recover after a weak performance in the first half of 2017, mainly because more residents were in employment.

However, the report states that the impact of income gains from the tax reforms and the wage indexation measures was lowered by the surge in consumer prices. High households’ indebtedness and increasing debt burdens, could also affect consumption growth.

In 2017, private investment will be mainly driven by the satellite and aircraft industry, while growth of construction investment is forecast to remain robust throughout the forecast horizon, the report states.

Financial sector growth strengthened in the first half of 2017, underpinned by the euro area’s recovery. The fund investment industry set new records, while the profitability of the banking sector was maintained, in spite of the high costs that new regulatory standards have entailed. The latest indicators suggest a continuation of these trends in the second half of the year.

“Stable and balanced growth ahead”

GDP is forecast to grow by 3.5% in 2018, with a more balanced, and broad-based composition.

Continued employment creation, the implementation of the next wage indexation (projected for mid-2018) and lower inflation are expected to continue to support private consumption and domestic demand growth in 2018. The external sector is expected to remain solid, supported by an improved external environment, especially in the euro area.

In 2019, consumption growth is projected to ease further, with income gains fading away and inflation progressively taking effect. The external sector, which is dominated by financial services exports, is expected to remain robust, even if receding, in line with financial markets prospects, according to the forecast.