European Outlook Roundtable

Economy not yet out of the woods, say experts

Oliver Rakau is associate director and deputy head Europe economics of Oxford Economics. Photo: Matic Zorman (archives)

Oliver Rakau is associate director and deputy head Europe economics of Oxford Economics. Photo: Matic Zorman (archives)

At an annual conference co-hosted by Luxembourg’s statistics bureau Statec and the advisory firm Oxford Economics on 24 February, experts discussed economic projections and the impact of increasing interest rates on banks in Luxembourg.

For Oliver Rakau, associate director and deputy head Europe economics at Oxford Economics, the economy is not yet out of the woods. Surprising economic resilience has lifted sentiments from “depressed levels,” and the “subsiding energy crisis is a key support for the 2023 outlook.” Lower gas demand and a mild winter will make it easier to refill gas storage ahead of next winter, he noted in his presentation.

However, Oxford Economics is “more cautious” when it comes to forecasting GDP growth for the eurozone, compared to others. They are anticipating GDP growth of only 0.4% for the eurozone for 2023. In comparison, the European Central Bank forecast 0.5% GDP growth (December figures), as did Consensus Economics (median from its February release), while the International Monetary Fund forecast 0.7% growth in 2023 in the euro area at the end of January, and the European Commission projected 0.9% GDP growth (in February).

“High backlogs and easing supply bottlenecks may not sustain activity until demand recovers,” said Rakau in his presentation. Moreover, Oxford Economics is forecasting weaker growth in China and the US in 2023 compared to the IMF--Oxford forecasts 0.0% real GDP growth for the US in 2023 compared to 1.4% for the IMF--before a “rebound” in 2024. 

Oxford Economics said that the “hit to demand” from the ECB’s tightening monetary policy has not yet been fully felt yet, and also expects that consumers will remain under pressure in the near-term, despite easing inflation and a solid labour market.

“There have been some grounds to be more cautiously optimistic recently,” Rakau’s presentation concluded. “We still see recessions as more likely than not in several advanced economies. But developments have lessened extreme downside risks and support the view that contractions will be short and shallow.”

How do things look for Luxembourg?

Ferdy Adam, head of division for economic analysis, forecasting and modelling from Statec, also gave a presentation on the medium-term outlook for Luxembourg. The statistics bureau is forecasting a weak 2023, but a stronger 2024, with trend growth at 2.5%, and non-financial market sectors returning to “normal” from 2024. In his presentation, he also pointed out that Luxembourg employment growth “regularly outpaces” that of employment in the eurozone, and that while wage evolution is more dynamic in Luxembourg, other countries “will catch up with a delay and with some pain.”

Pauline Perray from Statec also discussed the impact of the rise in interest rates on banks in Luxembourg. There has been a “substantial increase in consumer prices and policy rates,” she said in a presentation, as well as a decline in demand for loans in both Luxembourg and the euro area. All types of banks have benefitted from the sharp rise in interest rates. The total “interest margin” increased by 37% in 2022 and is expected to increase by 26% in 2023, says a recently published Statec report.