Luxembourg’s economy in the first half of 2022 was subdued, noted the European Commission in its published on 13 February, but real GDP accelerated in the third quarter of the year, thanks to resilient private consumption and a robust financial sector. Annual growth for 2022 has been revised up to 2.0%, and it forecasts growth of 1.7% in 2023 and 2.4% in 2024.
In comparison, GDP growth is expected to decrease from 3.5% in 2022 to 0.8% in 2023 in the European Union overall, before increasing to 1.6% in 2024. In the euro area, GDP growth is expected to follow the same trends, declining from 3.5% in 2022 to 0.9% in 2023, before rising to 1.5% in 2024.
The European Commission expects private consumption in particular to rise due to measures from the Luxembourg government that mitigate the impact of high energy prices, as well as several rounds of wage indexation. It also forecasts lower commodity prices and higher confidence to support investment, though tighter financial conditions will also weigh on investment, especially in the construction sector.
--and the resulting lower borrowing capacity of households--are expected to have a negative impact on residential real estate construction in the grand duchy.
Gradual deceleration of inflation
Headline inflation in Luxembourg gradually decelerated in the last two quarters, reaching 8.2% in 2022. Government measures (Solidaritéitspak), which supported households and businesses with facing higher energy costs, are expected to ease inflation in 2023.
Inflation in the grand duchy is expected to be lower than in the EU and in the euro area for 2023: 3.1% compared to 6.4% in the EU and 5.6% in the euro area. In 2024, the European Commission is projecting headline inflation of 2.7% in 2024, similar to the projections for the EU (2.8%) and the euro area (2.5%).
However, core inflation is forecast to increase due to rising food, non-energy industrial goods and service prices, as well as indexations--a wage indexation of 2.5% is expected in April 2023 and in the fourth quarter of the year. The Commission expects core inflation to decrease in 2024--only one wage indexation is projected for Q3.
EU economy has seen positive developments since autumn 2022
The European Commission notes that gas prices have fallen, thanks to a decrease in gas consumption and diversification of supply sources, resilience of households and companies, strong labour markets and improved economic sentiment.
It expects the European Union to escape recession, but cautions that core inflation increased in January, companies continue to face high energy costs and monetary tightening seems likely to persist, thus hampering investment.
On , Luxembourg’s finance minister (DP) stated that she was “delighted to see positive signs on our horizon: The [EU] has demonstrated remarkable resilience in the face of the Russian war & the energy crisis. A technical recession now seems avoidable. Looking forward to discussions today & tomorrow with colleagues on the way forward.” Backes will attend meetings of the Eurogroup and the Economic and Financial Affairs Council (ECOFIN) in Brussels on 13 and 14 February.