“Luxembourg has been affected more by the Ukrainian crisis than by the pandemic,” says Vincent Hein, director of the Idea Fondation, a think tank devoted to the sustainable future for Luxembourg. “Although the economy returned to growth in 2024 (+1%), the shock caused by the war in Ukraine continues to weigh on economic activity. GDP remains 0.8% below its 2021 level.” Under current conditions, he says, “the golden age of Luxembourg growth is certainly behind us, at least for the next five years.”

Hein points to the downturn in the credit cycle, which has caused investment to plummet (-22% in three years), particularly in the property sector. “[This] is significantly affecting the national economy.” He also points to net exports of goods and services, which have been sluggish since 2020. If the economy is holding up, he believes, it owes this to household consumption--a “surprise”--and to the increase in public spending via the “multiple public support plans and measures to preserve purchasing power.”

Structural stalls

For Hein, the last five years of polycrisis have accentuated the downturns already observable in the Luxembourg economy, such as the slowdown in trend growth, the fall in apparent labour productivity and the relative decline in the role of the commercial sector in value creation. “Compared with 2019, GDP per capita is down by 3.4%, GDP per job by 5.5% and GDP per hour worked by 4%.”

According to him, this poses three challenges for politicians: to put an end to public support schemes without penalising activity; to reinvigorate the productive fabric in order to gain in productivity; and to overcome the structural challenges to growth, i.e. high dependence on border labour, the housing crisis and the fall in productivity.

A slowing labour market

“The labour market is logically affected by this slowdown phase,” adds economist Ioana Pop. “Job creation has reached its lowest level since the 2009 crisis, with growth limited to 1.1% in 2024.” The construction sector has suffered the most, with the loss of 2,475 jobs. Notably, in 2024, the commercial sector created only 1,300 jobs, compared with 4,450 in the non-commercial sector.

Despite the slowdown, notes the economist, “dependence on cross-border work continues to grow.” Other challenges for the economist are the growing mismatch between skills and the market, particularly in the fields of artificial intelligence and the environment; the difficulty of keeping older people active, as only 48.3% of people aged 53-64 are still working; and the decline in the number of hours worked per job.

Public funding increasingly essential

For economist Jean-Baptiste Nivet, public finances are under pressure. While he believes that public debt should remain below 30% of GDP between now and 2030 and that the budget deficit will fall from 0.6% in 2024 to 0.4% of GDP in 2028, he stresses the central role that public investment will play in supporting the economy. Specifically, it should be a substitute for the support programmes launched with covid, programmes that, the Idea Fondation says, should be shuttered.

“Public investment--4.8% of GDP in 2025--is back at a level not seen since the early 2000s, with investment in housing, transport infrastructure and defence in particular,” he notes. “Increased military spending and economic uncertainties could constrain budgetary room for manoeuvre, as could an ageing population exerting increasing pressure on social accounts.”

This article in French.