The state of the grand duchy's economy compared to other countries was at the forefront of the Idea foundation's annual presentation for which it consulted a panel of economic decision makers with some interesting figures being provided along the way.

2.3% GDP growth in 2022

“Luxembourg has not done too badly compared to other countries,” says Muriel Bouchet, director of the Idea Foundation. “By the third quarter of 2021, we were back to pre-crisis GDP.” In 2021 the grand duchy's GDP increased by 6.9%. This is thanks to state aids, sectoral specialisation and the many jobs in sectors which allow for teleworking, according to Bouchet. But the war in Ukraine is creating new uncertainties. So much that, according to the Organisation for Economic Cooperation and Development (OECD), the conflict in Ukraine is likely to cause GDP to fall by 1.4% in the euro zone and by 1.1% in the world in 2022.

In Luxembourg, Idea surveyed 118 economic decision-makers between 9 and 18 March 2022. They forecast GDP growth of 2.3% in 2022, instead of the 3.5% predicted by the Statec in February. For 2023, their predictions indicate a 2.4% growth compared to the national statistics bureau's 4%.

These forecasts are less pessimistic than the ones made by the decision-makers before the covid crisis. “The panel had seen a 5% recession in Luxembourg, whereas in the end it was around 2%,” recalls economist Vincent Hein. “It's as if the panel members thought that we would resist this crisis in the same way that we resisted the Covid crisis,” he adds.

Michel-Edouard Ruben, an economist at the Idea foundation, puts forward a couple of reasons for the optimistic estimations: the fact that Russia is “poorly integrated into the world economy” and that “principles protect the economy”. However he also highlighted that  “forecasters are very bad in a crisis situation. We don't have enough hindsight on the war in Ukraine”. Idea nevertheless points out that Russian gas accounts for 40% of gas consumption in the European Union and that Russia and Ukraine account for 30% of world wheat exports.

-14.1% added value in the hotel and catering industry

Although Luxembourg has weathered the crisis well for the moment, the figures nevertheless show disparities between sectors for 2021. Unsurprisingly, the most affected area is the hotel and catering industry. Idea calculates a decrease in its added value of 14.1%. Conversely, it is the information and communication technologies (ICT) that have increased their added value the most: +10.1%.

5.1% unemployment rate in 2022

The labour market has also done well, with the creation of 22,000 jobs, including 16,700 in 2021, “a record” and “a clear contrast with the euro zone”, according to Bouchet. The latest Statec figures indicated that the unemployment rate is now 4.9%. After the 5.2% in December 2021, economic decision-makers are expecting it to stagnate at 5.1% in 2022 and then at 5.2% in 2023, higher than the Statec forecast made in February: 4.7% for 2022 and 4.5% for 2023.

5.4% inflation rate in 2022

The war in Ukraine is already pushing up prices, and economic policymakers are well aware of this in their forecasts. They expect prices to rise by 5.4% in 2022 (compared to 4.4% according to Statec in February) and by 3.6% in 2023 (instead of 1.3%).

28.2% of GDP public debt in 2027

Another feat of the local economy is in public revenues, which have made “a recovery that might have seemed undreamed of,” according to Idea. After having fallen by 4% in 2020, they have rebounded by 15.6% in 2021. Even if, once again, inflation-related aid could affect them. According to economic decision-makers, Luxembourg's public debt is likely to increase from 25.9% of GDP to 28.2% by 2027.

4.6% corporate tax yield

Idea outlines several challenges for the government. The first is the international tax reform, which foresees a minimum tax rate of 15% for multinational companies in 2023. In Luxembourg, revenues from these taxes are “much higher than in other countries”. They represent 4.6% of GDP in 2020, compared to 2.3% for France or 1.1% for the United States. One might think that the reform will further increase these revenues for the country but it could also lead to relocations. “At the moment, it is difficult to say whether we are heading towards a positive or negative scenario. The government needs to adopt an agile wait-and-see strategy,” says Bouchet.

0.1% property tax yield

Idea highlights the need for property tax reform in Luxembourg, where it represents less than 0.1% of GDP in 2020, compared to 3% in France, for example. A “ridiculously low” rate, for the Idea foundation, who says  increasing it represents "a potential for considerable additional revenue" for the State's coffers, and a "means of combating property retention".

This responds to the second challenge put forward by the Foundation's 2022 opinion: “making housing accessible to all”. Today, it takes six years for a couple on an average salary to afford 100m2, compared to two years in 1990.

On the other hand, economic decision-makers are optimistic on the subject of real estate. They project a price per square metre of €10,450 in 2030. "We could debate this estimate," warns Hein. He notes that “prices will continue to rise, but less than in previous decades”. This estimated 38% increase would be “the lowest since the 1970s”.

In any case, 70% agree with the need to increase property taxes in Luxembourg. And 78% say that a property tax reform should be carried out that makes aid conditional on income.

56% against a reform of the index

A more divisive issue is the index. 56% of economic decision-makers are against a reform of the index so that it only applies to the lowest incomes.

5% growth needed to finance pensions

One problem has not been exacerbated by the crisis, nor has it disappeared, namely that of financing pensions. At the current rate of growth, 5% of GDP would be needed to pay for them. According to Idea, a pension reform would allow us to keep up with an annual growth rate of 3%, which is more feasible. This would involve, for example, lowering the highest pensions.

13% less CO2 emissions in 2021 than in 2019

After the year 2020 marked by confinements and massive teleworking, CO2 emissions have necessarily increased in 2021. But they remain 13% below their 2019 level, according to initial estimates--perhaps an effect of continued “teleworking or the CO2 tax”. For the future, however, hope is fading. Whereas in 2021, 46% of economic decision-makers thought that the 2030 climate objectives were achievable in Luxembourg, now only 31% do so. As for the European objectives, the number of optimistic decision-makers has fallen from 44% to 28%.

This story was first published in French on . It has been translated and edited for Delano.