Industrial production volumes (three-month moving average) in Luxembourg have remained below their 2015 levels, Eurostat data shows, while the euro area and European Union have recovered quickly after the decline in production in 2020 due to the covid-19 pandemic and are experiencing moderate growth.
The latest available data up until April 2023 shows that the production volume in Luxembourg has sustained seven months of contraction on a year-on-year basis.
“Several important industries in the country had to increase their sales prices to adapt to significantly higher prices for raw materials and energy. This led to lower demand,” said René Winkin, managing director of Fedil.
The federation includes nearly 700 industrial members, service providers and construction companies, representing 95% of Luxembourg’s industrial production, a quarter of national employment and over a third of national GDP.
“Higher interest rates and increased product prices have slowed down important markets such as [construction],” he said. As the building industry struggles to book contracts, “this impacts, of course, the related upstream manufacturing industries.”
While labour shortages are an issue, “I do not see it as the limiting factor explaining the decrease in industrial output since autumn 2022.”
Supply chains, too, which faced strong headwinds during the post-covid recovery for various reasons, including Russia’s war in Ukraine, are less of a problem now, Winkin said. “Supply chain problems may still arise here and there, but overall these problems are not comparable anymore to what the industry experienced in 2021.”
It is the financing of projects that is proving the bigger challenge for industry companies, said Winkin, and high interest rates are contributing to the slowdown in output. “The manufacturing industries [are] exposed to higher raw material and energy costs [and] had to look for financial means to build up additional cash flow.”
Government subsidies have helped, but “industry in general and energy-intensive industries in particular face new investment requirements to decarbonise their production processes. Besides the effect of these investments on capital expenditure, the decarbonisation agenda creates new challenges when it comes to future operational expenditure. The green public support framework has to take this new dimension into account.”
Manufacturing is particularly badly hit by the impact of increased costs, Winkin said. “All of them were more or less struggling to increase their own sales prices.” Energy-intensive industries, too, “have been highly affected.”
Statec data backs up the Fedil representative’s analysis, with the statistics office listing manufacturers of construction materials, plastic products, other products of first processing steel and electronic products and the textile industry as the sectors with the biggest decrease in production since the end of 2022.
“This wave of price increases flooding through the supply chains started more or less in spring 2021 and it explains the high inflation rates that we have experienced since the end of that year,” Winkin said.