The European Commission reevaluated its economic forecast for 2022 in light of the energy crisis and Russian war on Ukraine.  Photo: Shutterstock

The European Commission reevaluated its economic forecast for 2022 in light of the energy crisis and Russian war on Ukraine.  Photo: Shutterstock

The European Commission on 16 May published its spring economic outlook, lowering the growth forecast for the grand duchy from 3.9% to 2.2% due to rising energy prices, inflation and the war in Ukraine.

After Luxembourg’s economy grew 6.9% in 2021, the European Commission’s quarterly update draws a bleaker picture for 2022 and 2023.

“Given the limited direct trade and financial flows with Ukraine and Russia, Luxembourg’s economy is projected to be impacted mostly indirectly, notably through higher financial market volatility, lower confidence and slower growth of trading partners,” the publication says.

With the outcome of the Russian attack on Ukraine and its impact on financial and commodity markets remaining uncertain, growth is estimated at 2.2% in 2022 and 2.7% in 2023. This was down from a February estimate of 3.9% growth for this year and 2.9% next year.

Inflation to rise but private consumption to increase

The growth recorded in 2021 will continue to support the employment sector in 2022, with unemployment set to sink to 5.2% in 2022 and 5.1% in 2023, and employment to increase by 2.6% this year and 2.5% next year. However, the high vacancy rate----and long term unemployed, which represent half of Luxembourg’s jobseekers, show “persistent skill mismatches”.

The rise in energy prices has a strong impact on the price of non-energy industrial goods and foods. The commission expects headline inflation to nearly double from 3.5% in 2021 to 6.8% in 2022.

Although the higher energy bills and food bills among others will strongly impact the purchasing powers of citizens, and private consumption will be affected, “it is projected to continue to grow”, thanks to savings accumulated during the pandemic, a dynamic labour market and government support measures, says the report.

For 2023, headline inflation is set to rise by 2.3%, the commission estimates.

Higher expenditure growth in 2022

The report also mentions a 0.1% GPD deficit for this year, due to lower growth and the high inflation rate pushing up expenditure. Compensation for employees, social transfers, public investments in the green transition and crisis mitigation strategies like the solidarity pact are set to increase spending.

The debt to GPD ratio also should rise from 24.4% to 24.7% for 2022.

However, the commission also says that “the revenue side is expected to still benefit from the strong performance of the labour market leading to an increase in personal income taxes and social contributions, also supported by wage indexations in October 2021 and April 2022.”