“2023 will have been a gloomy year for the Luxembourg economy,” , director of Statec, Luxembourg’s statistics bureau, stated on Wednesday. And to add insult to injury, 2023 will be a year of growth for the eurozone at +0.5%. Weak growth, and it could still turn into a recession if the economic situation deteriorates further. Global growth, even though it has entered a slowdown phase, should reach 3%, driven by emerging economies.
Financial sector weight
This poor result for growth can be explained primarily by the poor performance of the financial sector in terms of volume (-6%). This comes as no surprise to Allegrezza, who noted that since the great recession following the banking crisis of 2008-2009, on the six occasions when Luxembourg GDP has grown less rapidly than that of the eurozone (2008, 2011, 2017, 2018, 2023 and 2024), “it has often been when activity in the financial sector fell in volume terms”.
Other branches of activity are contributing to the economy’s negative performance in 2023: construction, which is suffering from the rise in interest rates; transport, which despite the recovery at European level is handicapped in Luxembourg by a decline in air freight; and the IT and communications sector. “Some signs of recovery are coming from industry and non-financial services, but these are very recent and still very feeble”.
Overall, Luxembourg companies say they are suffering from insufficient demand and increasing financial constraints.
The outlook for 2024 is slightly better, with real GDP growth of 2%. 2024 will benefit from the resilience of private household consumption and public spending, and from a recovery in exports against a backdrop of stabilising factors such as a slight upturn in growth in the eurozone (+0.8%) and the expected fall in interest rates. “However, with a meagre +2% forecast for GDP in volume terms in 2024, and also considering the lack of economic momentum already seen in 2022 (+1.4%), the years 2022 to 2024 should be considered as a period of economic under-performance for Luxembourg”, Allegrezza said. The statistics agency added that the effects of the government’s initial tax cut measures have not been included in the calculations for the various macroeconomic scenarios.
-2.7% public deficit by 2024
On the inflation front, Statec expects inflation in the eurozone to return to the 2% target by 2024, after peaking at 5.6% in 2023. For Luxembourg, the forecasts are 3.8% for 2023 and 2.6% for 2024. This will trigger a round of indexation, automatic rises in salaries and pension payments, in 2024. Average salary costs are expected to rise by 6.3% in 2023, then slow to +3.1% in 2024, “due to a lower contribution from indexation and compensation to employers for the cost of the September 2023 indexation tranche next year”.
The trend in the labour market follows that of growth: despite a slight upturn in activity in 2024, employment should slow further (+1.3% in 2024 after +2.1% for 2023) and unemployment should continue to rise to 5.9% of the working population, “returning to its average of the last 15 years”.
On the public finances front, Statec expects a marked slowdown in the growth of both tax revenues and public spending in 2024. However, spending growth is expected to remain stronger than revenue growth in 2023 and 2024, pushing up the public deficit to -1.7% of GDP in 2023 and -2.7% in 2024. The measures announced in the coalition agreement have not been included in these forecasts, according to Statec.
Originally published in French by and translated for Delano