Because of inflation and rising interest rates, the Luxembourg economy is running at a low level, according to Statec. Photo: Shutterstock

Because of inflation and rising interest rates, the Luxembourg economy is running at a low level, according to Statec. Photo: Shutterstock

Against a backdrop of persistent inflationary pressures and restrictive monetary policies, economic activity will continue to expand at a moderate pace in 2023 and 2024, while the public balance will deteriorate considerably, according to Statec, which describes the economy as “running on empty.”

Penalised by the sharp fall in GDP in the fourth quarter of 2022, Luxembourg’s economy is likely to record weak growth this year, according to Statec, which, in its latest economic outlook, predicts growth of +1.5% for 2023 and +2.5% for 2024. This is 0.7% down compared to the February forecast.

“Despite the support provided by the measures adopted at the end of the tripartite talks, the forecast expansion appears moderate by historical standards,” comments the Luxembourg statistical office, which puts these projections into perspective by stressing the “many downside risks” that exist, “particularly with regard to the future path of inflation.”

3.9% inflation for 2023

Inflation is expected to remain buoyant in 2023 at 3.9%, before converging towards the 2% target at the end of 2024.

One of the components of this inflation is average wage costs, which are set to rise by 5.8% in 2023 and 3.7% in 2024.

On the labour market, the unemployment rate, which was 4.8% at the end of 2022, is expected to rise to 5.1% in 2023 and 5.3% in 2024. At the same time, employment growth will slow. In the first quarter of 2023, employment grew by just 0.4%, compared with 0.8% in the previous quarter. According to the latest projections, total employment growth is set to slow over the next two years, reaching an average annual growth rate of 2.5% in 2023 and 2% in 2024.

Public finances in the red

Public finances are more clearly in the red for the Statec. It’s a red that inflation could make even darker.

In the central scenario, public revenues are set to rise by 6.3% in 2023, buoyed by the wage bill, but limited by the less favourable trend in subscription tax and VAT. After committing around €700m in 2022, support measures are expected to reach almost €1bn in 2023 and slightly less in 2024. That’s just over 1% of GDP in both 2023 and 2024. As these measures will have an expansive impact on activity and a downward impact on inflation, they will ultimately make it possible to curb other public spending and thus limit the impact on public finances.

Nevertheless, Statec expects the nominal public balance to deteriorate in 2023 (-1.5%) and even more so in 2024 (-2.2%), as a result of the more pronounced slowdown in revenues than in spending.

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

Related articles