Statec, the grand duchy’s statistics bureau, anticipates stable GDP growth in the medium term but highlights challenges posed by high unemployment rates. Released on 19 September 2024, the suggests that Luxembourg is emerging from the 2023 recession, with real GDP growth forecasted at 1.5% for 2024. Growth is expected to gradually strengthen, approaching 3% by the end of 2025. However, Statec’s revised medium-term outlook indicates a less favourable scenario compared to previous projections, with employment growth likely to struggle to exceed 2% and unemployment expected to remain above 6% until at least 2026.

Euro area

Statec cited Oxford Economics, which has projected a slight increase in the euro area growth estimate for 2024 from 0.6% to 0.8%, reflecting a better-than-expected performance in the first two quarters. Conversely, the growth forecast for 2025 has been revised downwards from 1.8% to 1.7% due to mixed economic signals observed at the end of summer 2024. For the period 2026-2028, Oxford Economics expects a gradual slowdown in euro area growth, decreasing from 1.8% to 1.3%, aligning with long-term trends. Inflation in the euro area is anticipated to fall below 2%, with a forecast annual average of 1.4% for 2025. Interest rate cuts by the European Central Bank in June and September 2024 are projected to continue, with the three-month rate expected to average around 2.2% in 2025.

Stock markets, which saw double-digit gains in previous years, are forecasted to experience diminished momentum, with growth projected to be just under 2% from 2025 until the end of the forecast period. Oil prices are expected to decrease from $83 a barrel in 2024 to $77 in 2025, before stabilising. The euro is anticipated to appreciate gradually from $1.09 in 2024 to $1.14 in 2028.

Risks and uncertainties

Despite a rebound in euro area economies anticipated for 2025 and possibly 2026, risks remain. Previously highlighted risks concerning fluctuating interest rates and inflation trends are less applicable in the current context, where a slower decline in inflation could delay or space out interest rate cuts.

According to Statec, the Luxembourg financial sector showed a slight recovery in early 2024, though growth acquisition remained negative at -1.1%, affecting the overall outlook for 2024. Continued recovery is necessary to achieve the projected 1.5% GDP growth for the year. The forecast for 2025 has been adjusted to a 2.7% GDP increase, down from the previously expected 3.0%, due to a broader deterioration in medium-term growth expectations. For the period 2026-2028, Statec expects an average growth rate of 2.7%, revised from nearly 3% in earlier projections. This downward revision reflects a reduction in the assessed potential growth rate, estimated at around 2.4% for 2024/2025, with a further adjustment to about 2% by the end of the forecast horizon.

Labour market

Employment continued to slow in the first half of 2024, with annual growth of about 1% in June and July, the lowest since the financial crisis of 2009/2010. For the entire year, employment growth is expected to be around 0.9%, negatively impacted by the construction sector. Unemployment, having progressed modestly since early 2024, is projected to average 5.9% for the year, up from 5.2% in 2023. Although a rebound in employment is expected in 2025, the growth rate will remain subdued at 1.5%, with unemployment hovering around 6.0%. The labour market is expected to recover more slowly in 2026, with employment growth projected at 1.6% and a slight increase in the unemployment rate. A more significant recovery in employment is not anticipated until 2027 and 2028, remaining below historical averages.

Inflation and wages

Inflation in Luxembourg is expected to slow further, with Statec maintaining a forecast of 2.3% for 2024 and 2.6% for 2025. The slight rebound is attributed to the partial removal of price shields and the cessation of certain gas price measures. Inflation is anticipated to stabilise below 2% in the medium term, similar to the euro area. are expected to be spaced further apart, limiting wage increases and mitigating potential secondary effects on prices. Nominal wage increases are projected to exceed inflation by about 1 percentage point per year, driven by improved labour productivity.

Policy measures

Statec’s forecasts incorporate various economic policy measures, including energy price caps, improved purchasing power and compensation for indexation. These measures are expected to raise GDP growth by approximately 1% in 2024 but are projected to have a diminishing impact in the medium term. The extension of the CO2 tax until 2028 and other housing measures are also factored into the projections, with the latter expected to generate moderate positive effects in the short term.

Statec has not yet provided updated figures on public finances, with revisions for 2018 to 2023 pending release. Updated projections for public finance aggregates will be published in December 2024.