Paperjam.lu

unsplash-logoEileen Pan 

In a report issued on Tuesday, Statec warned of several potential drags on Luxembourg’s economy, including virus-induced slowdowns among the country’s major trading partners, a notably larger government balance sheet and softness in the financial services sector.

The negative impact should be felt when first quarter figures are released and, even with a rapid resolution of the outbreak, shockwaves could potentially continue to strike well into 2021, Statec cautioned.

From the Statec report:

“European countries were forced to adopt containment measures to slow and mitigate the spread of the virus. In specific terms, this has meant shutting down many sectors of economic activity, either completely or partially. This is set to considerably inflate public spending, firstly through automatic stabilities (i.e. institutional mechanisms aimed at smoothing out changes in the economy, such as unemployment benefit and partial unemployment) and secondly through exceptional budgetary policy measures to support both companies and households”.

 

“For the moment, the economic impact on the first quarter is hard to quantify. Many indicators relating to activity in Europe such as output and turnover are only available up to January 2020, while the first negative economic effects linked to the spread of the virus are not expected to impact results until late February (and the impact is set to be even worse in March).”

The Statec report subsequently stated:

“A crisis of this nature should in theory have only limited impact over time (similar to a V curve). But it could also have longer lasting consequences due to deteriorating public finances, the destruction of the economic fabric (through bankruptcies) and prolonged periods in unemployment (hysteresis). However, it is much too early to evaluate these effects, which will really start to hit in 2021.

 

“The only certainly is that 2020 will be much worse than expected as recently as February.”

Statec cited revised a OECD growth forecast for the euro zone of -1.3% issued on 2 March, a European Commission paper estimating a 1% contraction of euro zone GDP published on 13 March, and an Oxford Economics prediction that the euro zone economy would decline by between 2% and 3% this year, issued on 20 March.

Luxembourg GDP growth

Statec said it would issue its own revised economic forecast for the grand duchy on 11 June, but stated it would already “sharply downgrade short-term economic prospects” for the country.

Luxembourg GDP grew 2.3% in 2019, compared to 1.2% for the wider euro zone. In its paper, Statec observed:

“The apparent resilience of employment in Luxembourg is, however, due to a number of exceptional factors, which boosted job creation in the retail trade, the financial sector and public sector employment.

 

“Over 2019 as a whole, most growth occurred in non-financial services, particularly information and communication, business services and predominantly non-commercial activities. By contrast, added value in the financial sector dipped about -1% in volume. For Q1 2020--and unfortunately more than likely also for Q2--we can expect data to be weak, as activity appears to have come unstuck in late February.”

The Statec report noted increased public borrowing by European governments and the corresponding increase in the interest rates they have to pay on their bonds, but did not touch on Luxembourg’s balance sheet. (Delano has asked Luxembourg’s finance ministry if any new bond issues are planned.)

Partial unemployment programme

The latest unemployment figures, for February, did not reflect current coronavirus shutdown conditions. Statec commented that, as during the 2008-2009 recession, the short-time working scheme, “recently extended to almost all market branches, will again have to play its part to help absorb the shock.”

Statec published its monthly economic outlook paper, “Coronavirus threat becomes a reality”, on 24 March.