The economic fallout of the pandemic should see Luxembourg’s gross domestic product shrink by 6.5%, according to Moody’s, which also predicts GDP growth of 5% in 2021.

“The coronavirus pandemic has caused a deep recession in 2020,” the report published on 30 November said, adding that “the shock appears less pronounced than our projections for other European countries.”

The numbers compare to forecasts by national statistics office Statec of a 6% contraction in 2020 followed by a 7% recovery in 2021, and the European Commission predicting the economy to shrink by 4.5% this year and gain 3.9% next year.

“The possibility of remote working in the country’s large financial industry has helped contain the overall negative impact to date,” Moody’s said. However, it also warned of potential negative effects from Brexit, “given the strong links between Luxembourg’s financial sector and that of the UK.”

The agency also repeated words of warning on the grand duchy’s “heavy dependence” on the financial sector, which is regularly cited in its credit assessments. Luxembourg’s three rated banks--BGL BNP Paribas, BIL and Spuerkeess--fund 80% of the economy, Moody’s said, but account for just 1% of the country’s financial system.

Moody’s in April had upheld Luxembourg’s triple-A rating with a stable outlook although saying that the government would have to keep public debt under control.

Public debt is set to increase to nearly 30% of GDP because of the coronavirus crisis, with the government expecting a €4.4bn deficit in its “public administration” budget in 2020, including state, commune and social security finances. This deficit should shrink to €1.75bn next year.

The report also found between 48% and 55% of the three banks’ loans are linked to the real estate sector and mortages. “A continued rapid rise in indebtedness could increase households’ vulnerability to an economic downturn such as the one we are currently experiencing,” Moody’s said about high housing prices.

However, it also judged the risks for banks as limited, saying government measures to uphold households’ and companies’ creditworthiness will help mitigate the impact.