Economic expansion will continue at a steady pace this year and next, but the housing market remains an overarching risk to the grand duchy’s economy, a thinktank survey out this week has found.
Cumbersome regulations and unsustainable pensions also pose hazards to the country’s financial future, according to an annual review of Luxembourg’s economy by the OECD, a policy club for mainly wealthier countries.
GDP is expected to grow by 2% in 2019 and by 2.5% in 2020, underpinned by healthy levels of private consumption. The OECD forecast consumer prices to increase by 2.1% both years.
That said, the OECD identified several risks to Luxembourg’s economy and made policy recommendations to address the perceived shortcomings. Among them:
Rising property prices have led to higher household mortgage debt, and thus “domestic banks have large exposures to the residential real estate market”. The OECD wanted Luxembourg regulators to tighten “loan-to-value or debt service-to-income ratios, as envisaged in draft legislation, [which] would help avoid the further build-up of vulnerabilities.”
Zoning rules and “complex construction norms” are limiting the availability of housing, the OECD observed. Luxembourg should increase taxes on unused land and penalise “landowners and developers for non-use of building permits.”
Luxembourg’s population is ageing, and its retirement and care system (if unchanged) will eventually weigh down public finances. The OECD suggested: “Taking steps to increase the retirement age with life expectancy and/or reduce the generosity of pensions”.
The OECD additionally recommended reforming the bankruptcy code, improving worker training schemes, liberalising regulations on professionals (such as advertising bans), “enhancing” onsite inspections of financial institutions, and revamping how social housing is allocated.
The OECD’s “Economic Survey: Luxembourg 2019” was published on 10 July. Luxembourg policymakers are not obliged to implement the proposals, but the document can serve as a benchmark.