Economy: Luxembourg’s GDP will stagnate this year and next, while unemployment and government debt will continue to rise, and inflation will slow down, according to a rich world economic think-tank.
The OECD gave a relatively healthy report card to the Grand Duchy in its 2012 “Economic Outlook” released on Tuesday, but observed its financial sector was a double edged sword and called for Luxembourg’s government to push for fiscal reform.
“Economic activity has stalled since the end of 2011 owing to a sharp decline in exports and restrained domestic demand due to weak confidence and the ongoing euro area debt crisis,” the OECD said. The organisation forecasts GDP will grow this year by 0.6%, rising to 1.2% in 2% in 2014.
“Core inflation will remain above the euro area average, driven by the backward-looking wage indexation mechanism.” Nevertheless it predicted inflation will fall from 2.8% this year to 2% in 2013 and 1.9% in 2014.
Government debt is expected to rise from 29.8% of GDP this year to 32.6% in 2013 and 34.4% in 2014. “Long-term fiscal sustainability would be enhanced by ambitious reforms to the pension system, which has large future liabilities,” the OECD commented.
The OECD estimates that the unemployment rate will be 6.1% this year, rising to 6.6% in 2013 and 6.7% in 2014. “While employment has increased in the financial sector, unemployment is on the rise among lower-skilled workers due to lower demand in the export and construction industries,” the report noted.
Indeed, the financial sector remains one of the Grand Duchy’s bright spots, but also represents one the biggest risks of an economic slowdown. “Financial supervision has been strong and the sector is weathering the crisis relatively well,” the OECD concluded.
However it warned that “if the euro area debt crisis continues, confidence will remain low and drag down exports and growth by more than anticipated. At the same time, this may be mitigated by larger safe haven flows that boost financial sector activity.”
The economic think-tank’s annual report examined the prospects of more than 40 wealth nations and major developing countries.
