The researchers analysed best and worst-case scenarios, anchored in macroeconomics and its interactions with epidemiology, to determine what impact the health crisis will have on the grand duchy’s GDP across quarters in 2020 and into 2021. 

Best versus worst-case scenarios

The initial best-case scenario was based on there being no second wave and, thanks to rapid scientific progress, restrictions would be lifted by Q4 2020. 

In this model, “the underlying epidemiological trajectory assumes that virus transmission rates decrease monotonically towards zero between September 2020 and May 2021,” plus relaxed social distancing. “The spread of the virus remains rampant until June 2021 with low intensity from January.”

In this best-case scenario, although Luxembourg’s annual GDP growth would be -3.5% for 2020, this would pick up in 2021 to +4%. The projection estimates a Q1 2021 growth of 0.5%, and then 2% growth for each quarter thereafter. 

A worst-case scenario, on the other hand, would see a second lockdown (assuming a 1 November start) in light of a second wave, again with certain assumptions. In this model, “Covid cases would have peaked peak at 14,500 by mid-November 2020, as it takes approximately 2 weeks for lockdown measures to become effective. This roughly corresponds to 100-120 admissions in intensive care units two weeks after the peak (i.e., by the end of November). The cumulated share of people who have ever been infected reaches 20% (i.e., 100 000 individuals) by the end of 2021.” In this projection, Luxembourg would witness a -4.5% GDP growth rate for 2020 compared to -0.5% for 2021.

Somewhere in the middle

Given that Luxembourg has gone back into partial lockdown and has a set curfew plus other restrictions, the country is likely somewhere between these forecasts. As the brief’s authors note, the measures depend a great deal on whether individuals actually adhere to them. 

The brief therefore also analyses two other situations: a second wave without a second lockdown, and a second wave with a 1-month lockdown in the hospitality sector. Perhaps most surprising is that the figures, again according to the researchers’ assumptions, aren’t too far off. In the case of a second wave without another lockdown, they estimate -3.8% annual GDP growth in 2020 and +3.6% in 2021. With the hospitality lockdown this forecast changes to -3.9% and +3.7% growth over the same years. 

“Excluding…extreme scenarios, a one-month lockdown in HORESCA has limited impact on the national economy, despite increasing the already huge annual income loss in this sector,” the authors note. 

Teleworking practice changes “have little effects on the infection curve”, and the “highest transmission rates are now observed outside the labour market. Changes in social distancing have bigger effects.”

In addition, the report notes that annual growth rates are sensitive to the international context, with “the economic trajectory for 2021 [being] sensitive to exports.”