Although Luxembourg is now officially facing a recession of unprecedented scale since the height of the steel crisis in 1975, the hit to the economy from the coronavirus crisis is likely to be a short, sharp shock. Statec director Serge Allegrezza says the current crisis is completely different in nature to that which spurred the grand duchy to diversify its economy in the 1970s, and not limited to any particular sector.

Indeed, the forecast of a rapid rebound from this year’s 6% shrinkage, with 7% growth expected in 2021 indicates there will be a V-shaped recovery, says Allegrezza.

The concentration of economic damage over a short period of time will also have an impact on quarterly growth figures, according to Bastien Larue, head of Statec’s conjunctural department is currently planning a 3% contraction in growth in the first quarter of this year, followed by a shrink of 15% for the following quarter. “Then we should have a rebound, it could even be a strong rebound,” he says. At the height of confinement, “a third of the economy ended up in short-time work,” says Ferdy Adam, head of the economic forecasting and modelling division. “We are in an atypical crisis, it is not a classic recession.”

The most affected sectors, such as construction, Horeca or trade, will find it near impossible to recover turnover lost during confinement. It is precisely in these areas, where teleworking opportunities are the most limited, that the use of the temporary unemployment scheme was strongest.

This did not, however, prevent the unemployment rate from rising in March. For 2020, Statec expects an unemployment rate of 6.7%, compared to 5.4% in 2019. The rate is even expected to rise to 7.3% in 2021. In March-April, there was a net loss of about 7,500 jobs and, over the same period, about 4,500 were added to the unemployment register says Larue. The statistician says there has not been a further increase in enrolment at employment agency Adem in April, but on the other hand, “companies didn’t hire at all in April,” he concludes.

Statec estimates that nearly 140,000 people likely suffered wage losses over one or more months during the crisis. This has led to a slowdown in consumer price increases, with the exception of some products, notably food, and the recent rebound in petroleum products. From 1.7% in 2019, inflation is expected to only reach 0.6% this year, then 1.6% in 2021. The consequence is that the next index-based automatic salary increase will not happen until 2022, according to Statec.

This will all have an effect on public finances. “If the economy collapses, there are fewer profits, less payroll and therefore fewer taxable bases,” Adam says. The result is likely to be an unprecedented deficit of -5.9% of GDP by the end of the year. By 2021, the haemorrhage is expected to be contained at -2.8% of GDP, but researchers say there are still too many uncertainties to make an accurate projection.

A more positive result of the slowdown in economic activity forced by the confinement is that greenhouse gas emissions were reduced dramatically, meaning Luxembourg could probably meet its emissions target this year according to Statec projections.

This article was translated and edited from the original French, published by Paperjam.