Forecast: Economic growth is forecast to reach 1.6% in Luxembourg next year, but this will not stem increases in unemployment, inflation and the government deficit, according to a new EU report.

Luxembourg’s and Europe’s economies will remain roughly stable in 2013 and are expected to recover next year, the European Commission has said. However jobless figures, consumer prices and government debt are all likely to creep up in the Grand Duchy next year, according to the commission’s “Spring 2013 forecast” issued Friday.

GDP growth

This year Luxembourg’s economy is forecast to grow 0.8%, compared to 0% in Belgium, 0.4% in Germany, 0.6% in the UK and 1.1% in Ireland, and 1.4% in Japan and 1.9% in the US, according to the European Commission report.

Contractions are predicted in France and for the entire EU27 (both -0.1%) and for the 17-member euro zone (-0.4%).

In 2014 GDP growth--assuming no change in government policies--is expected to be 1.6% in the Grand Duchy, in contrast to 1.1% in France, 1.2% in Belgium and for the entire euro area, 1.4% for the EU27, 1.7% in the UK, 1.8% in Germany and 2.2% in Ireland, and 1.6% in Japan and 2.6% in the US.

In the commission’s view: “At present, domestic investment and consumption are still being held back by balance-sheet adjustment and credit supply constraints in some countries, low expectations about future profits and income, as well as high uncertainty about the economic outlook.”

Unemployment

“The weak labour-market situation is expected to weigh on private consumption”, the commission added.

This year jobseekers are forecast to represent 5.5% of Luxembourg’s labour force, versus 5.4% in Germany, 8% in Belgium and the UK, 10.6% in France, 11.1% across the EU, 12.2% in the euro zone and 14.2% in Ireland, and 4.3% in Japan and 7.7% in the US.

Assuming policies remain in place, next year unemployment is projected to rise in the Grand Duchy to 5.8% and in France to 10.9%; remain unchanged in Belgium at 8% and across the EU27 at 11.1%; and to fall in Germany to 5.3%, in the UK to 7.9%, in the euro area to 12.1% and in Ireland to 13.7%, as well as to 4.2% in Japan and in the US to 7.2%.

Inflation

Consumer prices are predicted to increase 1.9% this year in Luxembourg, below the indexation threshold of 2.5% which would trigger automatic increases in wages and pension payments.

That is above the forecast rate of 1.2% in France, 1.3% in Belgium, 1.6% for the euro zone, 1.8% in Germany and across the EU27, as well as 0.2% in Japan and 1.8% in the US. The Grand Duchy’s rate would still be lower than the UK’s 2.8% inflation projection.

If governments keep the same course, the European Commission reckons that in 2014 inflation will slow down to 1.7% in Luxembourg and for the EU27, 1.5% for the euro area, 1.6% in Germany and 2.5% in the UK. It is thought consumer price increases will remain stable in Ireland at 1.3%, while rising to 1.7% in France, to 1.8% in Japan (below Japanese prime minister Shinzo Abe’s announced 2% target rate) and to 2.1% in the US.

Government debt

Gross public sector debt is forecast to represent 23.4% of the Grand Duchy’s GDP in 2013, the European Commission said. That is below the comparable rates in Germany (81.1%), the EU27 average (89.8%), in France (94%), both the UK and the 17-member euro area (95.5%), Belgium (101.4%) and Ireland (123.3%).

By next year, assuming unchanged policies, Luxembourg’s government debt is expected to increase to 25.2% of GDP, and rises are also expected in the EU27 (to 90.6%), in the euro zone (to 96%), in France (to 96.2%) and in the UK (98.7%). However, public debt is predicted to decline in Germany (down to 78.6%), in Belgium (to 102.1%) and in Ireland (to 119.5%).

“Fiscal consolidation is continuing, but its pace is slowing down,” Olli Rehn, European economy commissioner (photo), said in a statement. “In parallel, structural reforms must be intensified to unlock growth in Europe.”