Luxembourg’s economy is poised for a period of moderate growth, with wage indexation expected in the second quarter of and continued, albeit uneven, recovery across sectors. While saw modest expansion, forecasts indicate a more robust trajectory for and , driven by falling interest rates and increased external demand, particularly for financial services.
The Luxembourg economy experienced a return to growth in following a contraction in , but this recovery has been characterized as lacking vigour and unevenly distributed. A modest expansion of 0.5% is anticipated for , with growth accelerating to 2.5% in and 2.4% in . This projected acceleration is underpinned by both stronger domestic and external demand.
Inflation remains a key factor shaping the economic outlook. Eurozone inflation is expected to reach the 2% target by the end of , falling below 1% in Luxembourg. However, a resurgence is anticipated in the Grand Duchy in , with inflation projected to reach 2.1% before easing back to 1.8% in . This anticipated rise is linked to the easing of energy price caps.
The next wage indexation is scheduled for the second quarter of , a crucial development for household incomes. Compensation per employee growth slowed considerably in , rising by just 1.2% year-on-year in the third quarter of . This slowdown was attributed to the reduced impact of indexation, coupled with a temporary reduction in employers’ contributions. However, compensation per employee growth is expected to rebound to 3.0% in with the expiry of the contributions measure, settling at 2.4% in .
Despite rising real wages, household consumption remains somewhat constrained by a high level of savings, although this savings rate is trending downwards. The global economy is projected to grow by 3% per year between and , despite anticipated slowdowns in the United States and China. The Eurozone is experiencing an ongoing, but uneven, economic recovery, showing signs of losing momentum as approaches.
Looking at specific economic indicators, real GDP growth in Luxembourg is projected at 0.9% for , increasing to 1.9% in . Unemployment is expected to remain relatively stable, at 6.6% in , 6.7% in , and 6.5% in . The general government balance is forecast to move from a surplus in to a deficit over the – period.
Recent data indicates a rebound in consumption growth in the second quarter of (0.2% after -0.5% in the first quarter), largely attributed to the wage indexation implemented in May. Consumption growth is expected to reach 1.4% in , down from 3.2% in . A pick-up in household loan demand suggests a slow but steady recovery in the housing sector.
Inflation in Luxembourg eased to 1.3% in January , a positive development for households. The decline from 1.9% in the previous month was driven by base effects and seasonal factors, although consumer prices did see a notable rise in February . The anticipated wage indexation in the second quarter of provides further support for household purchasing power.
The economic forecast suggests that favourable financing conditions will continue to support investment and private consumption in and , bolstering exports of financial services. While subdued in , growth is expected to accelerate in the coming years, contingent on continued low interest rates and a reduction in trade uncertainty.
