Luxembourg, long regarded as an economic haven, is facing growing economic challenges. The results of the Economic Barometer for the second half of 2023, published on 9 November by the Chamber of Commerce, point to a difficult context for businesses.

The barometer assesses a country’s economic health by aggregating key indicators such as business confidence, economic activity, employment, profitability, investment and economic outlook. The survey, carried out between 18 September and 6 October among 647 companies (with at least six employees), reveals a deterioration in the business climate. Certain sectors, such as construction, Horeca (hotels, restaurants and cafés) and industry, are particularly affected by this negative trend.

Falling confidence, uncertain outlook

For the first time since the start of the health crisis, the barometer’s overall score has fallen below 50 out of 100 (48.9). This drop of 1.8 points compared with the first half of 2023 reflects a clear deterioration in business confidence. All the main economic indicators--including confidence in the future of the business, confidence in the future of the economy, past and future activity, employment, profitability and investment--are down.

The proportion of business leaders who say they are “confident” or “very confident” in the economy has fallen significantly since the beginning of 2022, dropping from 87% at the end of 2021 to 64%. However, confidence in the future of their own business remains stable, with 74% of entrepreneurs optimistic. Nevertheless, confidence in the industrial sector has fallen significantly, by 15 points in the space of six months.

This loss of confidence is mainly due to the slowdown in economic activity, with 54% of businesses reporting stagnation over the past six months, while 27% have recorded a decline. The short-term outlook remains pessimistic, particularly for the construction, manufacturing and Horeca sectors.

The “second effect of inflation”

Luxembourg is facing what Chamber of Commerce director  describes as “the second effect of inflation.” On the one hand, the rapid and significant rise in interest rates, introduced by central banks to counter inflation, is compromising their ability to finance new projects. On the other, wage indexation--despite being advantageous in periods of moderate inflation--becomes a financial burden when prices soar.

To mitigate these challenges, the Chamber of Commerce is once again calling for a reform of wage indexation. This proposal is based on three pillars: limiting indexation to a single annual adjustment, capping indexation at 1.5 times the median monthly wage and making indexation degressive above four times this median wage. In addition, it recommends the introduction of indexation based on a sustainable basket to ensure economic stability.

Structural reforms

The results of the barometer illustrate the need for structural reforms to revitalise the economy. Thelen stresses the urgency of these reforms, emphasising that specific tax measures for SMEs can help attract and retain talent, support companies’ digital and environmental transitions, encourage investment and stimulate entrepreneurship.

This article in Paperjam. It has been translated and edited for Delano.