For the new director of Statec, , the medium-term economic outlook offers grounds for “cautious optimism.” His department is counting on a gradual recovery in economic activity (average growth of 2.5% over the next two years), inflation stabilising at around 2% and unemployment just below 6%. These are moderately optimistic forecasts, and they are subject to the threat of a resurgence in inflation. A resurgence that could delay the return to quality growth.

The key figure at a time when politicians are concentrating on the budget is the trend in the public balance. A trend that will continue to deteriorate. While the public balance for 2024, at -0.6%, was a pleasant surprise, this pleasant surprise was due to non-recurring factors: the balance of taxes due by companies for the covid years has risen sharply--a phenomenon that is almost impossible to predict, says Gabriel Gomes, head of Statec’s modelling and forecasting unit--and the return to normal VAT rates, which had been cut by one percentage point.

These are factors that will not recur over the next few years. What’s more, according to the country’s statistical bureau, resources linked to excise duties on fuel and tobacco will mechanically fall for various reasons, such as the CO2 tax, which will drive down fuel consumption, and the convergence of tobacco prices. In 2025 and 2026, the public balance will remain negative at -1.3% and -1.9% respectively. Despite a slowdown in spending, the ratio of public expenditure to GDP is also set to reach historically high levels: almost 50% in 2026.

No index before the second quarter of 2025

It is worth noting that the rise in GDP will not reduce the negative trend in the public balance.

In Statec’s central scenario, growth would reach 0.5% 2.5% in 2025 and 2.4% in 2025. The same applies to unemployment, which is forecast to rise from 5.7% in 2024 to 5.9% in 2025, before falling back to 5.7% in 2027, against a backdrop of stagnating domestic employment, which Gomes believes will grow at a “historically low” rate: 1% in 2024, 1.4% in 2025 and 2.2% in 2026.

Average wage costs will rise by around 3% in 2025, falling to 2.4% in 2026. In view of the stabilisation of inflation, the Statec is now forecasting the next indexations for the second quarters of 2025 and 2026. Inflation, which will slow sharply to 2% in 2024, should rebound to 2.1% in 2025 before dropping back below 2% in 2026. This rebound can be attributed to energy prices, against a backdrop of the disappearance of tariff protection for gas and greater selectivity in subsidies for electricity.

Consumption and investment struggling

The adjustment variable? Household consumption. In Europe, as in Luxembourg, it remains weak, while the savings rate is on the rise again. It reached 16.5% of disposable income in the second quarter of 2024. This compares with an average of 13% before the covid crisis. This is a real “black mark” for Bastien Larue, head of unit, who explains this situation by the rise in commodity prices, including energy, and also by a certain anxiety. Household consumption has slowed sharply to +1.4% in 2024, compared with +4% in 2023. In the 2010s, the average growth rate of household consumption was 2.5%.

This sluggishness can also be seen in the 7% fall in investment spending in 2024. In 2023, the decline was just 1%.

Driven by the fall in interest rates, residential investment should gradually recover over the next two years. Even so, the situation in construction remains difficult. Since 2022, activity has fallen by 17% and remains on a downward trend. However, the rate of decline is slowing. The morale of companies in the sector remains at a low, especially as, although there has been a recovery in transactions (up 26% year-on-year in the second quarter), transactions for new-build property--where the construction sector is sustained--remain low.

This article was originally published in .