Despite the slowdown in inflation and the fall in interest rates, geopolitical and economic uncertainties are still weighing on the business climate in Luxembourg. These are the findings of the , carried out between 16 September and 4 October 2024 among 617 companies with six or more employees. It should be noted that the survey was concluded before the  and the collapse of Germany’s coalition in early November, which is likely to accentuate this climate of uncertainty.

As a reminder, the economy barometer score (out of 100) corresponds to the average of seven business indicators: confidence in the future (business and economy), activity (last six months and next six months), employment, profitability and investment. With an overall score of 49.3/100, compared with 49.5 in the previous six months, the economic climate appears to be stabilising after a period of slowdown.

However, this stability masks significant sectoral disparities. Industry and construction, in particular, show worrying signs: 45% of manufacturers and 43% of builders report a decline in business over the past six months. Conversely, the financial sector stands out, with only 7% of companies reporting a fall in business.

The outlook for the next six months is slightly less pessimistic, but still worrying. Roughly one in five (19%) of those surveyed anticipate an increase in business, while 58% expect stagnation and 22% fear a decline (the construction and industrial sectors are the most worried about this possibility).

Confidence on the rise, but well below pre-pandemic levels

Managers’ confidence in the country's economic future is gradually rising, reaching 69%. This is still well below the level recorded before the covid-19 pandemic and successive crises (90%). Executives in the transport (79%) and financial services (78%) sectors are the most optimistic, while those in the construction sector are more reserved (59%).

With 30% of managers expecting their profitability to deteriorate over the next six months, the majority of companies have opted to stabilise their investments in the short term, particularly in industry and commerce. In construction, almost 40% of companies are even planning to reduce their investments.

“The continuing deterioration in business profitability, which is very marked in some sectors, should be a cause for alarm,” said , CEO of the Chamber of Commerce. “Restoring it must be one of the priorities of government measures and initiatives, because we can never stress enough that a business must first of all be profitable before it can invest, recruit and thus grow.”

The job creation dynamic remains modest: only 15% of companies are planning to increase their workforce, while 18% are planning to cut jobs, particularly in the construction, hospitality and retail sectors. Another problem is the shortage of qualified staff, which is currently a concern for 59% of business leaders.

Innovation key to business competitiveness

Against this economic backdrop, the Chamber of Commerce stresses the importance of innovation in maintaining business competitiveness. “Innovation is an essential lever for ensuring the sustainable and competitive development of our economy and our businesses,” said Thelen. “The majority of companies would like to see the creation of new tax incentives or capital funding to stimulate their capacity for innovation and thus their productivity. We could, for example, think of a research tax credit, a reduction in tax on staff costs or even greater opportunities in the area of equity investment.”

Over 63% of companies say they have innovated in the last three years, and 95.6% of them see tangible benefits for their business. The most notable benefit? An increase in productivity for 54.5% of companies, with particularly marked results in the industry and construction sectors.

However, one-third of managers have not innovated in recent years, or have been unable to do so, due to various internal and external obstacles. Among the three main internal obstacles are the difficulty of finding the right workforce (39%), lack of financial resources or profitability (37%) and lack of time (33%). As far as external obstacles are concerned, three major challenges persist: regulations that are too strict (29%), an uncertain economic environment (26%) and financial aid that is deemed to offer little incentive (25%). This last point is cited as the main obstacle by almost all sectors, with the exception of trade and financial services. For the latter, overly strict regulations are the main obstacle.

Artificial intelligence is seen as by far the most likely to reshape business, especially in financial services, where 90% of executives believe it will redefine their business models. Robotic technologies, meanwhile, are seen as the next big revolution in the industrial sector, with 57% of companies ready to invest in this area over the next three years.

“Innovation is a key factor in boosting business productivity. It is the main challenge facing Luxembourg businesses, whatever their size or the sector in which they operate. Their survival depends on it in a complex, uncertain and constantly changing world. For the government, it will mean gradually helping to remove the persistent obstacles to innovation, and making the very dense ecosystem of support and assistance for innovation more comprehensible, although its specific initiatives and measures are still too little known to business leaders,” concluded Thelen.

This article was originally published in .