The clear upturn in GDP in the first quarter, the improvement in business sentiment and the prospects offered by the fall in interest rates all point to a recovery in activity in Luxembourg, say Statec economists in their latest , published 19 June. They are nevertheless wary of being over-optimistic, pointing out that we are still only seeing “the embryo of a recovery.” Although activity is on the up, not all the signs are green.
Business and consumer confidence is rising, but remain volatile. In the construction sector, despite successive packages of government measures, confidence remains low and the number of transactions is plummeting, particularly in the new-build sector. “For this sector, the prospect of lower interest rates should gradually reinvigorate demand, but it will take time for activity to return to previous levels,” reads the report.
On the inflation front, although the forecast has fallen from 3.7% in 2023 to 2.3% for 2024, pressure persists on services and inflation could well pick up again in 2025 to reach 2.6%, driven by energy costs. On the labour market, Statec is observing a marked slowdown in job creation, and is therefore forecasting that the unemployment rate will continue to rise, averaging 5.8% this year (5.9% for 2025). Employment growth should slow to +1.3% from +2.2% in 2023, before picking up slightly to +1.7% in 2025.
A persistent public deficit
Statec forecasts very weak growth in public revenues in 2024 (+4%). “The marked slowdown in revenue is mainly due to the compensation for the third indexation in 2023 on the 2024 business contributions, the adjustment of the household income tax scale by four index brackets and the slowdown in growth in the wage bill.” Spending is also expected to slow in 2024 to +4.8%, “under the effect of stagnating investment and the moderation in employment and the sliding wage scale.”
With expenditure growing faster than revenue, the public balance would deteriorate by 0.4 percentage points, from -1.3% of GDP in 2023 to -1.7% in 2024, according to Statec.
In 2025, revenue growth should return to normal (+6%), benefiting in particular from the lesser impact of tax cuts. Public spending is expected to grow at a similar rate to revenues, driven mainly by the recovery in investment and the government’s programme to purchase housing to meet the needs of people on low and moderate incomes. The deficit should therefore stabilise at the previous year’s level, says Statec.
Statec’s macroeconomic forecasts in a nutshell. Image: Statec
This article was first published in French on . It has been translated and edited for Delano.