Salary indexation not before April 2025: Statec

In 2025, Luxembourg’s economy is expected to grow by 2.5%, with inflation remaining at 2%, while the public deficit is forecast to widen further to 1.3%, according to the statistics bureau Statec. Wage indexation is not anticipated before the second quarter.

In its first “Conjuncture Flash” of 2025, Luxembourg’s statistics bureau, Statec, reported that the grand duchy is expected to see modest economic growth in 2024, with a more substantial recovery projected for the following years. The report, on 6 January 2025, also confirmed that indexation, automatic rises in salaries and pension payments, would not be possible before the second quarter of 2025.

The bureau forecasts a 0.5% growth in Luxembourg’s GDP for 2024, following a contraction (-1.1%) in 2023. However, the recovery remains uneven, with various sectors experiencing differing growth rates. A stronger economic performance is expected in 2025 and 2026, with GDP growth projected at 2.5% and 2.4%, respectively. This rebound is largely attributed to lower interest rates, which are expected to encourage residential investment and the export of financial services, noted Statec.

Inflation trends and wage growth

Inflation in Luxembourg is expected to remain subdued, falling towards 1% by the end of 2024. However, Statec predicts that inflation will rise to 2.1% in 2025, primarily due to the easing of energy price caps. In 2026, inflation is forecast to slightly decrease to 1.8%. Luxembourg’s inflation remains lower than the eurozone’s target of 2%, with inflation in the eurozone projected to average between 2.3% and 2.4% in 2024. For 2025 and 2026, forecasts converge around the 2% target, ranging between 1.6% and 2.1% for 2025, and 1.7% to 2.0% for 2026.

Average wage costs in Luxembourg have decelerated, with a 1.2% increase year-on-year in the third quarter of 2024. This slowdown is primarily due to the reduced impact of wage indexation linked to lower inflation and a temporary decrease in employer contributions. Statec forecasts a 2.2% increase in average wage costs for 2024, followed by a stronger 3.0% rise in 2025 as employer contributions return to normal levels. Wage growth is expected to stabilise at 2.4% in 2026.

Employment

Employment growth in Luxembourg is expected to decelerate, reaching its lowest point since 2009 in 2024. Statec forecasts a 1.4% increase in employment in 2025, followed by 2.2% in 2026. However, this growth remains well below the 3% average seen over the past two decades. The construction sector continues to face challenges, with weak employment trends persisting despite some recovery in recent quarters. In contrast, non-financial services, which performed well in 2024, are expected to support overall employment growth.

The unemployment rate in Luxembourg is predicted to rise slightly to 5.9% in 2025, before improving to 5.7% in 2026, as stronger employment growth takes hold. As of , the unemployment rate stood at 5.9%.

Public finances

Statec’s report also notes a slowdown in public revenue growth between 2024 and 2026. This is attributed to in tax brackets, a decline in fuel sales and the normalisation . Public spending is expected to follow a similar trend, with growth limited by the end of crisis-related measures. As a result, Luxembourg’s public deficit is anticipated to widen from -0.6% of GDP in 2024 to -1.9% in 2026.

Real estate market

Luxembourg’s real estate market has shown signs of recovery, with an uptick in both house and apartment sales since the beginning of 2024. In the third quarter, sales of existing apartments rose by 8.3% quarter-on-quarter and 44% year-on-year, while new apartment sales increased by 11% quarter-on-quarter and 20% year-on-year. However, sales of new apartments remain significantly lower than historical averages, down by 76% compared to the 2015-2021 average.

Mortgage rates and real estate prices have contributed to the recovery, with mortgage rates decreasing since the beginning of 2024. The third-quarter banking credit survey indicated a rise in household demand for loans, supported by improved prospects for the real estate market. Fixed-rate mortgage rates decreased by 0.5 percentage points year-on-year, while variable rates decreased to 4.3%, compared to 3.5% for fixed rates.

In contrast, the financial sector has faced challenges. In the third quarter of 2024, the financial sector’s value added declined by 1.7% quarter-on-quarter and 1.9% year-on-year. This downturn was driven by reduced bank interest margins, which fell by 0.7% quarter-on-quarter and 3.3% year-on-year. Despite this, wealth management and investment fund fees supported banks’ results. Additionally, life insurance premiums saw a sharp increase of 65% year-on-year in the third quarter, although insurance companies’ contribution to the total financial sector's value added remains minimal.

Risks and uncertainties

While Luxembourg’s economic outlook appears promising, several risks could affect growth. Uncertainties surrounding inflation trends and future monetary policy responses could disrupt the economic recovery. On the downside, higher-than-expected interest rates in the eurozone could undermine growth prospects for 2025. Conversely, a quicker-than-expected reduction in rates could add around 1 percentage point to the growth forecast for the year.

Additionally, the anticipated improvement in employment may face structural challenges. Statec highlighted that the current slowdown in cross-border employment could be not only cyclical but also structural in nature, which might dampen the pace of employment growth in the medium term.