Real GDP growth in Luxembourg is projected to remain modest in 2024, at 1.2%, before picking up to 2.3% in 2025 and 2.2% in 2026. The below-average growth in 2024 is mainly due to weaker investment and net exports amid adverse financing conditions and geopolitical uncertainty. After a deceleration in 2024, headline inflation is set to rebound slightly in 2025 as a result of the phasing out of several energy measures. The general government balance is projected to remain in a small deficit.
| Indicators | 2024 | 2025 | 2026 |
|---|---|---|---|
| GDP growth (%, yoy) | 1,2 | 2,3 | 2,2 |
| Inflation (%, yoy) | 2,3 | 2,4 | 1,8 |
| Unemployment (%) | 6,0 | 6,0 | 5,8 |
| General government balance (% of GDP) | -0,6 | -0,8 | -0,6 |
| Gross public debt (% of GDP) | 27,5 | 27,6 | 27,5 |
| Current account balance (% of GDP) | -4,5 | -4,3 | -4,0 |
Growth to slightly rebound in 2024
After a contraction of 1.1% in 2023, real GDP expanded by 0.7% and 0.6% q-o-q in 2024-Q1 and 2024-Q2 respectively. Growth rebounded thanks to an acceleration in domestic demand and to a positive contribution from net exports, given that exports outperformed imports in the first half of the year.
Private consumption is expected to decelerate in 2024 due to a slowdown in wage growth and to low consumer confidence. Investment is set to suffer from a low level of transactions in the housing market hindered by tighter credit conditions. Nevertheless, a recent pick-up in household loans demand could indicate an imminent recovery. Overall, GDP is projected to grow by 1.2% in 2024 as a whole.
In 2025 and 2026, economic growth is expected to accelerate supported by an expansionary fiscal stance, falling interest rates -which underpin investment-, and the improvement of the external environment. Two expected wage indexations in 2025 should further support private demand, while an improved outlook for the property market is set to contribute to investment in dwellings. Credit to companies is projected to pick up from the current low level, benefiting both from the expected further fall in interest rates and from the realisation of delayed equipment investment projects. On the net exports side, financial services recovery, which started already in 2024, is projected to continue, thanks to a pick-up in investment fund revenue. In 2026, momentum is expected to weaken on the back of a lower domestic demand.
Labour market set to weaken
Following the contraction in GDP in 2023, employment growth is projected to lag activity, thereby slowing down to 0.9% in 2024, before accelerating to 1.6% in 2025 and 1.7% in 2026. The unemployment rate is expected to rise from 5.2% in 2023 to 6.0% in 2024, and to stabilise in 2025 before edging down to 5.8% in 2026 as employment recovers somewhat.
Inflation expected to slightly rebound in 2025
Headline inflation is set to drop to 2.3% in 2024 as a result of decelerating goods prices, primarily of energy, but also of food and industrial goods. It is projected to slightly rebound to 2.4% in 2025 as the acceleration of energy inflation (following the phase-out of most of the energy-related measures) is expected to more than offset the deceleration in food prices. Headline inflation is then forecast to drop to 1.8% in 2026 as inflation of energy turns negative and that of services and foods moderates further. Consequently, HICP inflation excluding energy, food, alcohol and tobacco is expected to decrease to 2.6% in 2024, and to rebound temporarily to 2.7% in 2025 before decreasing to 2.1% in 2026.
General government balance to remain in a small deficit over the forecast horizon
In 2024, the general government deficit is expected to decrease to 0.6% of GDP from 0.7% of GDP in 2023. Expenditure growth is projected to slow down compared to the previous year on the back of a less inflationary environment, in which the automatic indexation of wages and social transfers should not be warranted. The implementation of the provisional twelfths system in the first part of the year is also set to contribute to the expected slow down of expenditure. Revenue growth is projected to remain robust in spite of the impact of measures to support households’ purchasing power, the competitiveness of enterprises and the construction sector. The aggregate impact of these measures on revenues is estimated at 0.5% of GDP and includes an upward adjustment of personal income tax brackets following several wage indexations and a reduction in social security contributions for companies.
In 2025, the deficit is projected to increase to 0.8% of GDP, under the impact of a new set of measures to support the economic recovery and households’ purchasing power. In spite of the expected rebound in economic activity, revenues from direct taxes are projected to come in at a slower pace than in the previous year, as the government implements measures to support households and companies, including a reduction of the corporate income tax rate. The almost complete phase out of the measures to mitigate the impact of high energy prices contributes to limit expenditure growth in spite of the projected increase in price pressure, which increases expenditure on compensation of public employees and social transfers.
The deficit is set to decline to 0.6% of GDP in 2026, as revenue growth is expected to outpace expenditure growth. The assumed complete phase out of energy-related measures by end of 2025 should contribute to this. Public investment is projected to remain at a high level over the forecast horizon and support the digital and green transition.
The interest rate expenditure is expected to rise due to higher refinancing rates and increasing debt, reaching 0.4% of GDP in 2026. The debt-to-GDP ratio is projected to increase from 25.5% in 2023 to 27.5% in 2026, due to the budget deficits and to social security fund-related stock-flow adjustments.