Real GDP growth in Luxembourg is projected to remain low in 2024, at 1.4%, before recovering to 2.3% in 2025. The below-average growth in 2024 is mainly due to weaker net exports and investment amid adverse financing conditions and geopolitical uncertainty. Headline inflation is set to decelerate over the forecast horizon, mainly as a result of the deceleration of food prices and moderating wage growth. The forecasted budget deficits are projected to increase the general government debt-to-GDP ratio, although it is still set to remain at a low level.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | -1.1 | 1.4 | 2.3 |
| Inflation (%, yoy) | 2.9 | 2.3 | 2.0 |
| Unemployment (%) | 5.2 | 5.8 | 5.7 |
| General government balance (% of GDP) | -1.3 | -1.7 | -1.9 |
| Gross public debt (% of GDP) | 25.7 | 27.1 | 28.5 |
| Current account balance (% of GDP) | -3.3 | -3.4 | -3.2 |
Growth projected to slightly rebound in 2024
Real GDP contracted by 1.1% in 2023 mainly due to a drag from net exports and contraction in investment. The weakening of the activity was mainly observed in the financial and construction sectors with an important drop in gross value added, explained notably by high interest rates, high level of real estate prices and supply constraints.
Private consumption accelerated strongly in 2023 in a context of multiple wage indexations and a temporary VAT reduction. It is projected to continue expanding in 2024 supported by fiscal measures, disinflation, excess savings, and improved confidence. Domestic demand is also underpinned by the growth in government consumption due to higher compensation of employees and intermediate consumption. On the other hand, investment is expected to recover only timidly in 2024 as interest rates are set to remain high during the first half of the year and residential investment is still declining. Furthermore, a drop in export of services linked to investment funds and the lower volume of transactions in the financial sector would imply a negative contribution from net exports resulting in a GDP growth of 1.4% in 2024 for the year as a whole. In 2025 interest rates are expected to fall and the economic activity in the euro area and EU’s external environment to improve. Real GDP is projected to accelerate further, to 2.3% mainly supported by a recovery in investment and a positive contribution from net exports while private consumption is expected to normalise.
Labour market set to loosen
Following the slowdown in growth, the labour market weakened in 2023 and is expected to remain subdued in 2024 despite a pick-up in activity. The deceleration in employment this year is set to mirror the projected decline in real estate and construction activity, before recovering in 2025. In a context of declining labour productivity in 2023, employment growth decreased only moderately to 2.2%, but is set to decline to 1.4% in 2024 before recovering to 1.9% in 2025, still below the historical trend. Unemployment is expected to increase to 5.9% in 2024 and remain broadly stable at 5.8% in 2025, following both stronger growth and a slight deceleration in labour force.
Inflation expected to decrease
Headline inflation decreased to 2.9% in 2023, as a result of a drop in energy and goods prices. It is set to drop to 2.3% in 2024 and 2.0% in 2025 due to the deceleration of prices of industrial goods, food and services. Consecutively, HICP inflation excluding energy, food, alcohol and tobacco is forecast to decrease from 3.9% in 2023 to 2.5% in 2024 and 2.2% in 2025, reflecting slowing services inflation and industrial goods prices.
General government deficits projected over the forecast horizon
In 2023, the government budget deficit increased to 1.3% of GDP. The deficit was driven by a general increase in spending of 12.2%, while government revenue also grew at a high rate of 10.1% supported by strong growth in corporate income tax. The total budgetary cost of measures to mitigate the impact of high energy prices amounted to 0.9% of GDP in 2023.
In 2024, the deficit is projected to increase to 1.7% of GDP, due to a stronger slowdown in revenue growth compared to expenditure growth. The revenue-reducing measures consist of the upward adjustment of personal income tax brackets following several wage indexations, a compensation of companies for the third indexation tranche in 2023 via a reduction of social security contributions in 2024, and of measures to support the construction and housing sector. These revenue-reducing measures are partly offset by the reversal of the 2023 VAT-rate reduction and the phasing out of the crédit d'impôt conjuncture. The aggregate revenue impact amounts to 0.6% of GDP. The total budgetary cost of energy-support measures is expected to be 0.5% of GDP in 2024. Expenditure growth is driven by the automatic indexation, which raises expenditure on compensation of public employees and social transfers.
Based on unchanged policies, the deficit is set to rise to 1.9% of GDP in 2025, as expenditure growth is expected to slightly outweigh revenue growth. Energy-related measures are assumed to remain in place until the end of the year, with a projected net budgetary cost of 0.3%. On the revenue side, social contributions will recover following the phasing out of the measure compensation companies for the third indexation tranche in 2024, but the planned reduction of the corporate income tax rate in 2025 will have revenue-reducing impact. Expenditure growth on compensation of public employees, social transfers and capital transfers is expected to remain high, while on subsidies it is projected to fall due to the lower costs of energy-related measures. The interest rate expenditure is forecast to rise due to higher refinancing rates and increasing debt, reaching 0.4% of GDP.
The debt-to-GDP ratio is projected to increase from 25.7% in 2023 to 27.1% in 2024 and 28.5% in 2025, due to the budget deficits and to social security fund-related stock-flow adjustments.