Real GDP growth in Luxembourg is expected to accelerate in 2026 and 2027, despite a worsening international context and rising energy costs, as services exports support the economy. Meanwhile, the slowdown in private consumption and investment following a drop in confidence and rising interest rates are set to detract from economic performance. After remaining high in 2025, headline inflation is set to further increase in 2026 due to the energy crisis, before slowing down to below 2% in 2027. A revenue shortfall and large investment expense led the general government balance to a larger than expected deficit in 2025, which is forecast to be partially absorbed in the 2026-27 period.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.6 | 1.6 | 2.0 |
| Inflation (%, yoy) | 2.5 | 2.7 | 1.8 |
| Unemployment (%) | 6.5 | 6.6 | 6.5 |
| General government balance (% of GDP) | -2.0 | -1.2 | -1.5 |
| Gross public debt (% of GDP) | 26.5 | 29.2 | 30.2 |
| Current account balance (% of GDP) | -2.9 | -2.8 | -2.7 |
Growth is set to accelerate in 2026
Real GDP expanded by 0.6% in 2025, supported by private and government consumption. Net exports contributed negatively as imports accelerated faster than exports. In terms of real gross value added, the main contributors were the public sector and, the finance and insurance sector driven by increases in net issuance in bond funds as a result of interest rate cuts.
In 2026 and 2027, economic growth is expected to accelerate, supported by exports of financial services. The worsening geopolitical climate in early 2026 led stock markets around the world to plummet. But the recovery was relatively fast. However, strong volatility remains a risk in the face of persistent geopolitical tension. On the consumer side, confidence improved at the start of the year before falling in March by 9.2pp, the second biggest fall in the EU, followed by a slight recovery in April. Private consumption is expected to lose some steam in the coming quarters and grow by 1.6% in 2026. For 2027, consumption is forecast to increase by 2.1%, supported by a reduction of uncertainty related to the conflict in the Middle East and the normalisation of short-term interest rates. Although still below average, the trend in confidence surveys in the construction sector has improved over the past 12 months. The activity in the sector is recovering slowly and investment in housing is expected to recover slightly in 2026. The acquisition of a satellite in 2025-Q3 had a negative carry-over on investment growth. Due to a base effect, investment is expected to contribute negatively to GDP growth in 2026 unless additional important acquisitions are to be recorded. In 2027, investment is set to recover following the expected drop in interest rates.
Employment to remain below the long-term average
Following the deceleration of economic activity in recent years, employment growth slowed down and is expected to grow by 1.3% in 2026—well below Luxembourg’s historic average—before accelerating to 1.5% 2027. Slower than average cross-border workers growth is expected to curb the unemployment rate, which is set to remain stable at 6.6% in 2026, before edging down to 6.5% in 2027 as employment growth recovers.
Inflation persisting in 2026
Headline inflation is set to increase at 2.7% in 2026, up from 2.5% in 2025, as energy prices rise following the conflict in the Middle East. Wage increases based on indexation, expected in May 2026, is set to push service prices up. In 2027, inflation is projected to decelerate to 1.8% due to a contraction in energy prices and lower food inflation.
General government balance expected to remain in deficit
In 2025, the general government balance turned to a deficit of 2.0% of GDP in 2025 from a surplus of 0.9% of GDP in 2024. Total revenues declined by 0.6 percentage points of GDP to 47.1% of GDP, while public spending increased by 2.3 percentage points to 49.1% of GDP. The slowdown in revenue growth is mostly due to the impact of measures to support household purchasing power, the competitiveness of enterprises and the construction sector. Notably, revenues were affected by the upward adjustment of personal income tax brackets for 2025 compensating for several past wage indexations, a decrease in the nominal corporate tax rate from 17% to 16% and the extension of support measures for the construction sector. Expenditure growth accelerated in 2025 due to the implementation of the public sector wage agreement and strong hiring pushing up the public wage bill, higher social transfers and public investment. Public investment increased to 5.0% of GDP from 4.7%, partially due to the purchase of a military satellite.
In 2026, a lower deficit of 1.2% of GDP is projected. In line with the higher projected economic growth, revenue growth is expected to resume. Revenues from personal income taxes are expected to increase, in line with the improvements in the labour market and the absence to inflation indexation of tax brackets. The increase in the social contribution rate from 24% to 25.5% is expected to drive up revenues from social contributions. Higher private consumption combined with the increase of tobacco excises is set to increase indirect taxes, although this will be partially offset by the government’s electricity network cost measures which aim to mitigate the impact of high energy prices.
The deficit is set to increase to 1.5% of GDP in 2027, as expenditure growth outpaces revenue growth again. Public investment is projected to remain high by recent standards over the forecast horizon, supporting the government’s social, digital and green agenda.
The interest expenditure is expected to rise due to higher refinancing costs on newly issued debt, reaching 0.5% and 0.6% of GDP in 2026 and 2027 respectively. The debt-to-GDP ratio is projected to increase from 26.5% in 2025 to 29.2% in 2026 and to 30.2% of GDP in 2027, due to the budget deficits and social security fund-related stock-flow adjustments.