Real GDP growth in Luxembourg is projected to remain subdued in 2025, held back by weaker investment and net exports, but supported by private consumption. Growth is expected to accelerate in 2026 and 2027, benefitting from low interest rates which should stimulate investments and private spending while bolstering the exports of financial services. After remaining high in 2025, headline inflation is set to slow in 2026 following electricity tariff cuts before rising to just below 2% in 2027. Windfall revenues led to a surplus of the general government balance in 2024, which is expected to turn to a deficit over 2025-27.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 0.9 | 1.9 | 2.2 |
| Inflation (%, yoy) | 2.3 | 1.7 | 1.9 |
| Unemployment (%) | 6.6 | 6.7 | 6.5 |
| General government balance (% of GDP) | -0.8 | -0.5 | -0.8 |
| Gross public debt (% of GDP) | 26.8 | 27.1 | 27.2 |
| Current account balance (% of GDP) | -3.6 | -2.8 | -2.0 |
Subdued growth in 2025
After an expansion of 0.4% in 2024, real GDP expanded by 0.7% and 0.6% q-o-q in 2025-Q1 and 2025-Q2 respectively, largely driven by the frontloading of exports in the first quarter and a steady expansion in government consumption.
Consumption growth rebounded in 2025-Q2 (0.2% after -0.5% in 2025-Q1) thanks to the wage indexation in May. Following improving consumer confidence, consumption growth is expected to grow by 1.4% in 2025, down from 3.2% in 2024. A recent pick-up in household loans demand indicate a slow but steady recovery in the housing sector. The outlook is improving although confidence indicators are still below historical averages. Overall, GDP is projected to grow by 0.9% in 2025.
In 2026 and 2027, economic growth is expected to accelerate, supported by continuing favourable financing conditions which should boost investment and private consumption. Domestic demand is expected to continue supporting the economy, while slightly reduced trade uncertainty is set to support net exports. The already recovering financial sector is forecast to also benefit from low interest rates and to push the exports of financial services.
Employment stalled
Following the deceleration of economic activity in recent years, employment growth slowed down and is expected to grow by 1.0% in 2025, well below Luxembourg’s historical average, while gradually accelerating to 1.4% and 1.6% in 2026 and 2027, respectively. A slowing population growth is expected to curb the unemployment rate that is set to rise from 6.4% in 2024 to 6.6% in 2025, to peak at 6.7% in 2026 and to edge down to 6.5% in 2027 as employment growth recovers.
Persisting inflation in 2025
Headline inflation is set to persist at 2.3% in 2025, unchanged from 2024, as the moderation in services inflation is broadly offset by a slowing deflation in energy. Inflation is projected to decelerate to 1.7% in 2026, due to the renewed contraction in energy prices (electricity fees) and lower food inflation, before edging up to 1.9% in 2027, reflecting a rebound in energy inflation that more than offsets the slowing in food and services inflation.
General government balance to remain in a small deficit
After a surplus of 0.9% of GDP in 2024, the general government balance is expected to turn to a deficit of 0.8% of GDP in 2025. Total revenues are projected to decline by 0.3 percentage points of GDP to 47.4% of GDP, while public spending is expected to increase by 1.4 percentage points of GDP to 48.2% of GDP. The projected 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 will be affected by the upward adjustment of personal income tax brackets for 2025 following several wage indexations. Corporate taxes are expected to continue increasing, but at a slower pace than in the previous years. Expenditure growth is projected to accelerate in 2025, also due to impact of the automatic indexation from May. The automatic indexation, compounded by the implementation of the wage agreement in the public sector and a dynamic hiring, is expected to push up the public wage bill. Social transfers, including pension expenditure, are also expected to increase substantially. Public investment, including due to the launch of a military satellite, is projected to further increase.
In 2026, a lower deficit of 0.5% of GDP is projected, primarily due the increase in the social contribution rate from 24% to 25.5%. In line with the projected economic recovery, revenue growth is expected to pick up. Notably, revenues from personal income taxes are expected to increase in line with the improved labour market and the absence of indexation to inflation of the tax brackets this year. Higher private consumption combined with the increase of tobacco excises is set to increase indirect taxes, although partially offset by the government’s electricity network cost measure to mitigate the impact of high energy prices.
The deficit is set to increase to 0.8% of GDP in 2027, as expenditure growth is expected to outpace again revenue growth. Public investment is projected to remain at a high level over the forecast horizon and support 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 0.4% and 0.5% of GDP in 2026 and 2027 respectively. The debt-to-GDP ratio is projected to increase from 26.3% in 2024 to 26.8% in 2025 and to pick up to 27.2% of GDP in 2027, due to the budget deficits and to social security fund-related stock-flow adjustments.