Luxembourg

Luxembourg experienced a solid recovery in 2021, which continued into H1 2022. We expect still solid real GDP growth in 2022 (+3%, after +6.9% in 2021), thanks to the solid H1 carry-over. However, the economic consequences of the war between Russian and Ukraine will take a toll on Luxembourg's economy. Going forward, we see a weakening outlook, with the economy likely to experience a mild recession starting from Q4 this year, leading to an overall GDP contraction of -0.3% in 2023. Private consumption will be impacted by high energy prices and elevated uncertainty. Trade will also represent a major drag as exports and imports could shrink due to lower demand from Luxembourg's main trading partners (Germany, France and Belgium). Investment should also slow down after the strong performance in 2021 (+12%). Luxembourg saw an upward inflation trend from mid-2021. Inflation decreased slightly to 6.8% y/y in August, but we expect it to average around 7% this year, and to remain above the ECB’s 2% target in 2023.

Luxembourg’s external balance is dominated by the large financial sector, which has supported a persistent current account surplus in recent decades, notably standing at +4.7% of GDP in 2021. This should narrow in 2022-23 The unemployment rate continued to improve, dropping back to 4.7% in July from the pandemic peak of 6.9% in April 2020.

Luxembourg's trend growth will continue to exceed the Eurozone average. The country has developed a strong competitive advantage in financial services over the past decades, turning it into the world's second-largest investment fund center after the US and the most important private banking center in the Eurozone. However, labor productivity needs improvement in Luxembourg, given lower education levels compared to those of its neighbors. The skills shortage has resulted in most of the jobs created in the financial sector attracting foreign nationals, causing Luxembourg's resident workforce to rely on public administration jobs or jobs in the steel sector—highly subjected to foreign competition.