The euro zone might just avoid a recession in 2023, thanks to several "pleasant surprises." For 2024, however, the National Institute of Statistics and Economic Studies (STATEC) predicts a rise in inflation and therefore… another wage indexation.

The clouds hanging over Luxembourg's economy will, according to STATEC's latest economic report, be less grey than predicted in 2023. However, the outlook is less rosy when it comes to purchasing power, with STATEC predicting an increase in consumer prices from 1 January 2024.

The measures taken by the government should make it possible to further curb gas, electricity, and heating oil prices in 2023. However, in the absence of new measures and after the lifting of tariff shields on 1 January 2024, consumer prices should experience "an upward adjustment, in particular energy prices," STATEC warns.

STATEC forecasts a price increase of "around 40%" for gas and "around 80%" for electricity in 2024. However, these forecasts should be viewed "with caution" in view of the high geopolitical instability and volatile energy prices of the past months.

The institute maintains its inflation forecast at 3.4% for this year and anticipates a rise to 4.8% for 2024. In this case, a wage indexation "would be paid in Q4 2023 [after the index brackets in February and April], then another in Q2 2024."

After the wage indexation that came into effect at the beginning of February, a second one in April, and a third one announced for the end of this year, it therefore seems that a fourth one is already in the pipeline for spring 2024. This would mean four salary increases within 15 months and would be unprecedented in Luxembourg.

On Friday 3 March, the government, employers, and trade unions will meet again at Senningen Castle for a new tripartite meeting.

Inflation contained, Luxembourg benefits

The new STATEC report highlights a positive trend for the beginning of 2023. While a recession was expected for the euro zone, this outlook "now seems to be receding, giving way to a simple slowdown in activity," according to STATEC.

The reassuring news is that Luxembourg "should be able to benefit from a better-than-expected European climate this year" as indicators show "a certain resilience of activity in the face of the impact of of the energy crisis."

Several "pleasant surprises" explain this change. Starting with a better-than-expected GDP in the euro zone in Q4, household demand holding up well, or the positive performance of the labour market. However, it should be noted that youth unemployment in Luxembourg rose from 16.7% to 18.7% between May and December.

Concerns about energy supply have also dissipated, on the one hand because the winter – with the exception of December - was not particularly cold, but also due to the voluntary reduction of consumption by households and businesses.

Finally, the economic outlook also improved after the sudden announcement in December of the end of the zero-covid policy in China.