The European Commission has confirmed that Luxembourg is entering a recession, projecting a real GDP growth decline of 0.6% in 2023.

This figure surpasses the 0.4% decline forecasted by the International Monetary Fund (IMF) in the autumn. However, a recovery is anticipated, with GDP expected to rebound to 1.4% in 2024 and further increase to 2.0% in 2025.

Addressing concerns about the loss of purchasing power, the European Commission has offered somewhat reassuring news. Following a record level of overall inflation in 2022, the forecast indicates a slowdown, supported by measures aimed at mitigating the impact of high energy prices.

-> Economic headwinds: Luxembourg faces slowdown amid unfavourable climate

Finance, trade, and construction affected by slowdown

Key sectors such as finance, trade, and construction have experienced a slowdown in activity in recent quarters. While domestic demand is bolstered by growth in private and public consumption, additional support measures, and three wage indexations in 2023, growth in private consumption is expected to decline slightly due to a labour market slowdown, leading to precautionary savings.

Investment is anticipated to remain weak, influenced by an uncertain economic outlook and rising interest rates affecting bank lending and loan demand, particularly for mortgages. Negative export growth is projected to contribute to a GDP decline of -0.6% in 2023, falling well below the pre-pandemic trend.

Unemployment and public deficit on the rise

While unemployment fell to 4.6% in 2022, the European Commission forecasts an increase to 5.5% in 2023, 5.9% in 2024, and 6.0% in 2025.

In 2023, the public deficit is expected to surge to 1.9% of GDP (from 0.3% in 2022) against a backdrop of weak economic growth and the growing impact of measures aimed at mitigating the impact of high energy prices and supporting household purchasing power and business revenues. Energy-related measures are estimated to impact 0.9% of GDP, with other measures accounting for 0.6% of GDP.

The public deficit is projected to rise to 2.1% of GDP in 2024, primarily due to lower revenue growth amidst the economic slowdown and revenue measures to support households and businesses.