174 ď ź
Luxembourg Growth is projected to ease to 2.8% in 2020 and to 2.3% in 2021, amid subdued investment and persistent weakness in the euro area, which will hamper further export dynamism. Solid private consumption growth will underpin domestic demand. The buoyant labour market will keep creating jobs, though at a decelerating pace and benefitting primarily cross-border workers. Consequently, the unemployment rate is projected to decline only slightly. The fiscal position is sound and fiscal space is ample. Fiscal policy should be eased if the current slowdown worsens and reduces growth significantly below potential. Increasing the supply of social and private rental housing is key for making the access to housing more equitable and slowing house price growth. Rising household indebtedness creates vulnerabilities for some families and banks, calling for the introduction of borrower-targeted macroprudential tools. Growth is relying more on domestic demand GDP growth was strong in the first half of 2019, mainly due to surging exports. This largely reflected a significant rebound of financial and insurance activities, in part as compensation for a very weak end of 2018. Consumer confidence and retail sales are still strong. Construction maintains an upward trend. However, business surveys are beginning to show a deteriorating outlook, reflecting the slowdown in activity in the euro area. The unemployment rate has declined and there is growing evidence of skill mismatches and shortages, signalling potential capacity constraints.
Luxembourg Growth will rely more on domestic demand
Increasing house prices are a source of risk Price-to-rent ratio
Y-o-y % changes 6.0
Real GDP
5.5
Index 2007 = 100, s.a. 160
Luxembourg Real total domestic demand
5.0
150
Euro area
140
4.5 4.0
130
3.5
120
3.0
110
2.5 2.0
100
1.5
90
1.0
80
0.5 0.0
2015
2017
2019
2021
0
0
2007
2009
2011
2013
2015
2017
70
Source: OECD Economic Outlook 106 database; and OECD Analytical House Price database. StatLink 2 https://doi.org/10.1787/888934045734
OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION Š OECD 2019
ď ź 175
Luxembourg: Demand, output and prices
2016
Luxembourg GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)
2017
2018
2019
2020
2021
Percentage changes, volume (2010 prices)
Current prices EUR billion
54.9 16.3 8.7 10.0 35.0 0.5 35.4 116.8 97.4 19.4
1.8 2.2 5.2 5.6 3.9 -1.0 2.3 0.7 0.7 0.4
3.1 3.3 3.9 -6.1 0.8 0.9 2.3 0.5 -0.3 1.6
3.3 2.5 4.4 2.0 2.9 -0.7 1.8 1.7 1.0 1.8
2.8 2.8 3.8 1.3 2.7 -0.1 2.6 2.9 2.8 1.3
2.3 2.7 3.7 1.3 2.6 0.0 2.6 2.6 2.8 0.7
_ _ _ _ _ _ _ _ _
1.7 2.1 1.4 5.9 16.0 1.4 29.9 22.4 4.9
2.5 2.0 0.9 5.5 16.0 2.7 29.0 21.0 4.8
2.9 1.7 1.8 5.3 14.5 2.8 29.0 21.0 5.0
1.9 1.7 1.7 5.3 13.6 2.9 28.3 20.3 4.6
1.7 1.8 1.8 5.2 13.2 2.9 27.2 19.2 4.3
1. Contributions to changes in real GDP, actual amount in the first column. 2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco. Source: OECD Economic Outlook 106 database.
StatLink 2 https://doi.org/10.1787/888934046665
Policies are needed to promote green growth and increase productivity The fiscal position is strong, with the fiscal surplus projected to remain close to 3% of GDP and the gross public debt ratio among the lowest in the OECD area. After some corporate income tax cuts and reduced VAT rates for certain products introduced in 2019, the fiscal stance is projected to remain broadly neutral over the coming two years. Fiscal measures can improve green growth through higher taxes on transport fuel, the introduction of congestion charges in Luxembourg City, an increase in car taxation and investment in electric vehicles infrastructure. Productivity growth has been subdued in recent years. Skill shortages, regulatory constraints in some professional services and lack of innovation, even among the top productive firms, are among the drivers of the productivity slowdown. Labour market policies should aim to undertake regular exercises for the assessment of future professional needs and ensure their outcomes feed into enhanced training offers. The modernisation of bankruptcy law should aim to ease restraints on early restructuring and promoting second-chance opportunities, as well as facilitating the exit of non-viable firms. Policies should also ensure a level playing field between FinTech and traditional financial intermediaries, promoting a risk-based approach in regulating financial innovations.
OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION Š OECD 2019
176 ď ź House prices have been growing strongly, driven by population growth, a high rate of household formation, sustained demand pressure from cross-border workers and limited use of land available for construction. As a consequence, housing affordability has been deteriorating, in particular for low-income households. A mix of policies addressing supply-side restrictions, together with measures to increase housing tenure neutrality and better targeted fiscal support will be needed to make the housing market more efficient and inclusive.
Growth will ease but remain robust Growth is projected to weaken but to remain comfortably above 2% in 2020 and 2021. Investment growth is set to decline and exports to slow from their strong performance in early 2019, making their contribution to GDP growth ebb to modest levels by historical standards. Robust private consumption, in the context of a strong labour market, will help sustain economic activity. Risks to the outlook are tilted to the downside and include weaker-than-expected euro area and global growth and uncertainty about Brexit, even if in the medium-run Luxembourg could benefit from the relocation of some UK-based financial services activities. The financial sector is poised to remain profitable, but increased volatility in global financial markets may accelerate the pullback in global equity markets and the corresponding decline in net assets under management by investment funds.
OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 2: PRELIMINARY VERSION Š OECD 2019