Luxembourg Economic Forecast

Growth likely slowed in sequential terms in Q2. In April–May, industrial activity and merchandise exports fell at a steeper rate than the Q1 average. As imports also fell more sharply during the same period—more quickly than exports, thus leading to a smaller deficit—they may also point to weakening demand. Business confidence and economic sentiment worsened significantly over the quarter, which likely helped to push up the unemployment rate. That said, in April–May, wage growth picked up significantly. Coupled with average inflation falling below the ECB’s 2.0% target during the quarter—for the first time since Q1 2021—which should provide some support to private consumption. Moreover, producer prices deflated from last year’s record highs over the quarter, which bodes well for the supply side of the economy.

Harmonized inflation picked up to 2.0% in July (June: 1.0%). Easing price pressures for food drove the reading, more than offsetting a faster price rise for housing and recreation activities. Average inflation is set to fall sharply this year due to cooling demand and lower energy price pressures. Potential increases in commodity prices remain an upside risk.