Luxembourg: Recovery gains pace in annual terms, but underlying momentum loses steam in Q2
September 30, 2021
The economy expanded 11.8% year-on-year in the second quarter, accelerating from the first quarter’s 5.2% increase. The upturn was the fastest since at least 1996 when current records began, but was partly thanks to a favorable base effect.
The improvement was driven by markedly stronger domestic demand. Household spending jumped 14.6% over the same period last year, following the first quarter’s meager 0.1% expansion, buoyed by softer Covid-19 restrictions. Moreover, capital expenditure skyrocketed 30.2% year-on-year in the second quarter, picking up pace from the first quarter’s 11.6% expansion, supported by business sentiment turning optimistic in the period. On the other hand, public consumption growth eased to 4.2% in the second quarter from 5.6% in the first.
On the external front, exports of goods and services rose at a faster pace of 15.1% in the second quarter (Q1: +9.8% yoy) as the external demand backdrop turned healthier amid the relaxation of foreign lockdown measures. Additionally, growth in imports of goods and services accelerated from 9.7% in the first quarter to 16.3% in the second, further highlighting firming domestic demand.
That said, underlying momentum lost pace. On a seasonally-adjusted quarter-on-quarter basis, the economy contracted 0.5% in the second quarter. This contrasted the 3.2% expansion logged in the first quarter and marked the first quarterly drop in output since Q2 2020, when the pandemic hit the economy the hardest.
Looking ahead, the economy is expected to finish the year on a solid footing in annual terms, although growth will likely cool in H2 due to a less supportive base effect. Nonetheless, the relaxation of containment measures at home amid further progress on the vaccine front should see domestic demand firm. Similarly, softer restrictions abroad will support the external sector. Next year, the pace of economic growth is forecast to ease, albeit largely due to a less favorable base effect. Domestic and foreign demand should strengthen next year and a stable labor market at home will provide further support to household consumption.
Author: Jan Lammersen, Economist