Investment in Luxembourg

Luxembourg - Investment

GDP growth picks up in Q1

Economic growth accelerated in the first quarter of the year, with GDP expanding 4.9% in annual terms and marking the fastest increase in over four years. The print was up from the fourth quarter’s 1.7% expansion, despite lingering restrictive measures to prevent the spread of the coronavirus.

On the domestic front, business activity firmed as fixed investment rose 8.8% over the same period last year, swinging from a 9.5% contraction in the previous quarter. Public spending also supported the reading, with government consumption growth accelerating to 9.3% in the first quarter from 5.7% in the fourth quarter. On the other hand, private consumption continued to contract in Q1, albeit at a softer pace of 0.6% following the 3.1% fall logged in Q4: Ongoing Covid-19 restrictions weighed on consumers’ ability to spend.

On the external front, exports of goods and services expanded 9.3% year-on-year in the first quarter, up from the fourth quarter’s 6.7% expansion and marking the strongest growth rate since the first quarter of 2015. Meanwhile, imports of goods and services grew 9.9% over the same period last year, up from the 6.3% increase recorded in the prior quarter.

On a seasonally-adjusted quarter-on-quarter basis, economic growth waned to 1.4% in Q1 from 1.9% in the previous quarter.

Looking ahead, the economy has likely continued to grow strongly in the second quarter thanks to a supportive base effect and the gradual easing of restrictive measures at home and abroad, which should be firming domestic and external demand. A stabilizing labor market should be providing further support to household consumption.

Analysts at the EIU added:

“The relative resilience of the Luxembourgish economy in 2020 and its rapid recovery in 2021 can be attributed to the strong performance of its financial sector, which adapted quickly to remote working and was not as adversely affected as contact-based services. The international financial sector's dominance of the economy means that real GDP growth is highly correlated with international capital flows, and thus with movements in international investor sentiment and global financial markets. Although financial services are among the main drivers of the economy, most companies in the sector employ a large proportion of crossborder workers (about 48% of the workforce are classed as non-residents). Consumption gains from growth in financial services in Luxembourg are therefore often passed on to the economies of neighbouring countries.”

FocusEconomics Consensus Forecast panelists see GDP expanding 4.3% in 2021, which is unchanged from last month’s forecast. For 2022, the panel projects GDP growth at 3.6%.