Investment in Luxembourg

Luxembourg - Investment

GDP growth picks up in Q4

The economy returned to growth in the fourth quarter of last year, with GDP expanding 1.4% year-on-year after flatlining in the third quarter. The print marked the best result since Q4 2019. Looking at the year as a whole, the economy contracted a relatively mild 1.3% (2019: +2.3% year-on-year), as it was somewhat less susceptible to the pandemic’s associated containment measures due to its structure: Roughly a third of the economy is driven by the financial sector.

Household spending fell a more pronounced 3.5% in the fourth quarter, after dropping 0.9% in the third quarter. Government consumption grew at a slightly softer pace of 5.6% (Q3: +6.0% yoy). Meanwhile, fixed investment dropped 9.5% in the fourth quarter, swinging from the third quarter’s strong 9.0% expansion.

On the external front, growth in exports of goods and services accelerated to 6.7% in Q4 (Q3: +1.4% yoy). In addition, imports of goods and services picked up, growing 6.2% in Q4 (Q3: +3.0% yoy), marking the best reading since Q4 2016.

On a seasonally-adjusted quarter-on-quarter basis, economic growth waned markedly to 1.6% in Q4 from the previous quarter's 9.3% increase.

Turning to this year, the economy is forecast to bounce back as the gradual relaxation of foreign and domestic containment measures will boost external and domestic demand, respectively. Moreover, a stabilizing labor market should lend further support to household spending. That said, activity in the first quarter has likely remained somewhat downbeat amid the lingering impact of restrictive measures, which have remained in place through March. Furthermore, for the year as a whole, a potentially longer-than-expected pandemic amid a slow vaccination rollout continues to pose downside risks.

Katharina Koenz, economist at Oxford Economics, added:

“For Q1 this year, the resurgence of Covid-19 infections means we now expect a 0.2% q/q GDP contraction. But we expect recovery to start in Q2 and pick up in H2, supported by better weather and the vaccine roll-out.”

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%.