Investment in Luxembourg

Luxembourg - Investment

Economy grows at softest pace since Q4 2020 in the first quarter

GDP growth moderated to 4.1% year on year in the first quarter, from 4.8% in the fourth quarter of last year. Q1's reading marked the worst result since Q4 2020.

Private consumption improved somewhat to 5.8% year on year in the first quarter, which marked the best reading since Q2 2021 (Q4 2021: +5.7% yoy). Public spending, meanwhile, improved to a 4.5% increase in Q1 (Q4 2021: +4.4% yoy). Fixed investment growth moderated to 6.5% in Q1, compared to the 13.1% logged in the prior quarter.

On the external front, exports of goods and services growth fell to 1.7% in Q1, marking the worst reading since Q3 2020 (Q4 2021: +6.9% yoy). In addition, imports of goods and services growth moderated to 1.8% in Q1 (Q4 2021: +8.3% yoy).

On a seasonally-adjusted quarter-on-quarter basis, economic growth picked up to 1.2% in Q1, following the previous period's 1.0% expansion. Q1's reading marked the strongest expansion since Q1 2021.

For the year as a whole, the economy is forecast to expand at a softer clip compared to last year. Higher commodity prices due to the war in Ukraine are weighing on household spending. Disrupted supply chains will also impede activity to an extent. That said, Luxembourg’s private-sector economy is dominated by financial services and the country’s exposure to Russia is rather limited. The impact of Russia’s invasion of Ukraine should primarily be through elevated inflation, therefore, despite heavy financial sanctions placed upon Russia.

Analysts at the EIU added:

“Given the importance of the financial sector in Luxembourg, a rise in the level of bankruptcies in the aftermath of a pandemic-induced recession as state support is withdrawn would pose a major risk to the economy.”

FocusEconomics Consensus Forecast panelists see GDP expanding 3.0% in 2022, which is down 0.2 percentage points from last month’s forecast. For 2023, the panel projects GDP growth at 2.9%.