Investment in Luxembourg

Luxembourg - Investment

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

A flash estimate showed that economic growth moderated to 1.6% year on year in the second quarter, down from 2.7% in the first. The print marked the weakest result since the fourth quarter of 2020, due to the fallout from the war in Ukraine: High inflation will have eaten into consumers’ pockets, and a deteriorating global economic backdrop will have dented capital outlays.

On a seasonally-adjusted quarter-on-quarter basis, the economy contracted 0.5% in the second quarter, swinging from the first quarter’s 0.7% expansion.

A breakdown of national accounts data will be released on 7 October.

The economy is expected to grow at a slower pace this year than it did last year. Higher commodity prices as a result of the Ukraine war are impacting household expenditure. Supply chain disruptions will also restrict activity to some extent. Nonetheless, Luxembourg’s private-sector economy is dominated by financial services, and the country's exposure to Russia is low. Despite the harsh financial penalties imposed on Russia, the impact of its invasion of Ukraine on Luxembourg should be mostly via increased inflation.

Analysts at the EIU added:

“We expect growth to remain muted going into 2023, as the energy crunch will continue beyond the winter of 2022/23. Elevated inflation in 2023 will continue to squeeze household incomes and affect private consumption. 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in Luxembourg, a rise in the level of bankruptcies in the aftermath of a pandemic-induced recession as state support is withdrawn would pose a major risk to the economy.”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%.