On Wednesday 20 December 2023, Luxembourg's national statistics agency, Statec, published a report in which it states that Luxembourg is expecting a modest economic recovery in 2024.

According to Statec, 2023 has been marked by a clear slowdown in activity in the euro zone and certain countries, including Luxembourg, are not avoiding a recession. A recovery is expected for 2024, but this would be modest in nature due to an international economic context that is still recovering.

Minimum service for growth in the euro zone

Global growth entered a slowdown phase in 2023 and is expected to rise to around 3% this year, a pace which would remain in place for 2024. The slowdown observed in 2023 concerns advanced economies in particular – with the notable exception of the United States – and more specifically Europe where the effects of the energy crisis have been more widely felt by economic players.

If the euro zone is avoiding recession for the moment, it is not escaping stagnation, with growth reduced to a trickle in recent quarters. And the 4th quarter, based on degraded economic indicators, could actually tip it into a recession.

Despite the decline in inflation, growth in the euro zone would only record a slight rebound in 2024 (+0.8%, after +0.5% in 2023, according to the assumptions used by STATEC). A more negative impact than expected of rising interest rates on demand could, however, lead to stagnation.

A particularly degraded economic context in Luxembourg

Economic activity has tended to stagnate in Luxembourg since the start of 2023 and is down compared to last year. The poor results of the financial sector in terms of volumes (those expressed in value are better) partly explain this loss of dynamic, but non-financial services also seem to be facing a degraded economic situation as a whole.

Furthermore, the construction sector is seeing its activity (and its workforce) decline under the notable effect of the consequences of the rise in interest rates on the real estate market. In most non-financial market activities, business confidence has deteriorated this year, notably under the influence of the drop in demand and financing difficulties. Some signs of recovery come from industry and non-financial services, but these are very recent and still very timid.

For the year as a whole, STATEC therefore expects a slight recession in activity (GDP vol. -1%), while the euro zone would have remained in weak expansion (+0.5%). Private household consumption and public spending (consumption and investment) will have contributed to keeping domestic demand intact. Exports would have fallen in all areas in 2023, but should resume in 2024, against a backdrop of stabilising elements, such as the slight increase in growth in the euro zone (+0.8%) or the probable drop in interest rates. However, with a meagre +2% forecast for GDP in volume in 2024, and also considering the lack of economic momentum already observed in 2022 (+1.4%), the three years 2022-2024 should be considered as an episode of counter-economic performance of Luxembourg.

Inflation slows, wages should follow in 2024

Inflation is falling across Europe, following the easing of energy and food prices. Currently, it is still mainly services which are preventing a stronger slowdown, following the sustained increase in wages. In the euro zone, the increase in wages has been less pronounced than that of consumer prices in recent years, while in Luxembourg the real average wage cost has increased significantly since 2019.

Inflation forecasts for the euro zone are respectively 5.6% in 2023 and 2.0% in 2024. For Luxembourg, STATEC expects inflation of 3.8% for this year and 2.6% for 2024, resulting in a single index bracket next year.

The average wage cost is expected to increase by 6.3% in 2023, then slow to +3.1% in 2024, due to a lower contribution from indexation and compensation to employers for the cost of the index tranche from September 2023. next year.

The Luxembourg labour market clearly affected by the decline in activity

The status of the labour market in Luxembourg is less gentle than in Europe. While it still held up relatively well last year, employment has slowed considerably since the start of the year to the point of near stagnation in the 3rd quarter. Business services – usually among the main drivers of growth – and construction mainly contributed to this slowdown.

At the same time, the rise in unemployment accelerated in Luxembourg. While these developments have helped to somewhat ease the labour shortage – historically high in 2022 – recruitment problems persist.

Despite a slight increase in activity in 2024, employment is expected to slow further (+1.3% in 2024, after +2.1% forecast for 2023) and unemployment to continue to increase towards 5.9% of the active population (returning to its average over the last 15 years). For the euro zone as a whole, on the other hand, the unemployment rate would remain relatively stable over the forecast horizon.

Towards a more marked slowdown in revenues than in public spending, with a widening deficit as a result

Tax revenues were supported in 2023 by the effects of the dynamism of the wage bill on household taxes and social contributions, but also by significant balances of taxes on corporate income relating to previous fiscal years. On the other hand, the weak increase in subscription tax and VAT, but also the sharp drop in registration fees on real estate transactions weighed on revenue. The latter are expected to slow down further significantly in 2024, due to the slowdown in employment, inflation and the reduction in contribution rates to compensate for the 3rd index tranche in 2023.

Public spending was stimulated in 2023 by the increase in the wage bill and by specific transfers. They should also slow down in 2024 given the lesser contribution of wage indexation and the expiration of the energy tax credit.

Expenditure growth would, however, remain stronger than revenue growth in 2023 and 2024, widening the public deficit to -1.7% of GDP in 2023 then -2.7% in 2024. This deterioration goes in parallel with the deterioration of the economic outlook and the succession of anti-crisis measures. The measures announced in the coalition agreement have not been included in these forecasts.

Energy consumption impacted by price increases

With gas stocks fully filled before the heating season, Europe is well prepared for the coming winter. The continent benefited from moderate consumption throughout the year and the increasing use of liquefied natural gas (LNG) to compensate for the reduction in Russian deliveries.

Despite a drop in prices on the energy markets in 2023 compared to the previous year, the energy bill of households has not yet reduced and that of businesses has even suffered a sharp increase. Nevertheless, STATEC forecasts suggest that households could benefit from gas prices lower than the ceiling set by the government in 2024.

Energy consumption declined sharply in 2022 and early 2023. During the first ten months of 2023, fuel sales, electricity and gas consumption recorded declines of 2%, 7% and 10% respectively. compared to the same period of 2022. This decline in consumption, however, tends to fade in recent months. According to STATEC estimates, reducing fossil energy consumption would lead to a drop in emissions of 1.9% in 2023 and an additional reduction of 1.3% in 2024.