OECD Economic Outlook May 2019, Country Notes: Luxembourg

 179

Luxembourg Economic growth is projected to decline to 2% in 2019, but to recover to 2.5% in 2020. Domestic demand will support economic activity, notably private consumption, which will be held up by a resilient labour market and continuing effects of the tax reform. Slow growth in the euro area will weigh on exports of financial and non-financial services. Continued job creation will primarily benefit cross-border workers, but also help to reduce the unemployment rate to just above 5%.

Fiscal policy is sound and ample fiscal space could be used to step up infrastructure investment and implement other growth-enhancing measures, such as housing construction. Reliance on the financial sector exposes Luxembourg to high financial volatility transmitted by international investment funds, which warrants ongoing monitoring and diversification of the economy. Constraints on the supply of housing need to be addressed as housing prices continue to increase and household indebtedness is high.

Domestic demand underpins growth Consumer confidence has rebounded, pointing to continued robust household consumption supporting economic growth. In contrast, business confidence deteriorated in the first quarter of 2019, suggesting a possible weakening in exports of both financial and non-financial services. A decline in the unemployment rate, by more than half a percentage point from a year earlier, and a high vacancy rate, indicate tight labour markets. There is growing evidence of skills mismatches and shortages, signalling potential capacity constraints. Luxembourg’s position as a global financial hub translates into further growth of assets under the management of investment funds, driven by a search for yield and positive valuation effects from accommodative monetary policy. The contribution to growth by the financial sector was positive in 2018.

Luxembourg GDP growth has been strong

Population growth outpaces housing construction 2014-2015 changes

Y-o-y % changes 12 10 8

Luxembourg

Population

Euro area

Dwellings

% change 2.4 2.2 2.0 1.8

6

1.6

4

1.4

2

0

0

0

1.2 1.0

-2

0.8

-4

0.6

-6

0.4

-8

0.2

-10

2007

2009

2011

2013

2015

2017

2019

FRA

DEU

CHE

LUX

0.0

Source: OECD Economic Outlook 105 database; OECD (2018), International Migration Outlook; and OECD Affordable Housing Database.

StatLink 2 https://doi.org/10.1787/888933934736

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019

180 ď ź

Luxembourg: Demand, output and prices 2015

2016

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1 Memorandum items GDP deflator Harmonised index of consumer prices Harmonised index of core inflation2 Unemployment rate (% of labour force) Household saving ratio, net (% of disposable income) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP)

2018

2019

2020

Percentage changes, volume (2010 prices)

Current prices EUR billion

Luxembourg

2017

51.6 15.9 8.7 9.4 33.9 0.5 34.4 115.9 98.8 17.1

2.4 1.7 2.5 10.1 4.1 -0.4 3.5 3.8 4.5 0.1

1.6 3.0 3.5 3.9 3.4 -0.5 2.6 -1.9 -2.2 -0.1

2.6 4.2 4.0 -2.8 2.2 0.6 3.3 4.6 5.1 0.5

2.0 2.8 4.3 5.5 3.9 -0.6 3.0 3.8 4.4 0.1

2.5 3.6 3.2 4.5 3.7 0.0 3.6 4.1 4.8 0.1

_ _ _ _ _ _ _ _ _

0.9 0.0 1.0 6.3 13.7 1.9 28.9 20.7 5.1

2.1 2.1 1.4 5.9 16.5 1.4 30.7 23.0 5.0

3.8 2.0 0.9 5.5 16.5 2.4 28.8 21.4 4.8

2.8 1.7 1.8 5.2 18.0 1.9 29.1 21.7 4.0

2.2 1.9 1.9 5.1 18.1 1.8 29.5 22.1 4.2

1. Contributions to changes in real GDP, actual amount in the first column.

2. Harmonised index of consumer prices excluding food, energy, alcohol and tobacco.

Source: OECD Economic Outlook 105 database.

StatLink 2 https://doi.org/10.1787/888933935629

Policies are needed to revive productivity and increase the housing supply Gross public debt, at 21.4% of GDP in 2018, is among the lowest in the OECD. Indeed, net public debt is negative due to significant assets held by the social security administration. The general government budget is in surplus, which is projected to decrease in 2019, mainly reflecting slowing GDP growth. The fiscal policy stance is projected to remain broadly neutral. The 2019 budget projects falling revenues due to a corporate income tax reduction, the introduction of a minimum social salary tax credit, and a further loss of e-commerce VAT, offset in part by higher taxes and excise duties on transport fuel. Introducing a system of congestion charges in Luxembourg City would further promote green growth. An important structural challenge facing fiscal policy is work disincentives in the tax-benefit system, which are an obstacle to a further reduction in unemployment and inactivity traps.

The high exposure of the Luxembourg economy to financial sector developments warrants a close monitoring of related risks. This is particularly the case given high household indebtedness. Supply constraints in the housing sector, such as the limited use of available land, have held down new housing construction and led to strong increases in real estate prices, eroding housing affordability. Immigration, mainly driven by the buoyant labour market, has bolstered demand, while the supply of housing remains constrained by unused land zoned for construction and weak co-ordination between the central government and municipalities.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION Š OECD 2019

ď ź 181 Despite strong digital skills and substantial public investment into connectivity and high speed Internet, the take-up of digital technologies by companies, for example in the area of e-commerce, and by the public administration needs to be improved. Skills mismatches and shortages of high skilled labour are already apparent and further improvements in the education system should focus on lifelong learning and aligning the supply of skills with labour market needs.

Growth is projected to slow down Growth is projected to decelerate to 2% in 2019, mainly due to the slowdown in the euro area, before recovering to 2.5% in 2020 on the back of resilient domestic demand and improving export performance.

Fiscal policy is projected to remain broadly neutral. Heightened financial volatility represents a key downside risk in the medium term. On the upside, financial companies have announced the reallocation of some of their activities to Luxembourg after Brexit, possibly increasing the output of the financial sector.

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION Š OECD 2019