LUXEMBOURG

Country Economic Analysis

Country Overview

Timeline of Major Events

Macroeconomic Performance
AGENDA
Assessment of Current Policies

Policy Recommendations
(monetary policy, fiscal policy, structural reforms)

Conclusion
COUNTRY
OVERVIEW
LUXEMBOURG
Western Europe country

2,586.4 km2 ~ 660,809 people (2023)

Representative democracy, headed by a

constitutional monarch

Prime minister: Xavier Bettel – Democratic party

Currency: Euro

Fun Fact:

Europe’s 7th-smallest country

Grand Duke Henri

LUXEMBOURG IS THE COUNTRY WITH THE
HIGHEST GDP PER CAPITAL IN THE WORLD

Source: Gapminder
TIMELINE OF MAJOR
EVENTS
 Euro Covid-19
introduced Crisis
as national
currency
2008
Sharp contraction
of the economy

1958 2009 2022

Luxembourg
Joined
2002 Global 2020 Ukraine
War
Financial
EU Crisis
Exacerbating
inflationary pressures
Real GDP (8.2%)
Labour market
Sharper drop than the euro shortages
area average ( 5.8%)
MACROECONOMIC
PERFORMANCE
GDP GROWTH
GDP Growth (%) Key factor in slower economic growth:
10.00%
• Tightening of monetary policy in the euro area - fall
8.00% in investment and larger redemptions + downward
valuations in the funds industry.
6.00% • The situation was different for banks that are
focused on the Luxembourg market, where the rise
4.00% in interest rates increased their profitability.
2.00%

0.00%
2004200520062007200820092010201120122013201420152016201720182019202020212022

-2.00%

-4.00% • Economic growth is expected to reach 1.6% in

2023 before returning to 2.4% in 2024.
Mostly driven by private consumption
Where does GDP come from?
INFLATIO
N
Inflation Rate (%) • HICP inflation in Luxembourg was significantly
7.00%
lower than the euro area aggregate
6.00%
• Exacerbating inflationary pressures due to
5.00% Ukraine War
4.00%
• Price cap on gas (at +15% above the average
3.00% price level in September 2022) and a freeze of
electricity prices at their 2022 level
2.00%

• STATEC forecasts (2023) indicated a rebound

1.00%
in inflation in 2024
0.00%
2004200520062007200820092010201120122013201420152016201720182019202020212022
UNEMPLOYMENT
Unemployment Rate (%)
12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20

EU Unemployment Rate (%) Luxembourg Unemployment Rate (%)

YOUNG UNEMPLOYMENT
PUBLIC DEBT
- Public debt has been gradually increasing
Government Debt (Percent of GDP)
(remains at a low level)
30
- Reached 24.6% of GDP in 2022
25

20

15
- Threat to Long-term fiscal sustainability:
10

• Luxembourg faces the sharpest increase in

5
0 •
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20
pension-related spending (EU countries)
Highest expected impact on public finances
among the EU
EXTERNAL SECTOR
The external sector of an economy refers
to all economic transactions that a
country conducts with the rest of the
world. It includes the trade of goods and
services (exports and imports), cross-
border investment flows (both
investments by the country abroad and
foreign investments into the country),
and financial transfers (such as
remittances and foreign aid). The
external sector is reflected in the balance
of payments, which records all such
transactions and is divided into three
main accounts:
Current Account: Includes the trade
balance (exports minus imports of goods
and services), income payments (such as
dividends, interest, and salaries), and
current transfers (such as gifts, foreign
aid, and remittances).
Capital Account: Records the transfer of
capital among countries, including non-
financial and non-produced assets.
Financial Account: Includes investment
flows into and out of the country, such as
direct investment, portfolio investment,
and other investments (including loans,
bank deposits, and currencies).
Overall Assessment: The external position of
Luxembourg in 2022 was broadly in line with
the level implied by medium-term
fundamentals and desirable policies.
Current Account
Background. The CA surplus averaged around 4.1 percent of GDP over
2015-20, improving slightly to
5 percent of GDP in 2022 (from 4.6 percent of GDP in 2021), due to an
improved net factor income balance and despite the fall in the net
goods and services exports. Net goods exports have averaged around
21⁄2 percent of GDP over the past several years, declining since 2020
due primarily to an increase in the value of goods imports as pent-up
demand from the pandemic and the energy price shock increased
import value. The surplus in services declined in 2022 compared to
2021 due in part to financial conditions as services are mainly related
to private banking, the investment fund industry, and corporate cash
management entities.

Capital and Financial Accounts: Flows and Policy Measures

Background. The financial account declined to 5.1 percent of GDP in 2022 from 8.6 percent in 2021 due to lower net direct investment. The capital account was around 0.5
percent of GDP in 2022.
EXTERNAL SECTOR
Luxembourg's inward FDI stock of USD 3 327 Overall Assessment: The external position of
bn and outward FDI stock of USD 3 392 bn Luxembourg in 2022 was broadly in line with
are about 40 and 50 times the size of its GDP the level implied by medium-term
respectively
fundamentals and desirable policies.

Current Account
Background. The CA surplus averaged around 4.1 percent of GDP over
2015-20, improving slightly to
5 percent of GDP in 2022 (from 4.6 percent of GDP in 2021), due to an
improved net factor income balance and despite the fall in the net
goods and services exports. Net goods exports have averaged around
21⁄2 percent of GDP over the past several years, declining since 2020
due primarily to an increase in the value of goods imports as pent-up
demand from the pandemic and the energy price shock increased
import value. The surplus in services declined in 2022 compared to
2021 due in part to financial conditions as services are mainly related
to private banking, the investment fund industry, and corporate cash
management entities.

Capital and Financial Accounts: Flows and Policy Measures

Background. The financial account declined to 5.1 percent of GDP in 2022 from 8.6 percent in 2021 due to lower net direct investment. The capital account was around 0.5
percent of GDP in 2022.
RISKS FOUND
What are the strenghts of LUX?
• quality and attractiveness of Luxembourg’s public research system,
which has become of a pole of attraction for excellent researchers.
• Its Single Market integration is the highest in the EU, with the addition
of exports and imports of goods and services representing 111% of its
GDP (EU average: 46%).
Risks in general
• Unsustainable welfare system
• Pressure on housing market & Household Debt
• 180% of disposable income in 2022
• Some 80% of this is mortgage credit (linked to Housing prices)
• Diversification, Dependence on finance sector & Lacking Innovation & Young Workers / Engineering / Scientist
• Low R&D exp. 1/3 of EU average (Despite excelllent research)
• Public support for business innovation is still marginal (0.037% of GDP in 2020, compared to an EU average of 0.196%)
• Dependence on highly qualified people from outside
• The number of the new graduates in science and engineering per thousand population aged 25-34 is lower in
Luxembourg than anywhere else in EU (2.5 in 2020 compared to an EU average of 16)
and the number of graduates in computing per thousand population aged 25-34 (1.2 in 2020, compared to an
EU average of 3) is the second lowest in EU.
• In 2018, Luxembourg’s average skills levels, as measured by the OECD Programme for International Student Assessment
(PISA), were significantly lower than the EU average in all three areas tested.

• (Energy dependence, 92% imported)

 SOME RISKS WERE
IDENTIFIED:
Unsustainable welfare system Pressure on the housing market Household Debt

Housing supply < growing demand Reached 180% of disposable income in

2022
Labor shortages
+ 2.5
Population Dwellings
2.0 Some 80% of this is mortgage credit is
Young low-skilled workers still face 1.5 linked to Housing prices
higher unemployment 1.0

0.5

0.0 Household debt, loans and debt

Aging population FRA DEU CHE LUX securities (Percent of GDP)
+ 80

One of the lowest average retirement age Rising house prices 70

in EU 160

150
Luxembourg
60
30 30 Belgium
France 50
Public pensions expenditure, 140
25 gross
25
20 20 130 40
Health care expenditure
15 15 120
30
10 10 110

5 5
20
100
0 0 90 10
-5 -5
0
-10 -10
95 97 99 01 03 05 07 09 11 13 15 17 19 21
-15 -15 19 19 19 20 20 20 20 20 20 20 20 20 20 20
2016 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070
(Real house prices)
 SOME RISKS WERE
IDENTIFIED:
Dependence on finance sector Lacking Innovation & Young Energy Dependence
Workers / Engineering / Scientist
FISCAL POLICY
RECOMMENDATIONS
 Fiscal Policy
The Risk: Unsustainable welfare system
far:
Our Recommendations:
Adopt policies that encourage older workers
to keep working - reconsider taxes and
benefits that favour early retirement
Further reduce taxes on low wages – Making
the labour market more inclusive
Government action so
The government has
commissioned the National
Economic and Social Council
(CES) to discuss possible
implications of the ageing
population for the financial
sustainability of the pension
system in the long run
 Fiscal Policy
The Risk: Unsustainable welfare system

Our Recommendations:
Reduce the generosity of pensions
(modifying the benefit calculation
formulas)

Tax incentives for the creation of private

pension funds

Increase the retirement age with life

expectancy
 Government action so
Fiscal Policy far:
- To deal with the ongoing structural
The Risk: Pressure on the housing market issue of undersupply of housing, land
and unoccupied properties taxes were
applied : such as property, land-use and
vacancy taxes
Our Recommendations:
- Fiscal support to owner-occupied
Reduce taxes on construction companies property
Reduce IVA of
and property developers – incentive to construction
production (easier to be profitable) Ex: supplies
- Efforts to increase the low share of
Supply Side Reduce IVA of construction supplies social and affordable rental housing

- The government also announced a

Take advantage of non used public reform of the rent ceiling (cutting the
property to build more accessible housing maximum increase in rental prices from
5% of the capital invested to 3.5%
MONETARY POLICY
RECOMMENDATIONS
 Risks Recommendations

Exposure to volatility risks in

financial markets
Dependence on ECB

Ratio debt to gross disposable income: - Lower Interest rates would

180% improve financial sector

Private Sector dept: 326% Increase Countercyclical General

capital buffer ?? Recommendations

Pressure on housing market

STRUCTURAL REFORMS
RECOMMENDATIONS
 Structural Reforms Government action so
far:
The Risk:

Our Recommendations:
 Risks Recommendations

Dependence on exported talents

Dependence on

- Lower Interest rates

would improve financial
sector

Increase Countercyclical General

capital buffer ?? Recommendations

Pressure on housing market

PRIVATE SECTOR
 In Luxembourg, of all
How much of Luxembourg is In Luxembourg in 2019, how many people children aged 7 to 11,
protected land, such as worked in the restaurant and hotel sector? how many went to
national parks? school in 2017?
• A: Around 5%
- Around 5%
• B: Around 18%
-Around 20% • A: Around 30%
• C: Around 32%
-More than 40% • B: Around 70%
• C: More than 95%

• How many babies in • How many people in Luxembourg have

Luxembourg were some access to electricity?
vaccinated against some
• A: Around 30%
disease in 2020?
• B: Around 70%
• A: Around 30%
• C: More than 95%
• B: Around 70%
• C: More than 95%

Common misconceptions about Luxembourg – GOAL: people in class

better understand the country we are going to talk about
Fiscal Policy Recommendations:

Risk: ...
Adopt policies that encourage older
workers to keep working - reconsider
Government action so far: taxes and benefits that favour early
retirement

Further reduce taxes on low wages –

Making the labour market more inclusive
Problems in general 2
• Household debt
• 180% of disposable income in 2022
• Some 80% of this is mortgage credit (linked to Housing prices)
https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basi
cs/Fiscal-Policy