Population 55.287 million
GDP 0.523 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
2.9 |
1.7 |
0.4 |
0.4 |
|
Inflation (yearly average) (%)
|
2.8 |
3.7 |
2.9 |
1.8 |
|
Budget balance (% GDP)
|
-0.8 |
-0.3 |
-1.9 |
-1.8 |
|
Current account balance (% GDP)
|
8.2 |
7.1 |
4.4 |
2.1 |
|
Public debt (% GDP)
|
19.2 |
18.3 |
21.3 |
24 |
|
(e) Estimate (f) Forecast |
||||
STRENGTHS
- Limited public debt
- Highly skilled labour force
- International financial centre
- High standard of living
WEAKNESSES
- Small and very open economy dependent on financial services (a quarter of GDP)
- Exports of manufactured goods partly dependent on the steel industry
- Ageing population and its impact on public finances
- Scarcity and high cost of housing
Risk assessment
Slower growth
As elsewhere in the eurozone, the economy has been hit by the regional crisis. After a clear slowdown in 2012, recovery in 2013 is likely to be hesitant. Domestic demand is expected to slow further though it will still be the main driver of activity. Households and businesses (the latter are among the most indebted in the eurozone) will continue to defer their consumption and their investment decisions. The contribution of external trade to growth is, however, expected to be slightly less negative though exports will continue to suffer from sluggish eurozone demand (⅔ of the country’s foreign sales). The economy is very dependent on the financial services sector and the steel industry, though it is open to chemicals and international communications (internet). While the financial sector is still on a positive path, manufacturing (primarily steel) is on the decline with the partial closing, since 2011, of important production sites. In spite of everything, the financial sector is expected to benefit from possible progress on resolving the European sovereign crisis but it will not recover its pre-crisis dynamism for several years. At the same time, inflation is expected to decline due to weak domestic demand, a slight relaxation of energy prices and revision of the wage indexation system. While the payment failures recorded by Coface are currently declining (after peaking in 2008-2009), there has nevertheless been a rise in bankruptcies.
Heavy exposure to the international economic situation
The current account surplus is shrinking but the still largely positive services balance, including that of financial services, makes it possible to offset the deficit in the other current account items (goods, revenues and transfers). The country, moreover, has low public debt and deficit levels, although the country’s accounts deteriorated in 2012 due to the slowdown in revenue from the financial sector and higher public spending. The authorities will have difficulty in reducing the deficit in 2013, despite the budget measures announced. In the long term, there is also the question of the viability of the pension system. The financial sector, the biggest contributor to the country’s economy, was hit by the eurozone crisis but has generally remained stable. Investment fund assets recovered quickly after 2008. Those of the banks, whose business is essentially turned towards the international market, returned to growth later and more slowly. However, banks have remained well capitalised and liquid (apart from the problems encountered by the Dexia group), though their profitability has declined due to the depreciation of their European sovereign securities portfolio. Holdings of assets of European countries in difficulty have, however, greatly diminished. Despite everything, the banking sector could again be weakened by a recurrence of the eurozone crisis, as it is still exposed to the risks arising from foreign parent companies and because of big intra-group cross-border transactions. Luxembourg remains one of the World Bank’s highest-rated countries in terms of governance and its financial centre owes its reputation to a favourable and stable legal and fiscal framework. Continuous improvement of banking supervision remains no less necessary. This will come from advances at local and also European level (mechanisms for resolving banking problems, deposit guarantee systems).
