Luxembourg’s economy is expected to expand by 6% this year, followed by a 3.5% growth rate in 2022, the statistics bureau Statec said in its twice-yearly forecast published on Tuesday.
Inflation is expected to reach 2% and slow to 1.6% next year, which means an automatic indexation of salaries remains probable by the end of the year.
“The forecast for when indexation of salaries and pensions happens has not been revised (in today’s report),” a Statec spokesperson said on the phone.
Luxembourg's labour market this year is the most dynamic in the eurozone, Statec said. “Very good resilience is partly explained by the job retention measures implemented by the Luxembourg government, in particular the extension of short-time work,” the report said.
Forecasters did not expect employment to rise at a pace exceeding 2.5% this year or the next, much slower than economic growth. “Uncertainties persist, such as the high volatility of recent monthly data - which makes it difficult to interpret and forecast the economic situation - or a potential but delayed impact of the crisis on the sectors most affected by it,” the report said.
Statec expects activity and investment to pick up over the next two years, “gradually taking over from public spending, which was so significant in 2020,” the report said. Luxembourg ran a budget deficit of 4.1% for 2020, a historically high level, if still the lowest in the whole eurozone. Statec forecasts public accounts to be close to balance this year, saying that the 2020 recession “appears to be much less severe than in the other eurozone countries”.
Government revenue should expand just over 7% in both 2021 and 2022. “The shock was balanced out by the good performance of household taxes and social security contributions, as well as by the rapid rebound in VAT revenues after the collapse in the spring of 2020,” the report said.
The economic outlook for the rest of Europe is also positive. “The ramping up of vaccination campaigns suggests a clear rebound in activity in the eurozone from the second half of 2021, allowing GDP to grow by more than 4% per year, both this year and in 2022,” Statec said.