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Luxembourg

Subdued growth to rebound in 2025

Last update – January 2025

Country rating 


LOW RISK FOR ENTERPRISE
Economic risk

Very low risk of payments disruption
Business environment risk
Very low risk of payments disruption
Political risk

Very low risk of payments disruption
Commercial risk
Moderate risk of payments disruption
Financing risk
Low risk of payments disruption

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Form of state
 Constitutional Monarchy
Head of government
 Luc Frieden (PM) 
Next elections
 2028, general

Strengths & weaknesses

  • Dynamic economy; competitive, digital and innovative
  • Resilient and attractive labor market
  • Economic and political stability
  • Economy little diversified (mostly focused on financial services)
  • Strongly dependent on the Eurozone economic cycle
  • Education system to be improved to address the challenges of digitalization and to better anticipate the skills that are needed

Economic overview

Emerging from a prolonged slowdown

Economic activity remained quite subdued in 2024, only exiting the prolonged recessionary trend in the second half of the year. The wage-indexation mechanism prevented real wages from falling, safeguarding households’ purchasing power and supporting private consumption despite weak consumer sentiment. However, net exports and gross fixed capital formation continued to decline, weighing on the overall recovery momentum. We expect the economy to partially rebound in 2025, expanding by +1.6%. The easing of financial conditions is expected to support the financial sector and the recovery of the construction sector. Private consumption will remain supportive, driven by an increase in real disposable income, boosted by another round of wage indexation scheduled for 2025.

Inflation began a downward trend in 2024, with CPI reaching a year-on-year low of 0.8% in November 2024, the lowest rate recorded since 2021. The trend has been primarily driven by significant declines in gas and petroleum product prices. Looking ahead, inflation is likely to remain broadly stable in 2025. In the meantime, the tight labor market is showing the first signs of easing. Employment growth has slowed to its lowest level since the Covid-19 crisis, and hiring intentions are weakening further.

The general government deficit decreased only marginally in 2024. Looking ahead, slower expenditure growth is anticipated due to a less inflationary environment and the temporary implementation of the provisional twelfths system. Despite measures to support households, businesses and the construction sector – impacting revenues by 0.5% of GDP – revenue growth is projected to remain strong, driven by adjustments to tax brackets and reduced social security contributions. Therefore, we expect the deficit to rise slightly, reflecting new recovery and household support measures, including a corporate income tax cut. The gradual phase-out of energy price mitigation measures will help contain expenditure growth despite rising public compensation and social transfer costs.

Further diversification of economic activity is needed

Luxembourg’s external balance is dominated by the large financial sector, which has supported current account surpluses in recent decades but has seen large disinvestment in the last quarters.

As part of the EU Next Generation instrument, Luxembourg’s Recovery and Resilience Facility is expected to receive by 2026 EUR82.7mn in grants. Luxembourg has already received EUR32.38mn, representing almost 40% of its total allocation. The updated plan retains its strong focus on the green transition, with 68.8% of the resources allocated to support climate objectives (from 60.9% in the initial plan), and significantly exceeding the minimum of 37% required by the RRF Regulation. 30% of the resources remained allocated to digital objectives. The plan continues to prioritize the digital transformation, including investments in research and innovation, the deployment of new technologies, the digitalization of public administration and measures to foster territorial, institutional and social cohesion. These initiatives are expected to actively engage the private sector in the transition. Further investments are planned in digital skills, digital connectivity and eHealth. The updated plan also maintains its focus on improving digital inclusion for the population and workers and advancing the digitalization of small and medium enterprises. However, a further diversification of economic activity will be necessary in the medium period.

Luxembourg’s competitive advantage in financial services will support recovering growth. The country is the world's second-largest investment fund center after the US and the most important private banking center in the Eurozone. The government has been aiming at economic diversification for a few years and has been encouraging the development of sectors such as communication and information technologies, logistics, e-commerce and biotechnologies.

However, labor productivity needs improvement in Luxembourg, given lower education levels compared to neighbor countries. The skills shortage has caused most of the jobs created in the financial sector to attract foreign nationals, causing Luxembourg's resident workforce to rely on public administration jobs or jobs in the steel sector, which are highly subject to foreign competition.

Trade structure by destination/origin

(% of total, 2023)

Trade structure by product

(% of total, 2023)

Contact 

Maddalena Martini
Allianz SE Branch Rome
+39 (3) 463213764
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