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The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Luxembourg published on 1st July 2008.
Growth has been strong, driven by the expansion of the financial sector
Luxembourg’s economy has enjoyed a strong performance since the 2006 Survey. The economy grew by 4.5% in 2007, faster than in most other OECD countries, with relatively moderate national headline inflation of just over 2%. The general government had a surplus of 3% of GDP, while the current account surplus was around 10% of GDP. The main driver of economic growth has been the financial sector, which has continued to sharply expand its activity and now accounts for nearly 30% of GDP. Collective investment funds registered in Luxembourg hold assets of EUR 2 trillions, about one-fourth of investment funds’ assets in Europe. Private banking is also an important source of activity, with the third largest market share worldwide after Switzerland and the Caribbean Islands. There have been important beneficial effects of this expansion. Not only has the financial sector created large numbers of jobs, it has also been a significant purchaser of business services supplied by other sectors, such as legal services and real estate. Other positive effects have boosted the rest of the economy, such as knowledge, skill and location spillovers. The budget has benefited from dynamic tax revenues paid by the financial sector, together with temporary and recurrent positive revenue surprises from other sources. This has supported the expansion of the public sector, although its size has declined in relation to GDP.
The global financial turmoil is now taking its toll on growth
Real growth is projected to weaken in 2008, reflecting the international financial crisis. The fall in international equity prices has led to a decline in the nominal amount of assets held by investment funds, hurting commission fees. New net inflows into investment funds have also slowed, due to the change in investor sentiment. Employment in the financial sector remained strong last year, perhaps because firms have been hoarding hard-to recruit skilled staff, but this could change rapidly if the banking sector feels a durable squeeze on earnings. A contraction similar to that following the bust of the dotcom bubble would lead to a painful adjustment. A fall of net inflows of funds into the Luxembourg financial sector would have large spillover effects on the domestic economy, as financial institutions would reduce their purchases of goods and services from other sectors and lower their payments of tax receipts based on the size of assets under management. While the unfolding of the financial turmoil is uncertain, it is likely that the economic and financial slowdown currently under way will mean that tax receipts will suffer in 2008; this should be relatively easy to absorb, however, given the healthy position of the general government last year (a surplus of 3% of GDP) and does not call for immediate fiscal restraint measures designed to tighten fiscal policy.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Luxembourg 2008 is available from:
For further information please contact the Luxembourg Desk at the OECD Economics Department at firstname.lastname@example.org. The OECD Secretariat's report was prepared by Jens Christian Høj, Ekkehard Ernst, Arnaud Bourgain and Patrice Pieretti under the supervision of Patrick Lenain. Research assistance was provided by Laure Meuro and secretarial assistance by Heloise Wickramanayake.