OECD Economic Outlook, Volume 2025 Issue 1

Luxembourg

GDP is projected to grow by 2.1% in 2025 and 2.3% in 2026, following a strong rebound in activity in the final quarter of 2024. Private consumption will remain robust as real wage growth, bolstered by receding inflation and rising wage rates, supports households’ real disposable income. Lower interest rates will provide stimulus to the financial and construction sectors. Risks are broadly balanced. Construction and finance may recover faster than expected. Weaker activity in the euro area and increasing barriers to trade could dampen the recovery.

Fiscal policy should remain prudent through the full phasing-out of energy policy supports. A comprehensive pension reform, to raise contributions, increase the effective retirement age and adjust benefits, is needed to ensure sustainability for future generations. Rising capacity constraints imply the need to transition from a growth model based on rapid labour force growth to one based on innovation and skills, while maintaining public investment in transport and climate mitigation actions. Housing affordability should be tackled through reforms aimed at relaxing structural barriers to developing supply.

Economic activity recovered strongly in the final quarter of 2024

Industrial production and construction activity rose slightly through 2024. Lower interest rates fuelled the recovery of the financial sector and of housing transactions in the last quarter of 2024. High‑frequency indicators and the decline in new loans for house purchases suggest a slowdown in the first quarter of 2025. Business confidence indicators in most non-financial services have recovered since the sharp fall in 2024Q3 but remain below historical averages. While labour shortages persist, they have significantly eased from the post-pandemic peak. Wage indexation supported households’ purchasing power and private consumption through 2024, despite weak consumer sentiment. In the year to April 2025, despite the partial lifting of energy price supports and some increase in food and energy prices, headline inflation fell to 1.7% (down from 3.2% in April 2024) and core inflation to 2.1%.

Luxembourg

Source: OECD Economic Outlook 117 database; and Eurostat.

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Luxembourg: Demand, output and prices

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Luxembourg’s direct exposure to higher US tariffs on EU goods is currently limited as only 3% of total exports go to the United States and the main exports are financial (45% of total exports) and other services (43%), which are exempt from tariffs. However, indirect effects through weaker demand from European partners, including automotive components from Germany, are expected. Furthermore, lower equity prices and weaker household income growth in Europe may slow activity in the financial sector.

Fiscal policy will remain prudent

The government budget recorded a small surplus in 2024, mostly thanks to higher revenues from direct business taxes and lower current outlays. Despite the scaling back of energy policy support, the budget balance is projected to return to a small deficit in 2025 and 2026 due to increasing defence expenditures, which should reach 2% of GDP by 2030, up from 1.3% in 2024. Overall, the fiscal stance is projected to ease by 1.7% of GDP over 2025 and 2026.

The recovery in activity is expected to continue

Growth is projected to strengthen gradually over 2025 and 2026, as easing financial conditions bolster the financial and construction sectors. Despite increased global uncertainty, domestic consumption will be resilient, due to the scheduled wage indexation in 2025Q2 supporting real incomes, and to a modest draw-down of household savings towards their long-term average rate. Unemployment should peak in 2025 before gradually decreasing as activity picks up. Core and headline inflation are expected to slowly increase in 2025 due to the scale back of energy price support and higher costs of imports. Amid global uncertainty and growing barriers to trade, the contribution of exports to GDP will remain modest. Risks are broadly balanced, with a faster than-expected recovery in finance and construction representing the main upside risk. The main downside risks include a slowdown of economic activity in the euro area, potential financial markets disruptions, and a contraction of exports linked to tariffs.

Structural reforms are necessary to boost productivity growth and ensure fiscal and environmental sustainability

To safeguard fiscal sustainability, a comprehensive pension reform is needed to raise contributions, increase the effective retirement age and contain expenditures. Productivity is high relative to the EU area average but growth is stagnant. Structural reforms are necessary to support private investment in innovation and improve the quality of life-long training, including through better coordination across the main public actors supporting R&D, and a shift from the current institution-oriented system to a project-oriented one. Quality standards for training providers can be strengthened by introducing a national accreditation agency and by tightening quality controls. Despite substantial progress, further efforts to implement the national energy and climate plan and strengthen public transport are needed to meet climate targets, mitigate congestion and improve attractiveness to cross-border workers.