OECD Economic Outlook, Volume 2026 Issue 1

Luxembourg

GDP is projected to expand by 0.7% in 2026 and 1.3% in 2027, supported by increased public and business investment and robust financial sector activity. Household consumption growth will slow in 2026 with heightened geopolitical uncertainty and rising inflation, but pick up in 2027 as conditions improve and wage indexation sustains real incomes. The surge in energy prices is expected to temporarily lift inflation in mid-2026. Risks to the outlook are predominately to the downside, including from volatility in financial markets.

The budget deficit widened sharply in 2025 due to higher social and personnel spending. Measures to ensure the sustainability of the pension system and contain social security and public personnel spending and to ensure the implementation of the medium-term fiscal plan are needed. Encouraging commuters to shift from fuel-cars to more sustainable transport would help reduce exposure to global energy prices. A comprehensive strategy to boost skills and innovation would help maintain economic competitiveness.

Geopolitical tensions and energy prices are curbing the recent pick-up in activity

After a prolonged period of weakness, the economy’s momentum was improving until the recent shock to energy prices triggered by the outbreak of the conflict in the Middle East. Consumer and business confidence had been steadily improving through the last quarter of 2025 and early 2026 and retail sales reached a 14-month high in January 2026, with demand for services supported by wage indexation. Investments in the space and defence sector bolstered overall growth in 2025, while financial activity was stronger than expected in the first three quarters of 2025. Activity in the construction sector remained subdued. With the surge in energy prices, consumer confidence dropped well below its long-term average in March and April 2026.

Luxembourg

Source: Eurostat; and OECD Economic Outlook 119 database.

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Luxembourg: Demand, output and prices

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Energy prices increased by 17.7%, fuel prices by 28.8% and heating oil by 75.5% in the year to April 2026. This lifted annual headline CPI inflation to 5.2%, the highest rate in three years, unwinding the decline in the inflation rate in 2025. Since late March, reduced jet fuel stocks have led the aviation authorities to request that airlines limit refuelling in Luxembourg.

Fiscal policy will remain supportive

Financial conditions remain relatively accommodative, supporting activity in the country’s large financial sector. The budget balance deteriorated sharply in 2025, from the 2024 surplus to a deficit of 2.0% of GDP, as social security benefits and recurrent government spending rose. The deficit is projected to remain elevated as recent revisions to tax brackets weigh on personal income tax revenue growth and public investments in defence, digital and green innovation add to expenditures. In January 2026, the government increased the CO2 tax credit for low- and medium-income households, the tax credit for energy efficiency renovations of all rental housing, public contributions to electricity transmission costs, and public support to renewable energy development. Careful planning of spending will help ensure the implementation of the 2025 medium-term budget plan and maintain fiscal credibility.

Public investment and financial sector activity will support growth

Economic growth is expected to progressively pick up, with GDP growing at 0.7% in 2026 and 1.3% in 2027. Global uncertainty will weigh on employment and private investment in the second and third quarters of 2026, while high energy costs will slow consumption growth. Offsetting this, growth will be supported by large public and private investments in defence satellites, transport and logistics, and by private consumption, which is bolstered by scheduled increases in the minimum wage, and by pensions and wage indexation adjustments. Energy price shocks are expected to pass through general price levels, driving headline inflation up to 4.2% and core inflation to 2.2% in 2026. Downside risks include the effects of volatility in global financial markets, given the size of the financial sector in the economy. Recent policy measures to support housing supply could accelerate the recovery in construction activity.

Encouraging sustainable mobility would reduce exposure to energy price shocks

A careful review of expenditures could help bring the public budget back to the path laid out by the Medium-Term Fiscal Structural Plan. Raising the effective retirement age would support the sustainability of public finances and retirees’ incomes into the longer-term. Gradually linking tax benefits for company cars to their emissions, introducing congestion charges, motorway tolls and further improving public transport and cycling networks would accelerate the shift away from individual internal combustion engine transport. More reactive construction permitting processes and reforming land development regulation would bolster housing supply, reducing costs and helping attract foreign workers. Addressing skills shortages and better coordinating the sources of public R&D support would bolster innovation and productivity growth.