OECD Economic Outlook, Volume 2025 Issue 2

Luxembourg

GDP growth is projected to pick up from 0.8% in 2025, to 1.9% in 2026 and 2.0% in 2027, supported by business investment and recovering financial sector activity. Private consumption will remain robust as wage indexation and receding inflation bolster households’ real disposable income. Lower interest rates will stimulate financial and construction activity. Risks are broadly balanced. Construction and the financial sector may recover faster than expected, but weaker activity in trading partner countries may dampen activity.

The phasing out of energy price subsidies and further adjustments of the effective retirement age and benefits would help maintain fiscal prudence and the long-run sustainability of public finances. Housing affordability, central to expanding the labour force, should be tackled by simplifying the permitting process and revising the property surtax on unused land to boost housing supply. Fostering public-private research partnerships, reforming adult training accreditation standards and reducing barriers to entry in professional services could boost productivity growth.

Growth has picked up

After three years of subdued growth, GDP growth picked up through the first half of 2025 due to higher government consumption and exports. Short-term indicators point to a nascent recovery in the manufacturing sector to persisting difficulties in construction. Lower interest rates have supported the recovery of activity in the financial and insurance services sectors, but by less than expected. Consumer confidence and business confidence in the construction sector have been gradually recovering through 2025. Growth in retail trade turnover has remained positive but modest. Inflation has been higher than expected this year, reaching 3.0% in the year to October 2025, partly due to automatic wage indexation supporting services price increases.

The direct and indirect impact of US trade restrictions has been limited up to September 2025, partially absorbed by changes in inventories. The increase in non-financial services exports was compensated by declines in exports of goods and of financial services, Luxembourg’s main exports. Luxembourg's trade exposure to the United States is relatively low, at 3% of total goods exports and 5% of total services exports. Subdued activity in Germany, Luxembourg’s largest trading partner, has negatively affected exports.

Luxembourg

Source: OECD Economic Outlook 118 database.

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Luxembourg: Demand, output and prices

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The fiscal stance is projected to remain broadly neutral

The draft 2025 medium-term budget plan aims to maintain a very modest general government deficit in the coming years, consistent with maintaining the gross debt ratio around its current level. Fiscal revenues will be negatively affected by the recent revision of personal income tax brackets, which include tax relief for lower income workers, and the announced energy price subsidies. At the same time, expenditures will increase due to public investments in digital and green innovation and productivity-enhancing measures, and possibly defence spending. In the longer run, the pension reform may bring fiscal relief by increasing the effective retirement age.

A recovery of investment and financial activities will boost growth

GDP growth is expected to reach 0.8% in 2025 and to gradually increase in 2026 and 2027. The strengthening will be driven by an improvement in financial sector activities, supported by lower monetary policy rates, and by private investment, especially in transport and logistics. Employment is expected to expand gradually through 2027. Wage indexations in May 2025 and mid-2026 will boost services inflation and support domestic demand, even as household saving rates remain near historical highs. While headline inflation is expected to gradually decrease in 2026 and 2027, some increases in energy prices represent an upward risk to the projection. A stronger recovery in housing and construction, which have so far been subdued, would further strengthen growth.

Supporting skills, innovation and the supply of housing would support productivity growth

A comprehensive policy plan to improve the relevance of vocational training courses to labour market needs, to facilitate entry into service sectors and to bolster innovation through project-based R&D funding and public-private research partnerships would support productivity and output growth. Simplifying the bureaucratic procedures to obtain construction permits could boost activity in the housing sector and enhance housing affordability, improving Luxembourg’s attractiveness for foreign workers. To improve energy security, efforts should be focused on decarbonising the transport sector and enhancing the electricity transmission grid, with particular attention to the integration of renewable sources. The phasing out of energy price subsidies, a gradual increase of taxes on value added and immoveable property and a more ambitious reform of effective retirement age and benefits would help maintain a prudent fiscal stance while boosting the economy’s potential.