PwC/AGEFI Monthly Barometer - April 2023

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

April 2023

The PwC economic barometer remained stable in March at a level of +7. Although the recent tripartite agreement have supported the consumers’ confidence growth in Luxembourg the recent financial turmoil caused by the banking sector’s crisis have raised concerns about a probable recession in 2023.

The confidence in the Grand Duchy rose in the last month as a result of the latest round of tripartite negotiations which yielded significant outcomes that will impact wage indexation, tax brackets, energy subsidies, and housing-related matters. The delayed wage indexation will now be implemented in April 2023, followed by another indexation later in the year, which will be fully compensated by the Employers’ Mutual Insurance Scheme. In 2024, tax brackets will be adjusted to the equivalent of two and a half indexations. The agreement also prolonged the existing energy subsidies, which will result in extending the price cap on electricity and gas for another year. STATEC consequently reviewed the latest inflation forecasts to include the effects of such measures that are expected to prevent the anticipated price hikes of 37% and 78% for gas and electricity respectively in 2024, thereby averting the predicted inflationary shock in early 2024. While the forecast still predicts an inflation rate of 3.4% for 2023, it has been revised to 2.8% for 2024 (previously projected at 4.8%). The cap on electricity prices is expected to further slow core inflation, from 3.9% in 2023 to 2.8% in 2024 (down from 4.3% as previously predicted). As a consequence consumers in Luxembourg have experienced a considerable improvement in morale since hitting a low point in September 2022. This positive shift is attributable to a more optimistic economic outlook as well as an improved perception of their own financial situation. Despite this, there is uncertainty regarding whether this trend has translated into increased consumption during Q1 2023, as households have expressed an increased inclination to save rather than spend, in line with the rise in interest rates. On a yearly basis the interest rates for consumer loans in Luxembourg increased by 228 bps, reaching 3.82% in February. The variable and fixed interest rates on household mortgage loans also increased by 221 bps and 219 bps respectively, reaching 3.53% and 3.77% over the same period.

The Euro Area private sector has experienced its strongest expansion since May 2022, signaling a marked improvement from the final quarter of 2022. This upturn has been primarily driven by the service sector, with manufacturing production slightly picking up. Despite a decline in new business from abroad, total new order volumes have risen modestly in March, indicating a recovery in domestic demand. To support this increased activity, businesses in the region have continued to hire additional workers, resulting in an eight-month high rate of job creation. Additionally, there has been a softening of price pressures in March, with the manufacturing sector seeing costs decline for the first time since July 2020, and output price inflation slowing down to a 22-month low.

Despite the increasing business confidence, the outlook for 2023 still remains cautious due to recent financial turmoil. The failures of Silvergate Bank and SVB in the US and of Credit Suisse in Europe together with the OPEC’s announcement to cut oil production have increased the concerns about an incoming global recession and rising inflation in the near future and the major indicators are the first signals of global slowdown in economic activity.