PwC/AGEFI Monthly Barometer - April 2024

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

April 2024

In April, the economic barometer rose to -3 as business confidence displayed signs of improvement. However, caution persists regarding the economic outlook in the Grand Duchy and the Euro Area due to the looming risk of reflation.

In 2023, Luxembourg's economy entered a recession as confirmed by recent data from STATEC. Despite the country maintaining stable real GDP in Q4 2023 compared to the previous quarter, it experienced a 1.1% decline over the year. This downturn was propelled by underperformance in the financial sector, where value added decreased by 7% in real terms, primarily attributable to banking results. Although the net income in the Luxembourgish banking sector witnessed exceptional 67% YoY growth, this was mainly attributed to a substantial reduction in provisions for risk coverage and improvements in interest rate margins, notably propelled by derivatives. However, the gross value added (GVA) for banks only encompasses interest rate margins on loans and deposits from households and non-financial businesses. The European Central Bank’s aggressive monetary policy led to a significant decrease in new loans and mortgages to non-financial businesses and households respectively in 2023, with the former plummeting by 62% and the latter by 39%. Consequently, banks' GVA experienced a mere 8% of nominal growth in 2023 – and declined by 9% when price effects are excluded. As the economy decelerated in 2023, employment growth also slowed down, resulting in a 2.2% increase compared to 3.4% in 2022. Despite some improvements in business confidence in the first quarter of 2024 (due to the slowing inflation and expectations of imminent rate cuts), the outlook remains cautious due to the slowdown in the labour market and persistent macroeconomic uncertainty, which might further dampen household consumption.

At the Euro Area level, the economy moved to expansion territory at the end of the first quarter, as indicated by the Composite PMI, which recorded a value of 50.3 in March. The renewed growth in business activity was supported by a stabilisation of demand and continued efforts to clear backlogs. A third successive monthly increase in net Euro Area employment was also observed in March, amidst a sustained resurgence in business confidence. This optimism was bolstered by the decreasing headline inflation and the anticipation of an initial rate cut from the ECB in the upcoming June meeting. However, reflation remains a concern, as persistent high service inflation and the recent surge in oil prices, along with wage developments in Germany, indicate the possibility of inflation picking up again in the Euro Area.

In the US, such signs are evident. Headline inflation surpassed expectations in March, standing at 3.5% compared to a consensus of 3.4%. The Federal Reserve is now unlikely to implement rate cuts in June, especially considering the strength of the US economy, as non-farm payrolls exceeded expectations in March. The resilience of the US economy is primarily attributed to a strong labour market, although there are early indications of potential slowdowns, such as increasing layoff announcements and a shortage of full-time employment, with most jobs created in 2024 being part-time. Additionally, small business confidence plummeted to its lowest level since 2012 last month, further suggesting that a recession in the country remains a possibility.