PwC/AGEFI Monthly Barometer - February 2023

In collaboration with AGEFI Luxembourg

Economic Confidence Indicator

February 2023

The PwC economic barometer increased by 8 points during the month of January, reaching a level of +3 by the end of the period, recording a third consecutive month of growth and the first positive value since June. The drop in energy prices and the consequent inflation slowdown positively affected business confidence both in Luxembourg and at the Euro Area level.

The inflation rate in the Grand Duchy reached its lowest point since January 2022, recording a 5.4% YoY fall in December, reflecting the downward trend in gas prices observed since August in Europe. The decline was also supported by measures agreed to by the Tripartite Coordination Commission which limited gas price growth to +15% and reduced the heating oil price by 15 cents per litre in the country. However, the decline in prices cannot be generalised as prices for non-energy industrial goods and food accelerated in the same period by +11% and +6% YoY respectively in December. Housing prices of older properties are showing signs of slowing, although the 11.1% YoY growth as of the end of Q3-2022 remains significantly high. On the other hand, prices for new homes rose in the third quarter due to high construction services prices (15.9% YoY growth in Q4) and the rise in interest and mortgage rates which reduced the attractiveness of investments in residential property and put pressure on the construction sector confidence. While business confidence in the country is growing, the slowing inflation will have a negative impact on public revenues, which will also take a hit due to the reduction of the VAT rate by 1% until 31 December 2023 formalised under the second tripartite agreement.

The overall business confidence recovery observed in Luxembourg is also reflected at the Euro Area level where we observe a marginal expansion in business activity – led by the services sector – at the beginning of 2023 after six consecutive months of contraction. Although the pace of contraction is the slowest since June 2022, the latest data however continues to show a decline in the volumes of production in January, mostly driven by persistently low levels of demand which led to a drop in new orders for the seventh consecutive month.

At a global level, resilient economic growth in Q3 2022, strong labour markets, stable levels of household consumption, coupled with a better-than-expected European reaction to the energy crisis and China’s lifting of strict COVID-containment measures led the IMF to increase growth forecasts for 2022 and 2023. According to the latest figures, global economic growth will slow in 2023 to 2.9% (down from 3.4% in 2022), and will rebound in 2024 at 3.1%.